Wednesday tips round-up; Pennon, Wolseley

4th Jun 2014 08:11

Pennon has the potential to be very profitable. Its South West Water unit is an oasis of tranquillity. Its reported pre-tax profits increased by 10.8% last year and its application for the next five-year regulatory period which starts in 2015 has been fast-tracked - in effect removing any regulatory risks. In parallel, the company is nearly three-quarters of the way through the spending necessary for its new rubbish incinerators, to create power from waste, to come on line. Once completed analysts expect they will more than double cash profits at its waste recycling and land-fill unit Viridor within the next three years to more than £100m. The firm has also signed long-term agreements with clients and suppliers of the new plants which will constitute significant barriers to entry for any would-be new entrants. However, Viridor has taken a hit from new regulation and nobody anticipated the dramatic drop in prices within recycling. Furthermore, energy from waste may prove to be very low profit. Simply put, analysts' forecasts for profits look overly optimistic. On 20 times' earnings the stock looks too rich for a utility. Hold, says The Telegraph's Questor column. Wolseley was sounding rather cautious on Tuesday, which may come as a surprise given its exposure to the construction sector. Yet it should not have. The company's like-for-like sales in the UK dropped by 3.5% because in this country its business is mainly in selling heating products, but mostly replacement parts and boilers instead of equipment for new houses. To that one can add the mild winter, with the lower rate of breakdowns that goes with it. As well, the company may have gone overboard in its desire to protect its margins by not chasing less profitable business. That, however, induced a loss of market share. Nevertheless, its US business saw revenues surge - and 70% of its profits come from there. Nordic countries also saw an improvement, albeit perhaps weather-related. More importantly, it continues to be a strong generator of cash. Hence, further special dividend payments are likely at some point. On about 17 times' earnings the stock's valuation does not suggest much margin for outperformance immediately, but its exposure to the US construction outfit merits a long-term 'hold', writes The Times' Tempus. Please 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.AB