International Power can generate raider interest

Casino shares worth a gamble; Aveva's expensive but worth holding

International Power generates a lot of electricity – enough to power 10 million homes – but it has not generated a penny for its shareholders since the group was created from the demerger of National Power in 2000. The shares are nowhere near the price they were at that time, and the company does not pay a dividend.

In an investment climate that is rewarding solid dividend payers over most other types of company, it takes a brave man to recommend IP. But Jason Goddard, the highly rated utilities analyst at CSFB, IP's house broker, says there is "very significant value" in IP shares. He has an interesting thesis to back him up.

In a note publicised yesterday, Mr Goddard conducts an imaginary "asset stripping" of the IP group's portfolio of power stations and power generation investments, in the same way a corporate raider might.

He argues a raider would sell all the easily realisable investments in joint ventures and quoted power companies which, together with IP's own £348m cash pile, would raise £711m. The raider would also close or sell power stations whose output is being sold not to a contracted buyer but on to the wholesale electricity market, which in the UK and US – plagued by overcapacity – is generating only rock bottom prices. CSFB assumes the raider receives no cash from this part of the business.

Cash flows from the remaining generators, all with contracted buyers for their output, would give the raider a whopping 36 per cent annual return on the £328m she paid for them, CSFB says.

Even though they may agree with Mr Goddard's snapshot of undervaluation, sceptics will continue to argue IP is moving in the wrong direction. It is taking on a greater proportion of risky uncontracted generating activity, paid for with high-interest loans from nervous financial backers. Yet IP shares have recovered the ground they lost at the full-year results in March, suggesting many are receptive to Mr Goddard's argument that they represent hidden value.

An interesting share for contrarians with money burning a hole in their pocket.

Casino shares worth a gamble

No-one likes losing their shirt at a casino – least of all the company that owns said casino. A profit warning at Stanley Leisure back on Budget Day, which cited a luckless performance at its 37 regional casinos, sparked fears that gaming stocks were not quite the defensive bet investors had once thought.

The City fretted punters were tightening their belts, which, if true, would have also affected Rank Group's Grosvenor casino estate. Was the much hyped consumer slowdown finally emerging?

In short, no. Analysts have now settled on the view that Stanley's problems are specific to the company. Flushed with enthusiasm about the potential for big cash prizes from the industry's forthcoming deregulation, Stanley gambled on pumping money into its casinos, adding new games and spicing up their menus.

But its punters have proved difficult to impress and its "drop" (the amount of money it takes) has fallen and could cost the group £3m in lost profits before the benefits of redundancies filter through. A dire Cheltenham Festival for bookies and Stanley's woes on the Grand National compounded matters, as did the fact that some high-rolling punters weren't paying up.

While Stanley relies on casinos – including a handful of swanky ones in London – for 65 per cent of its operating profit, they contribute just 10 per cent at Rank, leaving the leisure conglomerate (it also owns Hard Rock Cafes, Mecca bingo and Deluxe film processing) far less exposed. Its shares have fallen too far.

The City still expects both companies to see their numbers come up when the Government cements changes to the regulatory environment. Stanley's shares, up 6.5p at 285p, look worth a flutter, while investors should stick with Rank – if only for its 6 per cent dividend yield.

Aveva's expensive but worth holding

It is a common enough story among small businesses: that contract on which you were relying to meet your profit forecasts for the financial year fails to get signed in time, and you are left with an uncomfortable announcement to the Stock Exchange and a nasty dip in the share price. Aveva suffered yesterday, having failed to tie up its latest agreement with the oil giant Shell to sell a few more licences for the company's engineering design software.

What is uncommon about Aveva – not to be confused with Aviva, the insurance giant – is that the company has survived the technology boom and bust with more aplomb than most. Originally called CADcentre, it made judicious acquisitions to broaden its product range from its original 3D design software and to enable more recurring "software services" revenue. Its software helps designers see interactions between the thousands of components in factories, oil rigs and other big engineering projects, so it is less exposed to the economic and technology investment cycle than some rivals.

Yesterday's disappointing trading update – which cited the Iraq war as a reason for sluggish sales and led analysts to cut profit forecasts for this year and next – sent shares down 17p to 330.5p. Aveva is a relatively expensive software stock, but is worth holding.