The Investment Column: A journey on National Express is too expensive at the moment

Click to follow
The Independent Online

It is more than seven years since the Divine Comedy told people to "take the National Express when your life's in a mess, it will make you smile." Investors who took the coach company's shares have had almost as much cause to grimace as to smile in that time, but their most recent performance is enough to generate a big toothy grin.

It is more than seven years since the Divine Comedy told people to "take the National Express when your life's in a mess, it will make you smile." Investors who took the coach company's shares have had almost as much cause to grimace as to smile in that time, but their most recent performance is enough to generate a big toothy grin.

The historic UK coach business has been spruced up in the past couple of years, offering a much more attractive range of low fares, well advertised. The "sustained passenger growth" that has resulted, and about which National Express boasted in a trading update yesterday, has enabled it to invest in upgrading its facilities and services, including putting televisions in the seats.

But National Express is about more than coaches. It is one of the UK's biggest bus operators, too. Now it is expanding in London, where increased subsidy and anti-car measures from the Mayor, Ken Livingstone, have pushed people on to the buses. It has just doubled in size in the capital with the purchase of Tellings Golden Miller's London bus operations. Hopefully this will generate efficiency gains to offset the rising costs of fuel.

The question is whether the company has, er, missed the bus in terms of the passenger growth in London. There is little in the way of growth in Birmingham, either, so this major part of the group could be a dull spot in the next few years.

So then there are the trains. National Express's operations include the Gatwick Express and the new "one" franchise in the east of England.

"One" is typical of the new, larger contracts being offered by the Strategic Rail Authority, the result of a "remapping" to reduce the number of operators and increase the coherence of the network. Some of National Express's existing franchises, including Central Trains and Midland Mainline could be "remapped" in the future, making the outlook opaque.

While the company has seven of the top 10 most reliable train operating companies, it is still a bit of a lottery whether it will keep hold of the two lucrative contracts that come up for renewal in the next two years. There could be upside, though, from victory for its bids in either of the Great Western or Thameslink franchise auctions.

Transport companies can be a decent cash generative investment, but their thin margins make them prone to upsets, particularly when they make overseas adventures. We tipped National Express shares at 396p in 2003, and were too cautious in advising readers to take profits when they had hit 604p. Now, with a dividend yield of just 3.5 per cent, they are too high.

Sunnier times are ahead for Parkdean Holidays

Graham Wilson, the chairman of Parkdean Holidays, owner of 20 caravan parks, is not a happy camper.

In fact, he says the 2005 season has been as challenging as he "could ever recall". Parkdean's interim losses have widened to £10m after buying six parks last year, and its current like-for-like sales are down more than 4 per cent. The shares dipped 7 per cent to 205p yesterday.

Cheap package holidays abroad have lured holidaymakers away from the British countryside for decades, so that can't be the reason Parkdean is struggling. Industry-compiled statistics suggest camping and caravaning is growing in popularity in the UK.

The problems stem from the new parks. The bigger its estate during the closed winter months, the larger the losses Parkdean must make up in the summer. The acquisitions delayed printing of its 2005 brochure and led to a delay in summer bookings. Some existing customers have switched to the new parks, cannibalising sales, and others are opting to stay for shorter periods. Visitors to Cornwall, where many of its parks are based, have declined.

Parkdean's parks are a mixture of privately owned caravans, caravans available for hire, and empty pitches for campers to bring their own accommodation. To help steady out its income stream, Parkdean plans to sell off to private owners some of the hire caravans that are persistently empty. Private owners pay an annual rent, which gives Parkdean more reliable, if lower, revenues.

Parkdean's parks do, however, constitute real assets, and a revaluation of its land bank puts its net assets a share at about 250p, excluding debt. This means its shares are unlikely to go much lower. Sunnier times should be ahead. Buy.

No time to move out of Morgan Sindall, which has a well-built future

Morgan Sindall has built some impressive things in the past two years. A first-floor sports hall for a primary school in Islington which used prefabricated steel panelling so that it could be completed in half the usual time, for example. Some of the largest affordable housing schemes, including a 10-acre development at Culverhouse Cross, for another.

But its best construction is the reputation it has rebuilt with the City after a shocker of a profits warning in 2002. The shares are higher now than they have ever been.

Again, yesterday, the company was guiding analysts to move their profit forecasts higher. Most nudged them up by £1m, suggesting pre-tax, pre-goodwill profits of £38m this year. That puts the stock on 12 times earnings at last night's 772p. That was up just 0.25p on the day because of fears the stock may have got ahead of itself.

We said "hold" rather than "buy" last August and think it is still worth staying in, despite the great run. Affordable housing has moved to the top of the agenda, and Morgan Sindall is also working as part of the Government's decent homes programme to renovate existing social housing. Although these are increasingly competitive areas, Morgan Sindall has a good reputation.

Civil engineering projects are harder to come by, but it is winning work for utilities, which have begun a new investment cycle. Government spending on schools and hospitals could soon come under pressure, but Morgan Sindall as a group has an order book of £2.9bn of future work, so is well placed for the forseeable future. Hold.

Comments