Avis Europe shares no longer attractive

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The Independent Online

AVIS europe has been motoring along quite smoothly in many of its markets but something rather nasty has appeared in the rear view mirror. The wheels have fallen off in Germany and dragged the whole show off the road.

AVIS europe has been motoring along quite smoothly in many of its markets but something rather nasty has appeared in the rear view mirror. The wheels have fallen off in Germany and dragged the whole show off the road.

Germany accounts for 17 per cent of Avis' sales and the sharp economic downturn there has resulted in a 2 per cent fall in revenues in the first six months of the year. Added to this has been a hit from the manufacturers, which have been squeezing the prices they pay the car rental firms for the cars they take back after their six-month rental life.

Another brake on performance has been the wider problems across all Avis markets, such as the rising costs of new cars and more expensive insurance. It is perhaps no surprise then that the shares have been going downhill.

They closed another 11p lower yesterday at 160.75p, after Avis reported flat operating profits of £61.8m for the six months to June and a 0.9 percentage fall in its operating margin. The market also took fright at the group's comments that the outlook for the German market remained weak.

Trading elsewhere is good with double-digit revenue growth in the UK, France and Spain and has continued strongly in July and August. The German business is being addressed with cost control and an emphasis on improving margins at the expense of sales.

There is also a new joint venture with Inchcape to find buyers for cars nearing the end of their rental life.

But the worry is that this might be as good as it gets for car rental for a while. Businesses are cutting back on discretionary items, such as travel, and that must hit the likes of Avis eventually. And though consumer spending is robust in markets like the UK, things could look very different in six month's time.

Assuming full-year profits of £109m, the shares trade on a forward multiple of 12. That is not expensive but given the outlook, not attractive either.



In the 1990s TMT bull market, one of the greatest stars was Orange. Now a part of France Telecom, but with a 15 per cent free float listed in London and Paris, Orange is battening down the hatches.

Gone is talk of relentless expansion to extend the group's bright brand identity. In its place is a message of debt control, exploiting voice services for more revenue and seeking new business users – an area where Orange France is a strong player.

With debt of just 6.04bn euros (£3.8bn), Orange has a decent balance sheet and can well afford to await opportunities as the market continues its seemingly inexorable lunge downwards. In France and the UK it now boasts the number one slot among high-value customers and would appear well placed to add additional market share.

Key to the Orange investment case is its ability to double operating profits over the next three years. Though half-year operating profit jumped 80 per cent to 1.63bn euros, the mobile industry's key performance measure – average revenue per user figures – could slide during a widespread economic slowdown.

This could lead to price skirmishes, though Graham Howe, Orange's deputy chief executive and finance director, seemed to rule that out yesterday. It would also be foolish to rule out continued decent revenue gains from SMS and other data services.

With the shares down 18.5p at 436p, Orange is trading at 29 per cent below its February float. Though it is at a slight EBITDA premium to Vodafone, that will soon reverse as Orange's operating profit growth comes through. Despite the market's current black sentiment, Orange should emerge a long-term winner for investors able to await a return to brighter days.



HOLMES PLACE is shaping up into a truly trim outfit. Yesterday's interim results left the premium fitness club operator in good health to meet its goal of being Europe's number one.

Holmes is laps ahead of its closest rival, Esporta, in terms of progress in Europe, where its 14 clubs moved into the black for the first time. This positions the group well for next year, when it will open more new clubs on the Continent than in Britain for the first time.

Its cluster approach – focusing on the Iberian Peninsular and central Europe – makes sense, maximising management resources while driving brand recognition. Especially so in Switzerland, where membership referrals helped the region hit profitability in the second quarter. Like-for-like sales in European clubs surged ahead by 29 per cent.

At home, trading is strong and there is no sign of an end to the fitness fad. Like-for-like sales from the mature UK market rose by 14 per cent – more than double the rate managed by its competitors. Membership numbers are up 38 per cent to 228,000. Encouragingly, retention rates remain high at 60 per cent, with room for improvement as the group opens more clubs outside city centres.

The group is close to setting up a joint venture with Bally Total Fitness, the largest US club operator at three times the size of Holmes Place. The move is one for the long term and further enhances the management's rock-solid reputation.

The shares, up 6.5p yesterday to 290p, have enjoyed a good run since they were pushed down by last year's £31.5m rights issue in November. They trade on a prospective p/e ratio of 18, which makes them cheaper than Esporta and a buy.