Investors climb on board

National Express's involvement in the Channel Tunnel link puts the coach company into overdrive
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The Independent Online
NATIONAL Express, the familiar operator of most of Britain's inter-city coaches, has fresh appeal to investors. The company has a 17 per cent stake in London & Continental Railways, the consortium which 10 days ago was awarded the contract to build and operate the pounds 3bn Channel Tunnel rail link.

Other participants include Virgin, merchant bankers Warburg and US construction giant Bechtel, but the only other member quoted on the UK market is London Electricity. And its 12 per cent share is less significant to the scale of its business than National Express's.

The Channel Tunnel link is the latest in a series of moves in a remarkable rise that sees the firm looking at UK and overseas airports. It is also shortlisted for the next rail sell-offs: Gatwick Express, Network South Central and the East Coast and Midland Main Line operations.

"Basically, the main feature is growth and more growth. The group is growing in coaches, buses, airports and rail. They're ambitious in terms of transport projects as a whole," said sector analyst Tony Shephard of brokers Greig Middleton.

When the National Bus Company was privatised a decade ago, there were so few serious bidders that the industry - which had been split into no less than 72 subsidiaries - was already patching itself back together before the process was over.

Topping almost every bidding list were three firms that still dominate the industry: Stagecoach, Badgerline (now FirstBus) and Drawlane Holdings. Drawlane now goes by the more grandiose name of British Bus and was founded by Ray McEnhill, National Express's retiring chief executive.

A former wheeler-dealer in the industrial cleaning business, McEnhill immediately snapped up four NBC firms and then gobbled up a lot more. National Express eluded his grasp, but when a management buy-out hit hard times in 1991, Drawlane pounced. A year later the City was ready to back coaches - but not run-of-the-mill buses - so National Express was spun off and Mr McEnhill and current acting chief executive, Adam Mills, with it. In just over three years, its market value has jumped from pounds 65m to pounds 450m, snapping up East Midlands and Bournemouth airports for pounds 34m and Birmingham bus company West Midlands Travel for pounds 244m on the way. The shares have rocketed from 165p to 469p and still have a fair way to go as the company expands further.

Analysts don't expect the Channel Tunnel link to be a Eurotunnel-style disaster. In a great government giveaway, LCR has been gifted pounds 5.7bn of assets, including swathes of land at King's Cross. The Eurostar train service, albeit loss-making, comes with it, making for an already up- and-running operation.

The downside is limited. For its stake National Express is committed to putting in pounds 11m of equity. Analysts believe it is sitting on a potential goldmine: LCR is aiming for a late 1997 flotation that might catapult it into the FTSE 100 index, with a market worth of pounds 1.8bn.

National Express is cautious: firstly, LCR has to cut Eurostar's pounds 5m- a-week losses and build passenger numbers up to justify the link. Then it must build it - on time and within budget.

"We will be working very hard with Virgin to develop distribution for Eurostar, which at the moment is disappointing, and to raise its profile," he said.

Eurostar carried just 3.9m passengers last year against a target of 5m, but that's hardly surprising: it has 50 sales outlets but, ludicrously, you cannot buy a ticket from a BR station.

National Express intends to change all that: rolling Eurostar out shortly to several hundred of its 2,000 booking outlets and with its management expertise generally, the City reckons the firm is on to a winner.

Amid all the excitement, analysts point out the strengths of core coach and bus operations. In coaches, passenger numbers have been growing and the firm has been quick to cut costs at West Midlands Travel.

Analysts expect pre-tax profits of pounds 40m when National Express reports on 21 March, up from pounds 15.2m, helped by WMT. A new chief executive is also likely to be appointed in April, ending uncertainty about the succession. Buy.

National Express

Share price 469p

Prospective p/e* 17.1

Gross yield* 2.84%

Year to 31 Dec 1993 1994 1995* 1996*

Turnover pounds 139m pounds 170m N/A N/A

Pre-tax profits pounds 9.3m pounds 15.2m pounds 40m pounds 57.5m

Earnings p/share 16.7p 25.5p 27.5p 30.9p

Dividend p/share 7.5p 8.7p 10.0p 10.6p

* Market consensus estimates