Friday tips round-up: National Grid, Hilton Foods

20th Jul 2012 07:17

National Grid's regulated business in the UK generates about 60 per cent of group profits. That's why Ofgem's rules on the rate of return it is allowed and level of investment are crucial. On Monday, Ofgem released its draft determination for the new, extended regulatory period from 2013 to 2021. The proposals are much tougher than those sought by National Grid - and this has prompted speculation of a potential dividend cut or a capital raising. The sustainability of National Grid's dividend is central to the investment case and, following the last regulatory review in the water sector, both Severn Trent and United Utilities ended up cutting their payouts. Questor said "buy" on Feb 1 when the shares were at 632p, but downgraded the shares to hold in May when they were at 675p. Questor feels that the two next catalysts - Ofgem's detailed proposals and National Grid's response - will be negative catalysts for the shares which have performed extremely well of late. Therefore, despite the dividend attractions, Questor is inclined to sell the shares now and wait to buy in again at a cheaper level. National Grid is an attractive share for income seekers to hold - especially for investors who bought in cheaply. However, the valuation is rich and uncertainty is high. The shares are more likely to fall than rise in the short term. On balance, Questor says sell and wait for an attractive re-entry point later in the year.Our second company today to be battling headwinds from the weaker euro is Hilton Food Group. They will not be the last in pointing out, as the summer progresses, the damage being done on relocated profits as the European currency heads seemingly inexorably towards €1.30 to the pound. Hilton gets 75% of its earnings from outside the UK, and has good prospects of expanding elsewhere its services, packing and distributing meat to supermarkets, notably Tesco in the UK. But there are other headwinds acting as a drag on the business. Low consumer confidence in all markets does not encourage the purchase of expensive meat cuts ? indeed, there is evidence of downtrading to cheaper products, such as meatballs and burgers. The grim weather has not been kind to the sale of meat for the barbecue, which would normally be selling well now. Meanwhile, the cost of meat has remained high, though there is the opportunity to pass this on to retailers. Hilton reckons it is still growing sales across the group. Most of the growth in the first half was in Denmark, where the company started production in spring 2011. There is the prospect of expanding outside Europe, into markets where the retail sector is becoming more developed. But those headwinds will persist. The shares sell on 10 times earnings, but, even with the support of a 4.5% yield, immediate progress looks limited, says The Times´s Tempus column.ABPlease note: Digital Look provides a round-up of news, tips and information that is impacting share prices and the market. Digital Look cannot take any responsibility for information provided by third parties. This is for your general information only as not intended to be relied upon by users in making an investment decision or any other decision. Please obtain a copy of the relevant publication and carry out your own research before considering acting on any of this information.