The Investment Column : Wessex keeps profits flowing

Wessex Water may be the last of the privatised water companies to report its figures but it is by no means the least interesting. Like most of the utilities sector, it is embroiled in merger activity which could see the company cast as either predator or prey.

In March, Wessex made an offer for its neighbour South West Water. Severn Trent also threw its hat into the ring. Both bids are being scrutinised by the Monopolies and Mergers Commission, which is not due to report until September. If approved, South West could be the subject of a pounds 900m bid battle.

Wessex management was due to meet MMC officials for the first time yesterday and the company promised shareholders that it would not over-pay. (Severn Trent said the same thing last week.)

Wessex's problem is that although it is well run and has an enviable record, its relatively small size makes it vulnerable. Swallowing the accident-prone South West may act as a poison pill. It would also make it a much larger morsel for a bigger rival to digest.

All this places shareholders in a good position. If Wessex does win South West, it ought to be able to wring out a better performance from the company. If it fails, there is always the prospect of Wessex becoming a bid target.

Yesterday's figures confirmed the good run of a company that has never issued a hosepipe ban and never made any exceptional charges in its core business. Pre-tax profits in the year to March were 14 per cent higher at pounds 134m.

Costs have been shaved by another 4 per cent. Management is promising a similar cut this year. The waste business, which has conducted 42 acquisitions since 1991, improved profits by 20 per cent to pounds 12m and should benefit from the landfill tax. The only negative here was the second-half drop in recycling profits.

With pounds 62m of net cash Wessex says it can easily gear up for a South West Water bid. If it fails it is likely to return some money to shareholders or acquire more waste management groups. Eight were acquired in the last financial year.

Analysts are forecasting profits of pounds 144m and the shares, 7p higher yesterday, trade on a forward rating of 8. Hold.