Investment Column: United Utilities is a safe share to hold
Paypoint; Hogg Robinson
Friday 29 May 2009
Our view: Hold
Share price: 538.5p (-4.5p)
Inflation is viewed as particularly nasty by most capitalists and should, they say, be avoided at all costs – even if that means unemployment increases.
Not so those at the regulated water companies, since their customers are charged according to the retail price index. With prices expected to rise in the coming 12 months or so, investors in companies such as United Utilities can expect better revenues. Add to this the defensive nature of the sector (we do all have to drink, after all) and it is difficult to dismiss groups such as United Utilities out of hand.
The elephant in the room as far as the industry is concerned is that all suppliers are waiting for the water industry regulator Ofwat to sign off on business plans submitted for running their patches between 2010 and 2015, including proposed price increases. There is no guarantee that Ofwat will agree to United Utilities' plan, even if it would be considered a surprise if a deal is not ultimately done.
With predictable returns – the company posted decent full-year results yesterday, the highlight of which was a better than expected debt position – companies such as United will provide a bit of backbone to any portfolio.
However, while we think United is a safe punt, we would not be buyers, thinking that there are better bets available. The experts at Cazenove argue: "United Utilities is one of the worst-performing European utilities year to date ... [and] on our calculations it is the most expensive water company on regulated asset value-based multiples, trading on a 7 per cent premium to March 2010 regulated asset value versus the sector average of around 2 per cent."
Those of you who reckon we are beyond the worst of the downturn should chase higher-growth stocks. We are not convinced the economy is set to improve soon and would not sell such a safe stock. There are better names in the sector, however. Hold.
Our view: Buy
Share price: 462p (+7p)
The very fact that the electronic payments group Paypoint has increased its dividend (yes, that's right, do not adjust your newspaper, increased) probably makes it worth buying without any further investigation needed.
Those opting to have a further look can only be encouraged. Yesterday, the company posted a 19 per cent increase in like-for-like profits and boasted that in most areas, its growth was continuing apace. Paypoint reckons it can increase its market share in the electronic bill payments market and that, with moves into areas such as parcel delivery and the further expansion of its Romanian business, the future looks rosy.
However, there are those who disagree. Watchers at Numis said last night: "We do not regard PayPoint as a high organic growth company... we do not think the company is recession-proof, we think mobile top-up commission levels are likely to come under further pressure and ultimately we regard cash transactions as being in long-term structural decline." Others agree.
Paypoint's chief executive, Dominic Taylor, says this is all tosh. Yes, he concedes, mobile top-up is slowing, but there are plenty of other parts of the business that continue to grow. For the time being at least, we would agree with him. Buy.
Our view: Buy
Share price: 23p (-0.25p)
David Radcliffe, the chief executive of the business travel group Hogg Robinson, refuses to say that trading is grim. However, while admitting that we are in the most challenging trading conditions ever seen, he claims the company is doing well on all fronts, with revenues up and debts down, as customers ask Hogg Robinson to investigate ways of saving money on travel expenses. Investors should not confuse the group as being reliant on the number of business people travelling, he stresses.
Mr Radcliffe is right that the group is more resilient after cutting its costs over the past 12 months and, while it may sound like bluster and spin, Hogg does have the flexibility to adjust costs further should it need to.
We do think it is a bit cute, however, to say that Hogg does not face any specific risks, despite what the company describes as fragile macro conditions. Profits were down 9 per cent, which the boss argued was pretty good, and the dividend has been "rebased" – meaning, of course, that it has been cut.
Nonetheless, we like Hogg Robinson and see that it has reacted decisively to the downturn. It helps that the yield remains good despite the cut dividend. The shares do not trade at a demanding level, and any recovery in the markets will lead to a better price. Hogg Robinson is high risk, but we think it is worth a punt. Buy.
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