Investments don’t come much more defensive than shares in United Utilities (UU). Stock in the £6.7 billion company has not budged a jot in 12 months – quite an achievement given the travails of the credit crunch – enabling it to outperform the FTSE all-share index by nearly 13 per cent in the process.

It ticked modestly higher yesterday as the Warrington-based water utility reported a 17 per cent rise in full-year pretax profits and confirmed plans to return £1.5 billion – 170p a share – to investors in August. Together with the declared final dividend of 31.47p, shareholders are getting back more than a quarter of the company’s market capitalisation within the next three months. But UU should not be considered a risk-free investment akin to a government bond – despite the fact that water utilities are probably the closest the stock market can offer to one. As Philip Green, chief executive, points out, UU is one of Britain’s biggest consumers of electricity because of the energy-intensive nature of sewage treatment. Although a hedging arrangement meant the company’s power costs actually fell this year, the recent surge in wholesale power prices is set to add 50 per cent to its bill.

There are other pressures. Bad debts rose by 33 per cent last year – to £51 million – and cash collection is only expected to worsen this year given the toll of consumer finances from the credit crunch. That phenomenon is also being felt in UU’s balance sheet: heavy capital expenditure commitments mean water companies carry high levels of debt, so with credit markets having tightened, UU’s borrowing costs will also rise over time. The wider uncertainty remains this year’s start of the regulatory review of the water sector, under which Ofwat will set allowed returns for the five years beginning 2010. The watchdog has signalled that it will seek a tighter settlement than the current regime – probably closer to 4.5 per cent per annum than the current 5.1 per cent.

The comfort is that UU’s gearing should sit comfortably within Ofwat’s target range, while capital expenditure of £826 million last year – indicating a catchup in investment over the past six months – should also please the regulator.

UU’s nonregulated activities, principally the contracting business that provides outsourced services to other utilities, continues to make steady progress despite increased competition from Veolia and Suez. It has won additional work from Southern Water and British Gas, sits on a £6 billion order book and is expanding in Australia and the Middle East.

But at nearly 14 times current-year earnings, UU trades at a premium to its peers, albeit offering one of the highest dividend yields. This suggests that while there is every reason for existing holders to hang on – not least the imminent capital return – there will be better entry points for first-time buyers.

Hamworthy

Joe Oatley, the new chief executive of Hamworthy, might feel relieved that yesterday’s results – the second set that he has presented since taking over in September – passed more smoothly than their predecessor. Then, a badly worded warning of possible contract delays and the stock market’s increasing aversion to engineering stocks combined to pull shares in Hamworthy down 43 per cent in the following months. No such upset accompanied yesterday’s numbers, with a forecast-beating 28 per cent rise in pretax profits helping the shares up 4 per cent.

It was the strength of the order book at Hamworthy – a world leader in technology for transporting liquids at sea – that most impressed.

With promised work on offshore oil production vessels and cruise ship desalination systems having returned, the company’s order book has swelled to £312 million, or a healthy 120 per cent of this year’s forecast sales. Further, sales of equipment to ship liquefied natural gas, which accounts for half of revenues, continues to rise at more than 10 per cent and are forecast to carry on doing so, given the distance between regions where gas is produced and consumed. Profit forecasts could benefit from Hamworthy’s planned return to the acquisition trail after a two-year hiatus: it has £48 million of cash and plenty of scope to consolidate its sector. That aside, the company’s expected double-digit organic growth is attractive in itself, even at nearly 18 times current-year earnings. Buy on weakness.

TNS

Shareholders of Taylor Nelson Sofres (TNS) face an enviable dilemma. The FTSE 250 market research company is trying to engineer a merger with GfK, of Germany, while at the same time the ever-present Sir Martin Sorrell, chief executive of the industry giant WPP, lurks, weighing up a counter-bid. Yesterday TNS and GfK set out the terms of their transaction, promising £76 million of annual savings in 2011.

That would be worth an extra 6p or so on earnings in 2011, reckoned to be about 22p – and if David Lowden, the chief executive of TNS, can deliver, that represents a big boost. But can it deliver? Critics recall that TNS has endured a tricky period, being slow to pick up the move to online research and struggling in the United States. With most market research businesses trading at 11 per cent margins, the belief that the two combined could get to 15 per cent is a stretch.

Analysts reckon that the new-look TNS would be worth 260p to 285p a share, compared with 259½p last night. On the other hand, the arrival of GfK’s core shareholder (a German foundation) on the TNS register would act as a quasi-poison pill.

A bid from WPP could come. Sir Martin may be able to boost his earnings by 4 per cent if he pays 300p, according to Morgan Stanley, while TNS-GfK may be able to find terms to sweeten their deal as a defence. That provides every incentive to sit tight for now. Hold.

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