The Investment Column: National Grid retains its spark with US venture
Wednesday 26 May 1999
National Grid (NG) is getting away from that image. It says its main asset is not its electricity transmission monopoly in England and Wales, but its skills in growing fledgling network businesses.
The phenomenal growth of Energis, the telecoms company that NG helped build and in which it still holds a 48 per cent stake, justifies the claim. But the task for NG is to find the next Energis.
The company yesterday said its strategy is to grow subsidiary businesses for future sale. Although the usual method for making the value of a subsidiary transparent is the demerger, NG has chosen to sell down its Energis stake.
NG's detractors argue that selling rather than demerging deprives shareholders of a chance to participate in a still growing activity. But NG is taking the cash from Energis for strategic reasons. This year it raised pounds 713m from selling shares in Energis to help fund its pounds 2bn acquisition of New England Electric System (NEES).
The point of NEES is to apply NG's experience of the deregulated UK electricity market in the US. The roll-out of electricity competition in the US lags behind the UK. Electricity transmission companies are vital to the process because they ensure that the lowest-cost generators are fully connected to customers.
What the US regulators want, and what NG offers, is expertise in this area. The NEES deal should be the starting point for NG eventually becoming the dominant transmission player in the US.
Analysts estimate that NEES will add around pounds 360m initially to NG's pounds 582m operating profits from the core UK electricity transmission activities. It could take six months to receive regulatory approval for the deal, but completion is highly likely.
The potential of NG's other fledgling businesses is much harder to predict. These include electricity transmission ventures and telecoms partnerships in Norway, the Isle of Man, Brazil, Zambia, Australia and Argentina.
The rather piecemeal nature of this portfolio suggests deals like NEES are going to be rare. Even so, on forecasts of pounds 522m pre-tax profits and earnings of 26.3p per share, the shares are on a p/e of only 16. That relatively undervalues NG's possible upside in leveraging its UK transmission expertise in the US in the long-term. Buy.
SIR COLIN Southgate's retirement from EMI in July will follow a period of belated cost cutting and top level management reorganization. If that leaves the music producer and publisher in rude health for the future, it may not be enough to see the shares outperform the market.
Few investors will have forgotten the hype around EMI shares prior to its 1997 demerger from Thorn. Since then, they have underperformed the media sector by 40 per cent as a takeover failed to materialise when Seagram's MCA Music arm opted to buy Polygram instead. EMI stock slid to an all- time low of 312p in October. Since then a decent recovery has ensued, although the shares fell 12.5p yesterday to 447p as EMI reported full- year results.
EMI's attractions are its 20 per cent discount to the media sector's historic p/e of 30. It also trades at a fractional discount to the market - this despite the music industry's expected long-term growth potential and EMI's rarity value as the only independent among the big five music groups.
Analysts expect EMI to provide 10 per cent earnings growth through 2001. A discovery like the Spice Girls would boost profit substantially. "Girl Power"can't be reliably factored into earnings forecasts, however.
With new directors installed in many of EMI's main markets and the experienced Ken Barry and Martin Bandier heading up recorded music and music publishing respectively, incoming chairman Eric Nicoli has a fresh executive team to drive the company forward.
But management can have only so much impact in an industry fundamentally based on creativity. Sceptical investors may wish to exploit the recent rally and take some profits.
MORRISON GROUP is a construction company which even constructs its own business. It has established a leading position in the market for private finance initiative (PFI) contracts. This enables it to instigate 80 per cent of its sales.
Morrison's strength in PFI is based on a first-mover advantage. Securing PFI contracts requires in-house expertise to handle the bureaucracy and an army of advisers to get the finances right.
Morrison invested in these capabilities early on. Now it is cementing its reputation as a company that makes PFI a success.
The value of Morrison's reputation was proved yesterday by its reported 15 per cent hike in pre-tax profits to pounds 24.1m and a 17 per cent rise in earnings per share to 24p.
The group is broadly based around three divisions - property, infrastructure and facilities management - and has a diverse portfolio of business within each. It was able to offset declining revenue from roadworks with income from water deals and motor-racing circuit management.
Morrison is sustaining its earnings growth. Current orders, at pounds 450m, are already double those at this time last year. It will be raising its headcount to ensure smooth delivery of this organic growth.
Meanwhile, it is seeking acquisitions to strengthen the facilities management division, which is benefiting from the continuing outsourcing trend. With gearing at 55 per cent, the group's investment plans have firm foundations.
Despite the acquisition plans, Morrison is a cautious company; provisions against Russian disappointments dented profits slightly. Growth will not be spectacular.
However, on Sutherlands' forecast pre-tax profits of pounds 26.2m and earnings of 29p per share for 2000, the shares are on a forward p/e of just 10. At 285p they look good value.
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