Keep track of rail profits

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The Independent Online
In comparison to the Georgian candlesticks and tea service of the earlier privatisation, the flotations this year of both Railtrack and British Energy bore more resemblance to the sale of the partially complete canteen of cutlery that your grandmother left you in her will.

But investors who paid the first instalment of 190p for shares in Railtrack in May this year have made a handsome profit of nearly 50 per cent in less than six months as well as pocketing a large dividend, while those who subscribed 100p first instalment for British Energy in July saw their shares slip to a discount soon after trading started and only a recent rally has allowed them to see a profit.

It just goes to show that all such cutlery should not be treated in the same way, for some of the offerings this year were seen immediately as valuable parts of the set, whereas others bore the popularity of a pair of bent silver-plated teaspoons.

These two companies may have floated in the same year, but frankly that's about all they had in common. When Railtrack came to the market in May the entire attitude towards the use of railways had changed. Although we have long mocked our railways, and regarded them as the butt of national derision, we have been gradually changing our views about the use and need for an effective railway network.

As Mrs Thatcher drove us towards the motor car society, it became apparent to most of us sitting stationary and coughing on the M25 that there was, in fact, a place for a clean and efficient railway system. In the space of three to four years, when railway privatisation was first mooted, the level of interest and proper consideration has gone from sceptical indifference to serious participation.

By the time the advertising campaign started, even if there was still a lot of negative comments around, it was clear that this business would have the potential for significant cost-cutting and efficiency gains once in the private sector. A combination of business realism, structural opportunity, residual memories of Thomas the Tank Engine and Hornby sets, along with a stonking first-year yield, meant that this flotation was going to whistle down the track.

Compare this with the "Last of the Generators". British Energy was a totally different situation. Whereas travel, even on a British train, can have a positive connotation, power generation carries with it much of the negative impressions associated with industrial power plant. Add in the more controversial aspect of nuclear energy and the unfortunate company had an uphill struggle to convince its audience of its credentials.

The Treasury mandarins did a good job launching British Energy on the back of a successful sale of Railtrack, but British Energy was always going to be the more difficult to sell, not just from a business viewpoint, but from an emotional one as well. With Railtrack, we all understood the general concept of what was being sold, even if we didn't understand who actually owned which bit; with British Energy, nuclear power was not only something that most of us didn't understand, its very description was somehow rather frightening. But as an investment opportunity, it stood up for those willing to accept a higher level of investment risk.

Railtrack has purred off over the horizon with all the elan of a speeding Eurostar. Railway interest has been building apace with news of the franchises from the related business now being valued at very significant premiums to the price originally paid, and franchises which nobody would bid for two years ago are now going for millions of pounds.

As for British Energy, the shares languished below the offer price for some time but are showing a modest profit. But you should definitely not regard British Energy as a failure. Bear in mind that the electricity sector between l5 July and 11 October 1996 underperformed the market by 6.6 per cent; during this period British Energy has been far more encouraging.

It's wrong to say that one has been a success and the other not. Both were sold at the end of the privatisation campaign as they were the most controversial. In hindsight, more value could have been gained for Railtrack given its current price and investors seem to have bought themselves into a bargain, but who would say that it would have been so popular if the price had been any higher?

British Energy, although more controversial, has behaved slightly below what was expected but certainly cannot be said to have been a giveaway. Both were flagged as being higher risk than previous privatisations, although providing excellent first-year yields. As such, both provided what was asked of them. For us as investors, Railtrack has provided such a profit that judicious profit-taking should now be seriously considered. For British Energy, I would stick to the original game plan and decide whether to hold or sell after the first dividend which is due next January.

The writer is a director of Barclays Stockbrokers Ltd

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