The Investment Column: Bus operators are worth revisiting

Nichols deserves a toast after Vimto success; Clinical trials uncertainty makes Xenova an unsafe bet
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The Independent Online

Ken Livingstone's decision to approve the extension of his London congestion charge will, inevitably, send more of the visitors to Kensington and Chelsea on to the buses. The Mayor's move is the latest in a concerted strategy in the capital to boost public transport use, and adds another reason to revisit the investment case for the transport companies which operate London's growing number of buses.

Ken Livingstone's decision to approve the extension of his London congestion charge will, inevitably, send more of the visitors to Kensington and Chelsea on to the buses. The Mayor's move is the latest in a concerted strategy in the capital to boost public transport use, and adds another reason to revisit the investment case for the transport companies which operate London's growing number of buses.

The decision to ignore opposition and extend the zone covered by the charge reduces one of the negatives hanging over these stocks. The London bus market is tightly regulated by Transport for London, which pays operators on a cost-plus basis, with bonuses for service quality. The planned growth of this market therefore depends on Transport for London's ability to finance extra routes, which had been called into question.

The bus market outside the capital is deregulated, subject to outbreaks of vicious competition and, with operators able to cut unprofitable routes, in gentle decline. However, political pressures to adopt London-style measures in big cities could be a medium-term positive.

Cost pressures, mainly driver wage increases, appear to be abating and the strong, predictable cash flows of bus operators make them an attractive place for an investment.

Of the five major operators, Stagecoach is the company that gets the greatest proportion of its revenue from UK buses, at 40 per cent. After that it is FirstGroup at 39 per cent, Arriva at 37 per cent, Go-Ahead at 30 per cent and National Express at 10 per cent.

An analysis from Credit Suisse yesterday suggested the stock market is still undervaluing the cash flows from bus operations and tipped Stagecoach as the best ticket for capital gains from the sector. The company is returning 18p per share to its shareholders in September. Go-Ahead, which stands to win new routes in London because of its best-in-sector record on service quality, is also a buy. Credit Suisse, though, is advising investors not to take a trip on the National Express, which has made premium profits to date and will therefore struggle to raise ticket prices.

Nichols deserves a toast after Vimto success

Will the sound of Matt Lucas, of Little Britain fame, singing V-I-M-T-O to the tune of D-I-S-C-O be enough to make the historic fruity drink cool? It is difficult to imagine so but Nichols, the company which makes it, does not need to have a cool brand to be a cool investment.

Vimto is holding its market share in the ultra-competitive soft drinks market, which is currently growing modestly. It is also big in the Middle East (the Saudis often raise a glass at the end of Ramadan, apparently) and hoping to break into India. There are even reasons to think the product might prosper if Western health concerns push tastes towards non-fizzy drinks. Vimto sales are spread across carbonated, cordial and ready-diluted versions.

Nichols also owns Sunkist in the UK and will need to find another brand to push through its distribution system if profits are to grow significantly.

The group has been conducting long-overdue restructuring these past couple of years, with redundancies and, yesterday, a plan to sell its less profitable foods business, which is too small to stand the price cuts demanded by its customers, including the supermarkets. The disposal, for about £10m, will mean another write-off (probably £4m).

Nichols shares fell a penny to 140p, at which level they promise a dividend yield of more than 6 per cent, underpinned by strong cash flows from the soft drinks business. That's a dividend worth drinking to.

Clinical trials uncertainty makes Xenova an unsafe bet

Xenova thinks it might have found a vaccine to cure addiction to cocaine and smoking. One broker is recommending the biotech group's shares partly on the basis of "substantial media attention on the promising anti-addiction programme". The company, too, said positive trial results had "generated interest with investors and media on both sides of the Atlantic".

In a stock market sector which swings between hype and despair, investors need to be careful to differentiate between media interest and clinical progress. They must wait for trial results or a licensing deal to a big drug company before judging if a biotech venture has hit the jackpot.

None of which is to say that these vaccines are not exciting. Certainly they are - if they can be proved to work. Xenova is the UK biotech industry in microcosm, a dogged survivor which has seen a series of products fail to meet their promise but which has done enough in the way of mergers, cost cuts and fundraisings to give it cash for 18 more months at the casino. With £19m in the bank and a step-by-step approach to trials of its brain cancer drug, TransMID, it is in better shape.

But results from the first part of a trial of TransMID won't be out for more than a year, so gamblers need not hurry to place their bets.

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