Welsh Water playing it cool

THE INVESTMENT COLUMN

Welsh Water was yesterday giving nothing away about its designs on South Wales Electricity, despite recent speculation that it had gone cool about bidding for its neighbour.

Before speculative trading in shares in the National Grid started it was thought that Welsh Water was considering a bid in the region of pounds 10.20 a share, which would value Swalec at about pounds 940m.

Nevertheless, most analysts are expecting the water company to make a move, an expectation that yesterday overshadowed its half-year results. A 3.5 per cent rise in pre-tax profits to pounds 80.6m before exceptional items was bang in line with forecasts. Last year's numbers were distorted by pounds 28.5m in restructuring costs.

The company seems to have coped well during this summer's drought. But the extra spending on tankers and piping to ensure continuity of supplies to customers cut into profits. Operating profits in the regulated business dipped by pounds 3m to pounds 84.7m, even if Welsh Water at least had a publicity coup in being able to keep the water flowing.

The fall in regulated profits offset a better-than-expected performance in the unregulated businesses. Operating profits here were up from pounds 3.4m to pounds 3.6m, on turnover of pounds 26.3m, against pounds 23.1m before. The performance of the engineering business has improved thanks to the restructuring, which is almost complete. The business produced operating profits of pounds 100,000, against last time's pounds 2.8m loss, which included restructuring provisions. Group turnover grew by 3.7 per cent to pounds 269.5m, while earnings per share soared from 33p to 57.4p. The dividend, 11.5 per cent up at 12.6p, was in line with expectations.

Price rises agreed with the Director General of Water Services, effective from the start of this financial year, means charges to customers have been increased above the rate of inflation for the first time in 11 years, albeit only marginally. Full-year profit forecasts are around pounds 160m, putting the shares at 699p, down 5p, on a prospective price/earnings ratio of just 7.

With a prospective yield of only around 3.4 per cent and the bid for Swalec in the balance, investors would be wise to hold fire until the picture becomes clearer.

LCI worth

a gamble

Jaded investors put off the betting industry by a recent string of National Lottery-inspired profits warnings should take a look at London Clubs International. Since floating on the Unlisted Securities Market at 200p last year, the now fully-quoted casino operator has seen its share price more than double.

Yesterday's half-way figures give some clue as to why. Pre-tax profits jumped by an underlying 11 per cent to pounds 19.3m in the six months to 24 September.

At that level, they are more than the figure for the whole of 1994 and over twice the profits struck in 1993.

Unlike more downmarket betting operators, LCI is little affected by the lottery. Punters spend anything from pounds 30 to over pounds 1,000 a night at the group's mainly London casinos, putting them out of reach of the average lottery player.

Its three flagship operations, including the Ritz in Piccadilly and Les Ambassadeurs off Park Lane, still produce 69 per cent of LCI's half-year profits.

But the contribution is 10 percentage points down on last year and the real encouragement from the latest figures comes in the continued bounce back from the group's less exalted casinos.

The Golden Nugget, which attracts custom from workers in and around London's Chinatown, is now making a "useful" contribution after sinking into loss in 1993.

Meanwhile, the Palm Beach has been turned round by extracting more from the punters.

LCI should be able to work the same magic at the recently-acquired London Park Tower Casino, where the "win" percentage (actually the amount lost by customers) could be raised from its previous level of 14 per cent to nearer the group average of 20 per cent within a year.

This broadening of the earnings base is good news, but LCI's profits remain at risk to the volatile whims of high- rolling punters, which explains the relatively low rating of the shares.

Up 1p at 410p, they are on a forward multiple of 12, assuming full-year profits hit pounds 37m this year. Worth holding.