Worth splashing out on newly promoted Kelda

Laird Group a buy, but not yet; Maintain a stake in high-yielding SIG

Stephen Foley
Wednesday 12 March 2003 01:00
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The FTSE 100 has an impressive new star. Kelda, the owner of Yorkshire Water, will be added to the index at the end of next week, and is also well worth adding to a portfolio of high income shares. It has a dividend yield of 6 per cent that isn't going to come under threat from a deteriorating economic outlook, and a rock steady profit stream that the industry regulator has no interest in damming.

There have already been signals from Ofwat that the next five-year price review will allow a rise in charges to customers. The regulator needs water companies to be profitable so as to finance the infrastructure investment necessary in this industry. Normally, from the mid-point in each five-year cycle, speculation of price curbs and the start of the Ofwat negotiations conspire to dampen water share prices. This looks unlikely in 2003, and the new caution among equity investors is sure to keep demand for these safe-as-houses companies strong.

Kelda has a good track record in beating the cost savings demanded by regulators – savings which can then be passed on directly to shareholders. It has also settled on an attractive capital structure, having loaded the business with cheap debt.

Kelda's interests on the east coast of the US have strong potential, too, with more than 200,000 customers, although this past year profits have been constrained by drought conditions.

Kelda shares spiked higher in January on news that Waste Recycling, of which it owns 46 per cent, had attracted a bid. That has rather been reversed now that Waste Recycling has been forced to admit to accounting irregularities at a recent acquisition, but there remains an outside chance a bid will still materialise.

The water sector was one of last year's best performers and there is no reason to expect any different this year. The combination of defensive qualities, high dividends and the possibility of a takeover by a European mega-utility combine to make Kelda a buy.

Laird Group a buy, but not yet

Laird Group has undergone a serious facelift over the past year. After selling some lacklustre businesses, Laird has been left with three main divisions – the hi-tech Technologies unit and the lower-tech Security Systems, where it makes things like window locks, and Plastics, where it distributes plastic rods and sheeting used by construction firms.

The group restructuring came at a price. After booking a £58.8m loss on the disposals, Laird made a pre-tax loss of £54.4m in 2002, compared with a profit of £8.2m a year before.

Stripping those one-off nasties out, however, all three of Laird's divisions made headway despite the weak market conditions. Laird has highest hopes for its Technologies division, which makes electromagnetic interference shields that prevent microchips from interfering with each other, and which it sells to the likes of Nokia, Dell and Cisco. Real progress there, however, remains linked to a semiconductor industry recovery.

The company's broker, Cazenove, upped its profit forecast yesterday to £34.5m. That puts the shares, up 3p at 153.5p, on a forward rating of eight times. That isn't too demanding but until there are surer signs of an upturn in market conditions, there is no hurry to buy.

Maintain a stake in high-yielding SIG

Investors who believe the UK economy could be heading into choppy waters might find it hard to believe SIG, a building materials group with two-thirds of its business in this country, can make a good punt at this point. But there is a reasonable case to be made for at least holding on to the shares.

Pre-tax profit fell 10 per cent to £46m in 2002, which proved a difficult year. With increasing numbers of offices standing empty, SIG's highest-margin business, commercial interiors, has suffered a decline in sales. And the slide in commercial building work in Germany forced the company to close offices there last year, at a cost of £1.5m in redundancies. The company may still be being too optimistic when it predicts "no material in market conditions in 2003".

But here's the positive case. Its next biggest business after commercial interiors is insulation, and growth is spurred by new energy efficiency legislation requiring more or thicker insulation material in new buildings. A lot of work comes from maintenance, too, and the fixing of a leaky roof is not something that can be put off like a new kitchen or bathroom, no matter how cautious the consumer becomes.

Cashflows are strong and SIG shares are cheap at 189p, with a 6 per cent yield. Hold.

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