Ofwat turns taps on water sector

WARRINGTON-based

It had shocked the City with a proposed massive, deeply-discounted and two-stage £1bn rights issue at 330p to help repair its balance sheet and finance its heavy capital investment programme.

Critics accused it of raising cash to fund dividend payouts, not water projects. The shares are still an acquired taste.

Down from 561p in May, they rallied 6p to 513p yesterday on hopes that water industry regulator Ofwat will be lenient tomorrow when it reveals exactly how much water bills should rise over the next five years.

Ofwat has signalled that water charges must rise, not least to finance pension costs and because of adverse changes in utilities' tax regimes.

United Utilities has proposed the biggest price increase of all the water companies, with customers facing a

7.8% increase to help fund a £3.8m infrastructure investment programme.

Broker Merrill Lynch expects an industry average increase of no more than 4% over the five years to 2010 and says that as with all regulatory reviews there are likely to be surprises, and not all of these will be positive ones.

Merrills prefers Severn Trent (9p dearer at 798p) to UU but both Footsie constituents are rated neutral. Its sole buy recommendation in the sector is AWG (6p better at 614p) because it still trades at a substantial discount to the sector.

Northumbrian Water, 4 1/2p up at 136 3/4p, remains a sell because its capital structure issues will not get resolved until some time in 2005. Buyers have this week been tipping their toes into United Utilities following reports that Guy Hands' private equity group Terra Firma is favourite to land its renewables business for £80m.

Terrorism fears and Opec's warning that it couldn't immediately raise output lifted the price of Brent crude for September delivery above $44 a barrel for the first time ever.

Major oil stocks helped the Footsie stay in the black. It closed 14 points up at the day's best of 4429.7. Shell closed 10 1/4p dearer at 409p, BG Group 7 1/2p to 350p and BP 8 3/4p to 521p. Wall Street lost 46 points in the early stages. With still no sign of former BBC boss Greg Dyke - the City's number one choice - ousting Charles Allen as group chief executive, ITV cheapened 1 3/4p more to a low of 103p. Closing turnover swelled to 46m as continuing uncertainty about strategy at the merged Granada/Carlton group prompted persistent heavy selling. Investors also ran for the exit ahead of today's full-year results from BSkyB, 2p easier at 602p.

A disappointing performer so far this year on concerns over subscriber growth, Lorna Tilbian at Numis retains her buy recommendation and 816p price target. But she would like to see a strategic update from James Murdoch, who has now been chief executive for almost a year.

Excellent first-half profits and bullish comments about second-half prospects helped electrical equipment group Laird sparkle at 299 1/2p, up 20 1/2p. Pretax profits soared to £11.6m from £6.1m and the dividend is lifted 5% to 3.15p. Broker Dresdner Kleinwort Wasserstein upgraded forecasts for the full year by £1.2m to £44m and £1.1m to £50.5m for next year.

Speculative buying amid revived bid hopes helped investment bank Singer & Friedlander rise 10p to 242p. Icelandic bank Kaputhing owns 19.53% but cannot increase its holding or launch a full-scale bid until the end of the month. The plot thickened yesterday when dealers heard that Icelandic transport company Burdaras hf has acquired 3.4%.

Aim-quoted person-to-person online betting exchange Tradingsports Exchange Systems touched 80 1/2p and then retreated on profit-taking following confirmation that Terry Ramsden is willing to subscribe for up to 30m shares at 15p per share, raising up to £4.5m. The close was 9 1/2p lower at 61p.

Supermarket chain Somerfield rose 4p to 150p on hearing that veteran investor Jack Petchey has acquired 3.12% via his Isle of Man investment vehicle, Trefick.

AIM-QUOTED Computer Software, in which Michael Jackson's Elderstreet Investments hold over 30%, rose 4p to 59 1/2p on recovery hopes. Broker Seymour Pierce forecasts full-year profits to February next year of £1.19m after the group yesterday reported a reduced 2004 loss of £343,000, down from £1.4m. Shareholders can look forward to dividends in the future and more bolt-on acquisitions are planned.