THE INVESTMENT COLUMN
The recent flurry of customer and shareholder sweeteners from the water companies can, in some cases, be seen as little more than a convenient smokescreen to hide poor results. That's not really fair, however, when it comes to Severn Trent, the second-biggest in the sector.
Given its exposure to the rapidly declining coal mining industry, Severn has actually done well to keep operating profits moving ahead over the past five years. From pounds 155m in 1990, the operating result has risen to pounds 372m last year, before the pounds 55m exceptional restructuring charge announced at the interim stage in November.
The marked decline in water use two years ago - which saw consumption by British Coal crashing 44 per cent - bottomed out last year and recently started to rise again. As a result, turnover in the regulated water and sewage business grew 7.2 per cent to pounds 847m in the year to March, slightly ahead of what would have been expected from the company's old regulatory price cap.
With the increase in direct operating costs held to 1.2 per cent during the period, the higher sales were the main driver behind a 15 per cent rise in pre-tax profits to pounds 323m before the restructuring charge.
The continuing West Midlands manufacturing recovery should mean that there is still plenty of scope for further top-line growth. Future results will be further underpinned by the restructuring, which will see 750 head office jobs axed over the next two years, saving pounds 20m a year when fully implemented.
But while the regulated business is in good shape, Severn's diversifications outside its core have been less happy. Profits of pounds 17.4m from Biffa, the waste disposal operation acquired for pounds 212m in 1991, are still not covering the pounds 25m or so cost of the 11 per cent bonds issued to finance its purchase.
However, the trend is in the right direction. Profits are up from pounds 12m two years ago and pounds 14.2m in 1993-94 in what is now a very competitive market. Double digit percentage volume increases in both waste volumes and landfill usage last year are encouraging.
The underlying trading picture, alongside gearing of just 25 per cent, provides solid backing for Severn's customer and shareholder package. It is almost a carbon copy of the deal unveiled last month by North West Water.
Philip Hollobone of William de Broe believes dividends could rise to 31.8p next year, including the 3.84p "special", putting the shares at 578p, down 2p yesterday, on to a prospective yield of 6.9 per cent, a 60 per cent premium to the market. That should be enough to discount all but the worst regulatory and political storms, even if Severn has all but ruled out share buy-backs. Good value.
Don't write off British Land
Increasing net assets by less than 1 per cent to 421p a share is a disappointing end to what John Ritblat described, with masterly understatement, as an active year for British Land, the UK's third-largest property company.
It was encouraging, however, to see that Mr Ritblat had retained all his traditional optimism. Only he could be relied upon to put a favourable gloss on last year's 2.3 per cent portfolio valuation uplift, which compared with the previous year's 21 per cent rise.
Analysts, who had expected assets per share of up to 430p, took exception to the figures, which were less impressive than those from Land Securities and MEPC, and the shares slipped 16p to 395p.
Profits, less meaningful than assets, were 9 per cent higher at pounds 58.6m (pounds 53.9m).
It would be wrong to write off British Land, however. In many ways it is a much more attractive investment than comparable companies at the top end of the property sector, having the financial clout of the big players but behaving more like the entrepreneurial minnows that arguably are the only way to make money in the current stagnant market.
The active year to which Mr Ritblat referred included the acquisition of Stanhope, at the end of a patient stake-out that finally landed the prize of half the Broadgate office scheme in the City. If projections of rents in the Square Mile are correct, ownership of such a top quality asset will prove to have been worth the wait.
It also included the formation of a 50-50 joint venture with Scottish & Newcastle to buy freehold interests in 306 Chef & Brewer pubs and the early buyout of the Quantum partnership with George Soros.
Managing the portfolio like that is clearly the sensible thing to do when the underlying outlook for the market is so gloomy, but it would be wrong to imagine that doing so will allow British Land to shrug off the sector's gloom.
Analysts are pencilling in net assets for the end of the current year of between 460p and 480p, which puts the shares on a prospective discount of between 14 and 18 per cent.
Given the company's exposure to the slower growing provinces, that seems about right, and with a parsimonious yield of 2.6 per cent, it is unlikely to narrow.
Dropping the Saatchi name was just the start. Now the troubled advertising company Cordiant has really bitten the bullet, setting aside pounds 10m in severance provisions and cutting staff further. One might argue that the move comes rather late: after all, it has been clear since early this year, and particularly following the loss of the lucrative Mars confectionery account, that business was going to be well down this year.
But at least Cordiant can now argue it has put the worst behind it. The clients who were going to jump ship following Maurice Saatchi's departure have done so. The senior executives who wanted to work alongside Maurice are happily at his side. Even the legal clouds that dimmed Cordiant's prospects throughout the earlier part of the year have parted, although at some cost.
Cordiant will swallow nearly pounds 1m in legal costs as a result of the global settlement reached with Maurice et al. Overcoming the effects of client and staff defections will also not be easy. But the underlying operations do look a little brighter in the second half of the year, and management hints that new business may soon come in.
The City expects pre-tax profits of about pounds 20m-pounds 22m this year, before redundancy provisions and a pounds 15m write-off of goodwill following the sale of a US subsidiary. Next year, forecasts approach pounds 28m, or 5p a share.
So has Cordiant really turned the corner? The jury is still out. Competing firms continue to bad-mouth Cordiant's ad agencies, warning would-be clients that the "crisis" continues, but then they would, wouldn't they?
Most analysts like what the chief executive, Charlie Scott, has done to put the Cordiant management on a more professional footing: the company may be less exciting these days, but it is eminently more reliable.
That's as may be, but on a prospective price-earnings ratio of 21 at 104p, the shares, although well down from the year's high of 176p, have taken all the good news on board. High enough.
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