United Utilities's dividend is reason enough to hold shares

Ted Baker could suffer from further retail jitters; Game may score high on sales over Christmas

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United Utilities to miss telecom target

Investment Column

It has sometimes seemed a shame that United Utilities didn't stick to its plumbing. The group's attempts to diversify away from the heavily regulated electricity and water business has been hit and miss, at best.

It has had to execute a sharp U-turn out of South America and there was some more vaguely disappointing news yesterday from Vertex, the old UU customer service department which now does work outside the group, too, for the likes of Marks & Spencer, mobile phone operators, and local authorities.

Its move into telecoms has been particularly ill-starred. "I came in halfway through," was about all the words of consolation Simon Batey, the finance director, could muster yesterday. He is right to insist investors don't get too downbeat, though. Your Communications, as the telco is called, has stopped expanding its network so the £250m UU has pumped in will be basically the end of it. Even if the division can't be sold when it finally reaches profitability next year, the only real downside will be that running it takes up management time.

But these are pimples, actually, when compared to the smooth running of the vast multi-utility business at the group's core, which dominates the North-west of England.

In this business, the trick is to beat the regulator by making the infrastructure improvements demanded at a cheaper price than might have been expected, and by running the business more efficiently than the assumptions on which the regulator's price controls are based. UU is doing well. It is making "sound progress", it says, towards £480m operating cost savings, and is already looking years into the future at ways to find more, before the next set of price controls are negotiated in time for their implementation in 2005. It is beginning a major project to standardise water and waste treatment facilities across its business, making maintenance cheaper.

The worry is that the uncertainty caused by the price review will destabilise share prices in the couple of years beforehand. If the economy doesn't go to hell in a handcart after all, UU's shares could face a sharp sell-off.

So those are the risks, but they are outweighed, not least by a sturdy dividend – it yields 8 per cent – and a valuation that doesn't give much credit for the potential, if not yet the actual results, of Vertex. UU shares, up 11p to 604p, are worth holding.

Ted Baker could suffer from further retail jitters

Ted Baker has come a long way since its founder and chief executive Ray Kelvin burst on to the high street with his first shop in 1988. That one, in Glasgow, just sold men's shirts.

These days, the trendy retailer sees itself as a lifestyle brand. It preys on label-conscious consumers with a broad range of products from sunglasses to suits.

It uses selective sites in high-profile locations, such as London's Covent Garden and New York's SoHo, to showcase its goods and expects major expansion projects for both of these locations to pay off in the key Christmas shopping period. It has 18 stores in the UK and a new store in Paris and plans to add outlets in Miami and San Jose.

Retail sales account for two-thirds of the group's sales, with the rest coming from department store concessions through wholesale and licensing agreements. This strategy, it argues, will help to shield it from the worst of the UK high street fall out, if the slowdown is as severe as many fear.

Early indications in a trading update tacked on to yesterday's solid interim figures (profits up 19 per cent to £3m, on sales up 15 per cent) were that sales of its autumn collections are off to a slow start.

While analysts were unperturbed, the shares, down 4p at 196p, could suffer from further retail jitters. On a 12.5 times p/e rating, they look unexciting.

Game may score high on sales over Christmas

This was always going to be a high scoring year for Game Group, the retailer once called Electronics Boutique. Microsoft launched its XBox games console in the spring, while Sony's PlayStation 2 was still selling like hot cakes.

That gave Game, which has some 500 shops around Europe, with an interim profit for only the third time in its history. It normally has to wait until the crucial Christmas period to see profitable trading.

In the six months to 31 July, pre-tax profits, before goodwill amortisation, were £3.1m, compared with a £1.9m loss a year before. Same-store sales were up a storming 28.7 per cent and, with new store openings on top, total group sales surged 50 per cent to £214.7m.

And the best is yet to come. Game makes a third of its total sales from November to early January. The industry is predicting an excellent Christmas with computer games based on Lord of the Rings, James Bond and Harry Potter all expected to be big. What happens beyond Christmas, however, is less clear. There aren't likely to be any new consoles now until 2004 at the very earliest so Game will, until then, be more reliant on sales of games.

That is not necessarily a bad thing. The number of gamers out there is higher than before the console wars began, and software margins are greater than those on the kit itself. However, Game needs some blockbusting titles next year.

Analysts predict the company will turn out pre-tax profits of £40m to £45m this year which puts the stock, down 1.5p at 103.5p, on a multiple of around 13 times.

That rating does not seem especially demanding and leaves scope for another sprint higher over Christmas. But investors may want to reconsider their positions in the New Year and as the software line-up for 2003 emerges.