KINDLY observers will suggest that British Energy, in equity investment terms, is one of the walking wounded. Those of a less charitable disposition will conclude that it is one of the living dead, a stumbler through unpleasant twilight that is more night than day. Many do not emerge from this zone. Most of those that do survive live on only in emaciated form.

The roll call of fellow travellers, including Marconi and Railtrack, Queens Moat Houses and Telewest, is longer than anyone would like to think. Interim results posted yesterday by the nuclear electricity generator show that British Energy has many more problems than solutions. Its pre-tax losses may have narrowed, but it is still losing money hand over fist. It goes without saying that dividends will not be paid for the six months to September 30.

British Energy’s key problem is that its method of generating electricity is inflexible. You cannot turn nuclear power plants on and off at will, not in ways that are cost-effective. The costs of building and decommissioning nuclear generators are daunting. Public opinion is opposed, perhaps intractably, to the very notion of atomic energy. At the same time vote-seeking politicians with time horizons stretching only months into the future have little reason to provide the kind of support that the sector needs if it is to have an assured long-term hereafter.

Put in these terms, it is a wonder that shares in British Energy ever topped 700p, as they did five years ago. It is also perfectly easy to see why they have lolled around between 3.2p and 7.5p in the past 12 months. But there is an argument to suggest that this is a stock worth having.

It may never attain its prelapsarian value of 1999. There is also a genuine chance that equity investors will be obliterated in some way. But the UK Government is committed to shouldering the cost of decommissioning — because it has no other option — and decommissioning is the crucial aspect of this story. It is also possible that electricity will rise in price in the middle and later years of this decade as unloved nuclear and coal-fired stations are retired.

The Government will take two thirds of British Energy’s free cash flow in return for shouldering decommissioning liabilities. Judging the discounted value of what is left over is glorified guesswork. But it may be worth more than 4p a share. Hold.

Misys

MISYS, the software conglomerate, yesterday became the latest high-tech company to disappoint the market. A dispiriting trading statement sent the shares back 21 per cent to 221½p after the company revealed that all its divisions were running below expectations. Downgrades to full-year profit forecasts will follow.

The gloomy data is just the latest in a week of disappointments across the sector. LogicaCMG, the computer services group, has been under pressure after issuing a downbeat outlook statement last Friday. Then this week Cap Gemini, a bigger French rival to LogicaCMG, issued its second profits warning in four months. It is becoming clear that the hoped-for market upturn has not yet materialised.

That said, there are good reasons to stick with Misys for the moment. For a start, the disappointment is probably now fully reflected in its share price. Trading is weak but the general economic environment in the UK and US — where Misys derives most of its profits — is improving. Moreover, it is still reasonable to assume that high-tech demand will strengthen some time in 2004.

Plus, Misys fundamentals remain good. The company has three divisions, which supply banking software globally, healthcare systems in the US and services to UK independent financial advisers. Although the three have little in common, they benefit from operating on different economic cycles. Yesterday’s trading statement, for instance, showed how healthcare revenues grew by 6 per cent while banking tumbled by 14 per cent.

Misys is also profitable. Full-year profits may come in 15 to 20 per cent below where they were expected up to yesterday. But Misys will still make something in the region of £100 million and be capable of funding a dividend that might be enhanced at a double-digit percentage rate. It remains unclear whether the 2.8 per cent prospective dividend yield indicates there is obvious value in the stock. But it is worth holding for the cyclical bounce in IT spending that will probably come.

BBA

SHARES in BBA, the one-time stalwart of the UK engineering sector that has transmogrified into an airline services and textiles company, have oscillated in alarming fashion over the past five years. Shares have risen or fallen in value by between 25 and 50 per cent ten times since late 1999.

Unfortunately the overall trend has been more down than up and stock now trades at half the price at which it entered 2000. Few enterprises exposed to the airline industry have escaped the traumas created by the atrocities of September 11, 2001 and the global economic slowdown. Since the larger part of BBA air activities comprises servicing corporate jets, it has been especially hard hit. Companies have tightened belts all round, and governance considerations have made firms think twice about providing travel of this sort.

Meanwhile, the textiles business, which supplies non-woven materials for use in disposable wipes and nappies, suffered from a sharp rise in the price of polypropylene — an oil-derived raw material.

In the past nine months, however, shares in BBA have put in their most sustained and promising advance since 1999. Business travellers have returned to the skies and the sharing of corporate jets has met governance concerns. In textiles, the polypropylene price has moved back in BBA’s favour and improvements to the operating structure leave it set for a cash-generative future, albeit one without enticing growth prospects. Shares, with a dividend yield of 4.8 per cent, are good value. Buy.

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