BRITISH ENERGY’s nuclear associations give this investment story horribly complicated connotations. The variables impinging on the company are easily enunciated: it will succeed if the price of electricity remains high and it keeps its power plants in good working order. But it is easier to talk about them than achieve them. It may be blissfully simple to see how things could work out for British Energy but it is devilishly difficult for the company to exercise assured control over its destiny.
Electricity prices have shown the capacity to swing wildly over the past couple of years. It is true to say that the price of electrical power shifts in tandem with the cost of a barrel of oil, and inflated oil prices may well be here to stay. But British Energy is nothing if not a hostage to the fortunes that electricity prices may or may not bring. The nature of nuclear generation compounds the problem. British Energy cannot switch production on and off as it wishes and that makes it difficult for the company to manage supply and demand.
It is also easier to talk about keeping nuclear plant on stream than to achieve this goal. Nuclear plants involve more sophisticated engineering and where there is sophistication there is scope for disruption. The ever-present safety considerations only enhance the chances of frequent, costly interruptions in generation.
Shareholders do not have to worry too much about nuclear clean-up bills. As part of last year’s financial restructuring, the Government shouldered responsibility for closing plants when they come to the end of their natural lives. But in return the Government will siphon two thirds of the cashflows. At the same time British Energy will be responsible for maintenance.
The Government may sanction a new round of nuclear plant building and British Energy could get a slice of the action. But it is far too soon to make any sensible assessments about the benefits that could flow in the direction of British Energy.
Tempus readers were advised to steer clear of British Energy shares shortly after trading in the reconstituted stock recommenced in January. The price has since doubled. But the risks dilute the attractiveness of the stock every bit as much as it did earlier in the year. The risk of disappointment is still great. Avoid.
HMV
YOU would have had to be living in a cave for the past six months if you were not aware that retailers are struggling. It can therefore scarcely be a surprise to hear that sales at HMV, the music store that also owns Waterstone’s bookshops, are falling.Since HMV’s products are firmly placed in the discretional class of spending, it stands to reason that HMV will be among the hardest-hit retailers.
The fear, however, is that there is more to the HMV disappointment than softening consumer confidence. The danger is that the troubled retail environment is only compounding problems caused by the aggressive competition created by supermarkets on the one hand and internet vendors such as Amazon on the other. HMV’s problems, in other words, may be more structural than cyclical. Supporting evidence for this notion comes with news that individual customers of HMV spent about the same amount on visits this year as last year. It is just that fewer people are visiting. It would be wrong to extrapolate too far from this. But one explanation of the fewer customers, same spending scenario is that more customers are finding other ways of getting their books, CDs and DVDs. If they are, it spells long-term trouble for HMV.
HMV’s takeover approach for the Ottakar’s bookstore chain is, in part, a tacit admission that the competitive environment is getting tougher. That said, HMV will be better equipped to beat off competition from supermarkets and the internet if it can combine and create a single strong force in book retailing. It will also be better able to differentiate its product offering. It may be better placed to attract customers who want to enjoy the browsing experience, for example. At the same time, HMV has opportunities to expand its portfolio of UK stores. Meanwhile, its overseas activities are not without growth possibilities.
The shares, meanwhile, are near rock bottom level. They trade on a p/e ratio of 10, which suggests there is little hope of significant growth. The three times covered dividend yield of 3.5 per cent is sustainable in at least the medium term. Hold.
Barratt Developments
BARRATT DEVELOPMENTS yesterday joined an elite club of housebuilders, including Persimmon and Redrow, that have achieved bumper profits despite the challenging housing market conditions. The company reported record full-year profits, its thirteenth consecutive year of growth, and said that £900 million of sales, equivalent to 52 per cent of the current financial year’s target, are already in the bag.
The group has a wide geographic spread and maintains a comparatively affordable average selling price of £172,000. This has helped in troubled times, as has its decision to increase the amount of social housing that it develops. At the same time, the recent interest rate cut — combined with news that a planned council tax revaluation has been put on hold — should please cautious consumers and give them more confidence to buy a new home.
This downturn in the market, it is true, has not been as severe as the 1990s housing crash, but it has tested the mettle of weaker companies. Many have been forced into selling land to rivals at a cut price to massage their profits in time for the end of the financial year. This means the likes of Barratt and Persimmon can pick up choice sites at the expense of some competitors. With gearing of just 2 per cent, Barratt has plenty of headroom to take advantage should conditions remain difficult.
Shares in Barratt trade at just over six times earnings and generate a 3.5 per cent yield. The company has a proven ability to weather a downturn, and that makes the shares well worth holding.
