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Questor: as a possible Pennon deal sparks interest in water, we’ll stick with Severn Trent
Questor share tip: potential sale of Pennon’s waste recycling arm is positive for its rival in multiple ways
The fresh flurry in Pennon’s shares, amid chatter that the firm may be about to sell its waste recycling arm Viridor to private equity for some £4bn, puts water utilities firmly in the spotlight and this column remains content with Severn Trent as a stock capable of generating income and capital gains.
The Pennon talk is relevant for three reasons. One, it shows that financial buyers still want assets capable of generating relatively predictable cashflows over the long term. Two, London-listed utilities look decent value relative to their overseas peers on the basis of their regulated asset base, even allowing for the post-election relief rally.
Finally, there is a chance that any deal for Viridor kicks off a round of merger and acquisition (M&A) activity in the water sector.
Severn Trent’s 2017 purchase of Dee Valley is a (relatively) rare recent transaction but the ability to acquire, strip out replicated administrative overheads and create cost benefits for investors and customers may prove tempting.
This could also make Pennon worth a further look, as a would-be bidder or a potential target, in the wake of any Viridor deal, although that is a story for another day.
With or without any M&A angle, Severn Trent still looks a solid portfolio pick.
Questor says: hold
Ticker: SVT
Share price at close: £25.81
Update: William Hill
This column follows the horses as well as the stock market and likes to think of itself as a disciplined student on both counts, doing thorough research before putting any capital at risk.
Much of the equine analysis is done via the pages of the Racing Post and it is to this august journal that thanks must be given as it has pointed out that something is afoot at our (thus far) unsuccessful selection William Hill.
Since Ulrik Bengtsson stepped up from chief digital officer to the top job of chief executive, there have been major changes in senior management.
Chief financial officer Ruth Prior is the latest one to leave, as she returns to her previous field of private equity, and her departure follows those of the director of corporate communications, head of safer gambling, group trading director and chief information officer. The group director of strategy is also preparing to head for pastures new.
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Given that the bookmaker’s shares peaked in summer 2013, it makes sense to see whether a new approach can arrest the long-term slide. Regulatory pressure is not going to go away – and at least the latest trading update earlier this month said earnings would beat forecasts.
That makes a nice change from a steady diet of downgrades and suggests that Hills is getting its shop estate in Britain in order and improving its online offering, even as the FTSE 250 firm continues to build on the huge opportunity that is the American market.
Patience could yet pay off at Hills and a forecast 4.6pc yield means we can wait.
Questor says: hold
Ticker: WMH
Share price at close: 173.5p
Update: Resolute Mining
Resolute Mining’s plans to sell its Ravenswood site in Australia for a maximum of A$350m (£183m) and a A$196m capital raising will allow the gold miner to both pay down debt and allocate sufficient resources to the development of its Syama mine in Mali.
The dilution of existing shareholders by the share placement is frustrating but Ravenswood’s forecast “all-in sustaining cost” of gold production was expected to be $1,200 an ounce in 2020, compared with $960 at Syama (and $800 at the open-pit Mako mine in Senegal), while less debt means less risk and less risk can mean a higher valuation.
Analysts suggest that shares in Resolute, first assessed last October, trade below the net asset value of the Syama and Mako sites. The stock is still a valid option for investors who feel they need some portfolio protection via exposure to gold.
Questor says: hold
Ticker: RSG
Share price at close: 61.25p
Russ Mould is investment director at AJ Bell, the stockbroker. Read the latest Questor column on telegraph.co.uk every Sunday, Tuesday, Wednesday, Thursday and Friday from 6am.