Market Report: Heat on water companies as share prices evaporate

WATER pressure was high in the sun-drenched City yesterday. Shares in all 11 companies in the sector finished the day at least a couple of pence below last Friday's close.

There is concern over the possibility that some companies will have price increases capped to less than the rate of inflation by Ofwat, the industry regulator. Unrest among investors about directors' pay and performance is also affecting sentiment.

South West Water, which bills domestic customers with the highest rates in England and Wales, will today be one of the first to face intense scrutiny from shareholders at its annual meeting. The shares were the sector's worst performer yesterday with a 14p fall to 520p.

The morning's events at South West, no doubt, will be relayed to the board of Thames Water, down 8p to 486p, which will be quizzed this afternoon about a 43 per cent pay rise for Mike Hoffman, chief executive.

A similar line of questioning is on the cards on Friday for directors of Severn Trent, which chose to send John Bellak, its chairman, into early retirement with a cheque for pounds 512,000.

The water pressure was also a dampener for the FT-SE 100 index. Several of its constituents are water utilities.

Footsie was struggling from the bell. By mid-morning the index was off 15.7 points and, more important, below the 3,100 benchmark at 3,099.

Most of the falls - water issues apart - were not induced by a bout of selling, however. Volume trading was one of the lowest recorded this year, with only 431 million shares turned over.

Futures dominated the proceedings in early trading, while a raft of stocks going ex-dividend virtually ensured that Footsie was never going to move into positive territory.

The ex-dividends initially clipped 6.1 points off Footsie. They were British Telecom, off 9p to 382p, NFC, down 3p to 201p, Thorn EMI, which shed 32p to pounds 10.41, and Tomkins, 3p easier at 229p.

Among all Footsie constituents 59 fell, 31 rose and 10 finished unchanged. Notable gainers included Wellcome, up 12p to 644p on further favourable digestion of last week's figures.

Sectoral neighbour Glaxo, however, lost 6p to 568p on more worries about Zantac patent infringement allegations.

Second-line stocks also had an unsettled session, none more so than Blenheim Exhibitions, which slumped 43p to a three- year low of 257p.

Adverse weekend press comment about the company's prospects in France, which yields more than half of group operating profits, was largely to blame.

More than half a million Blenheim shares, including a late agency cross, were traded.

Elsewhere, London International Group held steady at 85p as SG Warburg placed the 19.7 million rump of the company's share issue at 84p. Some 88 per cent of the offer was taken up by shareholders.

Takeover talk spawned a couple of features. William Low climbed 13p to 278p on hopes that Sainsbury, 1p firmer at 406p, would soon top the recommended takeover bid from Tesco, 4p easier at 237p.

Great Southern gained a further 5p to 627p amid some speculation that the funeral company may open dialogue with the hostile bidder Service Corporation of the US.

Day 39, the last time that Great Southern can provide fresh financial information, looms this weekend. SCI will then have a week to ponder its options, which many believe will result in increased bid terms - possibly as high as 700p a share.

Clinical Computing blew a fuse 30 minutes before the release of poor results. The share price went indicative - some trades were said to be as low as 68p - with the market unable to keep up with events. The price closed 10p lower at 90p.

First day dealings in Freeport Leisure, the factory shopping and leisure village group, were lively. Placed at 65p, the shares closed at 70p.

The 3,100 mark for the FT-SE 100 index came under pressure in early dealings. A 15.7-point drop took the index to 3,099 before a small rally cut the deficit to 8.6 by the close at 3,106.1. The FT-SE Mid lost 6.9 to 3,624. Share trading was thin at 431 million.

The continuing hot weather has prompted Smith New Court to upgrade its profit forecast for Hozelock, the leading producer of hosepipes and watering cans, which joined the market last November at 250p a share. SNC has raised its expectations for the year to September by 5 per cent to pounds 6.3m. At 265p, unchanged yesterday, the shares are trading on a below-average p/e of 14.7.

Northern Foods was weak, falling 4p to 202p following a negative broker's note from NatWest Securities. NatWest sees little justification for investing in Northern given the uncertainty from the break-up of the Milk Marketing Board. The main concern is that the dairy industry has been very well cushioned, which means that margins can only come under more pressure.

MTM shares, which have been in the doldrums for the past couple of years, were one of the day's best movers with a 5p gain to 71p. The positive news for investors came in the form of the disposal of its agrochemicals business to United Phosphorus, an unquoted company, for pounds 10.5m. This latest disposal, which was struck at pounds 1.2m above book value, boosts MTM's net cash pile to pounds 16.2m.