What on earth is British Energy worth? As the graph here shows, investors have only the vaguest of ideas — and their theories change every five minutes. Confusion about the value of the nuclear generator is all the more noticeable in the context of the capital reconstruction that pretty much annihilated equity value in January 2005 and the bull run over the mid 1990s that saw the market capitalisation at £6 billion — or about 30 per cent higher than it was when shares hit their 2006 peak in August.

There was a time when electricity producers, in common with other utilities, could be relied on to deliver something akin to steady value. The volatility has come thanks to the combination of wild swings in electricity prices, a cost base that has proved hard to manage, and uncertain decommisioning costs. Uncertainty about whether the Government will create circumstances in which British Energy can replace ageing power stations adds yet another headache.

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Yesterday’s disappointing news from Hunterston and Hinkley Point underline the continuing vagaries of the nuclear story, and the continuing difficulty of ascribing a sensible value to the enterprise. So why not go back to first principles? British Energy is capable of producing about 11 million megawatts of electricity per hour. The best of the plants will still be operating into the 2020s, but a decent estimate is that the average life span is a decade. So let’s say British Energy will generate just short of one billion megawatt hours of electricity over the next ten years. How much is that worth? If the price of electricity remains at the current level of £37 per megawatt hour, the total revenues will be £ 37 billion. If operating costs soak up no more than 90 per cent of the revenues, £3.7 million of that would count as profit.

There is a possibility that electricity prices will rise and that operating costs will get lighter. There is precious little sign that new nuclear plant will be built soon and shortage of supply will keep prices buoyant. Environmental issues mean that gas, coal and oil fired capacity will be stretched and renewable sources of energy are, as yet, unproven bulk generators of electricity.

At the same time, British Energy is likely to make a post tax profit margin of about 15 per cent in the current year. Perhaps more of that £37 billion of revenue will drop to shareholders: and perhaps the plants will be generating for more than ten years.

Yet the value of this ten-year cashflow must take account of the risk that electricity prices will fall or that operating costs will rise. The present value of the £3.7 billion reduces when one takes account of inflation and the much less risky returns that could be had stashing cash away on deposit, or in high grade bonds. On balance the shares lack appeal. Sell.

Playtech

The Chinese are said to have an insatiable demand for gambling. Playtech is betting on just that after tying up a deal with Sino Strategic International (SSI), an Australia-listed investment group, to help to forge its entry into the market.

Under the five-year deal Playtech’s software and systems will be launched across 600 outlets in Shanghai to allow Chinese punters to play Texas Hold’em Poker.

The computer-based systems allow users to play against real players remotely, with Playtech and SSI both taking a slice of the revenues.

The deal marks a further push into Asia for Playtech, which already runs the online poker operations of Paddy Power, Victor Chandler, Bet Fred and Bet365. Combining smaller poker sites improves the experience for their users by allowing them to compete against more players.

While the Playtech deal could see strong interest, the gaming group is also hoping that the Chinese will start betting on traditional games such as mahjong, of which there are thought to be about 350 million active players. That would be the real boon for investors, as the company would be the first to invite online bets on traditional Chinese games.

The launch is limited to a tiny, albeit wealthy part of the country but could, if successful, allow the company to persuade other regions to grant approval for similar programmes. The Chinese market for such games is untested, but the potential could be huge.

Playtech has no exposure to the troubled US market. It cautioned in October that the state of the US market could set it back a year financially, wiping about 100p off the shares, but they have since recovered most of that ground. Trading on 14 times 2007 forecast earnings the shares, up 10½p at 235p last night, look good value.

Buy.

HMV

It is a wonder that anyone can see anything positive in the horror story that is HMV. There must have been a time when the company had good things to say, but the combination of weakening consumer demand for CDs and DVDs and the increasing competition from online and supermarket rivals, means that the retailer has had to run hard even to produce the anaemic results of the past couple of years.

That said, the 5.2 per cent dividend yield looks decidedly positive. It is income that could provide sufficient reason not only to hold on to the shares, but to buy quite aggressively. Sadly, the yield is now so high that it sets alarm bells ringing. Would the market really allow shares to trade where they are if the dividend were secure? Dividend cover, at two times, certainly restricts the group’s ability to increase its payout. So even the dividend sends negative vibes. Sell.

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