US Edition Pennon
420¾p -10.5
Questor says BUY
In the last four months Questor has recommended buying shares in Pennon twice. After the shares were recommended on December 3, we banked profits of around 25pc in less than a month. The shares started to slide and Questor recommended taking another position in the shares in February at 435p.
Unfortunately this was not the bottom and the shares slid below 400p, but have since recovered. After good news on the company's key energy from waste (EfW) project in Greater Manchester, the shares remain a buy.
Last week, Pennon said that its 50-50 joint venture with John Laing had received financial closure for its PFI Waste Contract with the Greater Manchester Waste Disposal Authority. This means that the venture can now start building phase one of the project, which involves the construction of an EfW combined heat and power (CHP) plant.
The joint venture was selected as preferred bidder for the contract in January 2007, but financial close has been delayed because of turmoil in the banking sector. The contract relates to 1.3m tonnes of waste a year and is designed to achieve at least 50pc recycling levels and 75pc landfill diversion.
The UK is required under the EU landfill directive to reduce the amount of biodegradable municipal waste going to landfill to 35pc of 1995 level by 2020.
Over the same period, the UK is targeting to increase its municipal recycling rate to 50pc compared with around 35pc at present. To do this, the government has increased the standard rate of landfill tax to £32 per tonne this year, rising by £8 per year to reach £48 per tonne in 2010/11.
In addition, each waste disposal authority has been allocated an allowance for the maximum amount of biodegradable waste
it may dispose of to landfill for the years up to 2020. These allowances are designed to ensure that the UK as a whole achieves the requirements of the EU directive. The group's Viridor unit is in a prime position to take advantage of this change in legislation.
The venture plans to deliver five new mechanical biological treatment facilities, four new anaerobic digestion plants, four new in-vessel composting plants and a new materials recycling facility working alongside new and upgraded household waste recycling centres. Viridor and John Laing entered into a joint venture with Ineos Chlor to build the associated EfW/CHP plant.
Solid recovered fuel produced from the waste will be used to generate electricity and provide process heat at the proposed EfW/CHP plant in Runcorn.
The total phased investment by Pennon by way of equity subscriptions, purchases and shareholder debt is £85m plus further possible mezzanine debt of up to £40m in 2010. This does not appear to be too much of a financial strain.
This part of Pennon's business is unregulated. Its regulated water business published final business plans for the next Ofwat price review last Tuesday. These are now being looked at by Ofwat and contain relatively few surprises.
Ofwat's draft determination on the business plans is due on July 23.
The shares are trading on a March 2010 earnings multiple of 11.8 times, which does not seem too stretched considering the Viridor unit's potential growth profile. The shares are yielding 4.8pc. Questor says buy.
JP Morgan Indian Investment Trust
266p +10¼
Questor says BUY
The Indian stock market hit a six-month high on Tuesday, giving shares in JP Morgan's India Investment Trust a welcome boost. The shares are now up 19pc since they were first recommended in January.
The Bombay Stock Exchange's blue chip Sensex index recently hit a six-month high to close at 10,967. Questor initially recommended the shares because emerging markets had been hit hard by deleveraging last year, as investors sold off assets deemed as risky.
India is less exposed to a slowdown in the US and Europe than China because a smaller proportion of its GDP is generated by exports. However, the recession is still hitting the country hard.
About 20pc of Indian GDP is generated through exports, with the figure being closer to 40pc for China. This means that domestic demand is more important and Indian companies are less affected by a slump in Western economies. However, this does not mean the country will not be affected by a global slowdown.
There is no doubt that India's GDP is slowing. The growth rate could slip to as low as 4.3pc in 2009, according to the OECD. The Indian government has been forecasting 7pc growth.
"In the large emerging economies, activities are slowing as access to international credit dries up, commodity prices fall and export demand weakens," the OECD said. However, this is a much better forecast than for other emerging countries. The OECD expects Brazil to shrink 0.3pc, with Russia down 5.6pc.
The trust's top five holdings are Reliance Industries, Infosys, HDFC Bank, Bharat Heavy Electrical and ITC.
It can be bought as normal through your broker. It does not pay dividends, which are reinvested, and the annual management fee is 1.5pc. Buy.
• Questor has an interest via a shareclub in 955 shares in this investment trust.