Pennon divides opinion. To some, the South West Water owner is obvious prey in a sector where two-thirds of its members have gone to predators over the past two decades. Others see a poison pill in Pennon’s waste disposal business, Viridor, which they say lacks the dependable cash flows desired by infrastructure investors and sovereign wealth funds.
The cynics were to the fore Friday, sending Pennon shares 3.7 per cent lower at 699.5p. Credit Suisse provided the reason with a note arguing that Pennon’s landfill business was in structural decline.
Tax hikes and industry over-investment into recycling will have cut Viridor’s operating earnings by 36 per cent in three years, Credit Suisse forecast. Yet expectations remained too high as falling volumes and rising competition were undermining the economics of energy-to-waste projects that provide the bulk of its value, the broker said.
Viridor has invested about £450m on supplying energy-for-waste incinerators with a further £640m earmarked for the next four years. But Pennon’s valuation implies that the volumes will be priced at a premium to landfill rates rather than a discount, which looked much more likely, said Credit Suisse. The risk of more downgrades at Viridor meant Pennon was worth a maximum of 790p apiece to a predator and 610p to a shareholder, it argued.
A quiet day for corporate news left the FTSE 100 barely changed for the third straight day, with the index down 5.18 points at 6,583.80. For the week the index was up 0.6 per cent.
Miners were Friday’s sharpest fallers, not helped by a Goldman Sachs forecast that gold would breach $1,000 an ounce as the Federal Reserve reined back stimulus. Polymetal International lost 3.5 per cent to 709.5p and African Barrick Gold slid 2 per cent to 164.2p.
Reckitt Benckiser led the blue-chip risers, up 2.3 per cent to £45.54. Sanford Bernstein said that Reckitt’s reformulation of its heroin substitute, Suboxone, was still gaining market share six months after generic competitors entered the market.
Tate & Lyle bounced 1.3 per cent to 793p, with Berenberg arguing that the sweetener maker had been oversold on fears of competition from China.
Imagination Technologies, designer of the iPhone’s graphics chip, gained 10.5 per cent to 339.7p on news it had expanded its licensing deal with chipmaker MediaTek. The news, while not significant to forecasts, may mean Imagination can deliver an upbeat message on competitive threats when it gives a trading update on Tuesday.
“MediaTek has primarily relied on Imagination’s [designs] historically but Arm Holdings was starting to make inroads lately, which the market was aware of,” said Liberum Capital. “This licensing agreement may signal that Imagination will hold on to its high share at this very important licensee.”
A bid rumour helped lift BWin Party, the sports bookmaker and online casino that has warned on profits three times this year. Some reports mentioned Google as the potential buyer, though dealers dismissed the theory that any American company could buy BWin while it was still taking bets from punters in unregulated markets such as Greece, Argentina and Brazil.
Back in July, BWin was rumoured to be looking to dump its unregulated operations into a spin-off company in anticipation of the US lifting its prohibition of online gambling. That plan looked expensive and impractical, said industry insiders, who reckoned BWin would be required to clone most of its infrastructure to guarantee the companies had no overlap whatsoever. BWin ended the day up 4.6 per cent to 115p.
A downgrade to “sell” from UBS led APR Energy, the generator hire specialist, down 1.7 per cent to £10.42. The market was unappreciative of APR’s success in Libya, which will provide about 60 per cent of its earnings next year, but that contract was up for renewal in mid-2014 and there was nothing to stop it being undercut by another power provider, it said.