Water growth is stagnant

Published on Wednesday 3 June 2009 21:05

Scrutineer

Northumbrian Water

245.25p -3.25p

EVEN the classic defensive industry, water, can leak in a recession. Water companies have obvious qualities for investors in a downturn because of the non-discretionary nature of the purchase for consumers.

But Northumbrian Water yesterday was the latest of a string of publicly-quoted water groups to say they are being hit by rising bad debts among consumers and falling demand from business.

Northumbrian, not the most liquid stock (sorry) given it is 26 per cent owned by the Ontario Teachers' Fund, posted a 10 per cent fall in profits to 152.7 million as a result.

The best managing director John Cuthbert could say was that there had been no increase in the rate of sales volume decline since the group's March financial year-end. Not quite a Henry V-style address to the City, then.

Business customer volumes fell 4 per cent and volume overall fell 1 per cent in the year, although revenue rose 3.5 per cent due to price hikes.

There will be more of these hikes to customer bills as the industry tries to persuade the regulator of water companies south of the Border, Ofwat, that they are necessary for water and sewerage improvements over the next five-year period beginning in 2010.

Many executives in the industry are talking about proposed price rises of nearly 30 per cent, but it remains to be seen how hard a stance Ofwat adopts on behalf of recession-hit consumers.

Like Northumbrian, the likes of United Utilities, Severn Trent and Pennon have also said they are being pressured by the reduced business demand and higher energy costs (although the latter should ease in the coming year).

Northumbrian's energy bill was up 50 per cent on the year, but the company – which operates as Northumbrian Water in the north-east of England and Essex & Suffolk Water in the south – reckons those costs should come down 5 per cent this year.

United Utilities is not so sanguine on this issue, saying it believed its fuel costs will go up 10 per cent next year to circa 60m

Meanwhile, UU has its own bespoke problem with its onerous 213m pension deficit. The company has warned it may have to pay up to an extra 30m a year over the next decade to make it up.

Net debt in the industry also remains quite high, nowhere more so than at Northumbrian, with a 2.2 billion debt pile.

As a result, like its peers, Northumbrian is putting all capital expenditure under the microscope, its spending reined in to 229m last year from 233m the year before.

All in the industry will also hope, as Severn Trent said it was noticing recently, that the decline in demand from stretched business customers is at least stabilising.

One of the best performers recently has been Pennon, whose 6 per cent rise in annual profits to 165m comfortably outstripped City expectations and came with a decent divi hike.

Dividend policy throughout the sector looking further out is sure to be partly determined by the outcome of the regulatory review mentioned earlier. If Ofwat is tough, expect to see share price falls among most of the players, forming an unattractive water feature of lower capital appreciation and restrained dividend yield.

So, steady rather than storming, like the sector in many ways, is likely to be the best shareholders can hope for on the payout front if Ofwat plays hardball.

Pennon's outperformance, meanwhile, probably makes it the pick of the bunch currently. The problem is it is already reflected in the share price. Pennon trades at 13.5 times estimated 2009 earnings, while Severn Trent trades at 11.3 times, Northumbrian Water on 11.1 times and United Utilities on 9.8 times.

Water remains a good defensive holding in these difficult times.

But the latest round of results suggests far from a totally insulated sector.

BETTER manufacturing figures recently have been followed by a surprise return to growth in the services sector in May.

Does it mean the recession could effectively be over by mid-summer?

Let's hope so. But the real question is how long the traditional post-recession period of stagnation lasts before we can really hail a sustained recovery.

Just stopping the economic fall is far from the same thing, a subject I've touched on here before.

The 1980-1 recession's shadow of stagnation lasted arguably until about 1983.

Negative equity and the largely white-collar recession of the early 1990s were not really shaken off until the mid-1990s.

That is not to put a damper on good news, and the latest manufacturing/services data is good news.

You have to start recovery somewhere. But it may take longer to get somewhere else.

Bryan Johnston of Brewin Dolphin

ONE TO WATCH

Prosperity Minerals

54p +2p

Scotsman says HOLD

PROSPERITY Minerals is a Chinese-based cement manufacturer and trader in iron ore. In October last year, Prosperity announced a profits warning as the recession bit, which triggered a near 40 per cent fall in the share price.

However, the stock has been picking up of late, helped by quite an appreciable investment by David Wong, the chairman and chief executive, who now holds 45 per cent of the company's equity.

Prosperity's fortunes are inextricably linked to the growth prospects for China and there is evidence the pace of industrial activity is beginning to accelerate. Many were concerned that, 18 months or so ago, China was expanding at an unsustainable rate so the subsequent slowdown could be regarded as quite positive.

China is continuing to invest in her domestic infrastructure, which should support Prosperity's cement business. The apparent and historic yield of more than 20 per cent should be regarded with considerable suspicion, especially as Prosperity is relatively highly geared, facing the repayment of a 100 million loan note in 2011. Furthermore, the share market itself is – unsurprisingly, given the ownership structure – very tight and if things did go wrong it might be extremely difficult for investors to extract their position. On the other hand, as the forecasts of looming international industrial extinction are discreetly binned, attention could begin to focus on the impetus for global growth that economies such as China, India and Latin America will provide. An investment in Prosperity is not without risk but, for anyone confident about the general economic outlook for the Far East, it could be a vehicle to consider.

&#149 The value of your investment could fall and you may get back less than you invested. You should take professional advice if you have any doubt about the suitability of this company for your portfolio.

Goldenport profits from sale of dry bulk carrier

SMALL BUT BEAUTIFUL

GOLDENPORT, which owns and operates a fleet of container and dry bulk vessels, has sold one of its ships for $20 million (12.3m).

The Gianni D, a dry bulk carrier, was bought by Intrigue Shipping, based in Liberia.

Goldenport expects to make a profit of $11.1m on the sale.

The vessel is expected to be delivered to the new owners by mid-August.

Captain Paris Dragnis, chief executive of Goldenport, which has a market cap of about 85m, said: "We are pleased to take advantage of the recent rebound in the dry cargo market and realise an attractive profit on the sale of the Gianni D.

"Our new-building programme and our strong balance sheet enable us to feel confident about the future growth prospects of our business even in today's difficult environment and put us in a position to take advantage of accretive fleet expansion opportunities as these may occur."

Following the sale, Goldenport's fleet now consists of 16 container ships and 13 dry bulk carriers.

In 2008, Goldenport's revenues rose by 24 per cent to $155m, while operating profit went from $59m to $93m.

Goldenport was admitted to the stock exchange in April 2006 and has its head office in Athens, Greece.

Wolfson rings up major boost with news of Nokia deal

SCOTS STOCKS

WOLFSON, the Edinburgh-based microchip maker, rose yesterday on reports that its product had been designed into a new Nokia phone.

While unlikely to compensate for its substantial loss of business from Apple – which came after Wolfson was designed out of many of the iPod products in 2008 – Nokia has previously overlooked the company and the latest contract will be good for business sentiment.

Wolfson shares were rose over 10 per cent at one point yesterday, but closed up 6.7 per cent at 119p.

ProStrakan, the Borders pharmaceutical firm, rose 1.25p to 90p after announcing that Allan Watson will become chief financial officer, succeeding Paul Garvey, who is standing down for health reasons.

Optos, the Dunfermline retinal scanning machine maker where Watson is currently employed, continued the strong rise it has enjoyed since announcing its new strategy, jumping 15.6 per cent to 70.5p.

Oil explorers fell as crude prices eased. Dana Petroleum closed 2 per cent lower at 1,282p after the chief executive repeated it was "not for sale", while Cairn Energy, Scotland's largest oil firm, fell 78p to 2,59p.

Shares in engineering group Weir rose to the highest level since early October on hopes of a sustained economic pick-up, despite a fall in commodity prices.

It rose 2.7 per cent to 554.5p.