Investment Column: United Utilities still has cards it can play

Britvic; French Connection
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The Independent Online

Our view: Hold

Share price: 483p (-3p)

Another day, another water supplier's results – and the industry is still holding its breath for the five-year pricing plans from Ofwat, due this morning.

On the subject of its financial performance, United Utilities' first half was largely in line with expectations. Recession has pushed down demand for water, particularly from industry, taking an estimated 4 per cent out of the group's revenues. Meanwhile, the 6 per cent price increase allowed in the early part of the year has been swallowed up by higher power costs and rising bad debts. But the group still managed a 1 per cent rise in underlying operating profit to £370m on revenues broadly flat at £1.2bn.

It is proposing an interim dividend of 11.17p, up by 5 per cent, and is upbeat about its prospects for the full year. But the real focus is Ofwat's new price controls, for the five years to 2014. The draft, published in July, imposes heavy cuts on United – reducing bills by an average of £17, or 5 per cent, over the period – and there is little expectation of significant changes in today's conclusions. Rumours of a United Utilities rights issue and a rethink of its dividend policy have being doing the rounds all summer. But the most interesting element of yesterday's statement was the company's plan "to assess further opportunities to crystallise value from its non-regulated business". Holdings in Northern Gas Networks and the Manila Water Company have already been sold for £130m. More disposals could follow.

It is too early to put a "buy" rating on United Utilities shares. It will be given two months to appeal against Ofwat's ruling, which could change things all over again. And all but the most daring investor would do well to wait until early next year's conclusions on the group's dividend sustainability. In the meantime, hold.


Our view: Buy

Share price: 368.2p (-4.3p)

A clean glass yesterday from Britvic, which issued its results for the year to September 27. The only real blemish was dire trading in Ireland (hardly surprising), where profits fell by 17 per cent to £12.2m, and worries about Britvic saying that visibility on both sides of the Irish Sea remains "limited" with the company taking a "cautious view of consumer spending".

However, apart from these blemishes the company reported what were otherwise a sparkling set of full-year results. The group, which has operations overseas including tte Netherlands and Bulgaria, saw its pre-tax profits rise by 23.4 per cent to £86.5m. In Britain, Britvic said it had outperformed the market in all key categories and touted a strong performance from its six core brands: Tango, Robinsons, JO and Fruit Shoot, as well as its bottling agreements with Pepsi and 7Up. These brands helped drive revenues up by 5.6 per cent to £978.8m.

A further tonic came from a 23.9 per cent jump in the final-year dividend to 10.9p. Investors may also take note of Britvic agreeing with US investors to raise $250m in a private share placing, which caused analysts to lick their lips at potential merger and acquisition activity. Furthermore, despite a surge in its share price since hovering at about 200p in March, Britvic's stock still appears cheap, trading on a 2010 price-to-earnings ratio of just 10.5. For these reasons, we expect to see some fizz over the coming year. So buy.

French Connection

Our view: Sell

Share price: 36.25p (-3.75p)

Time to recconnect with FCUK? The fasion chain has been under a cloud. The reccession has hit everyone, but French Connection sits in a particulary crowded sector of the market and has a brand in need of some vim now that people have realised its FCUK logo is really not that funny.

To be fair, womenswear is doing okay (particularly the mailorder Toast brand). However, men continue to stay away from its stores and yesterday's numbers were disapointing.

In a trading statement, French Connection also said that its North American retail business had been hit by fierce competition for consumers in a "highly promotional" market. As a result, like-for-like sales fell 4.7 per cent during the period.

The overall sales rise of 8 per cent must be seen in context: it has been lifted by the impact of a weak pound but that hurts its margins, which will be seen in the retailer's full-year figures, because a weaker dollar raises production costs.

Corrective action is being taken to put the company on a firmer footing and a strategic review is under way (Japan has already been cast aside), But with the trends not showing any real improvement and Investec forecasting a full-year loss of £14m, more is needed before we would be ready to commit funds. Avoid.