Last train to easy profits
Railtrack has beaten many predictions, but the express may have reached the end of the line
Sunday 05 January 1997
Perhaps there is a lesson in this for Labour; after all, Labour discontent and murmured threats of renationalisation seemed to contribute to the difficulties of selling Railtrack in the first place, and thus to an unreasonably low price. So Labour has few grounds for complaining that the company was sold on the cheap, when its own tactics contributed to the knock-down price.
Whatever the reasons behind the rise, and while Railtrack investors congratulate themselves on their prescience, there must be doubts now about how much longer this ride can last.
There are good omens. Unlike some other privatisation candidates, Railtrack had already operated for two years under the current regulatory regime, overseen by Rail Regulator John Swift QC, before it was launched into the public eye.
To date, Mr Swift's approach has consisted of a gentle laissez-faire. That may be changing, however. Last month, he sent a strongly-worded letter to the company, saying that evidence it had underspent by up to 25 per cent on its annual maintenance was "wholly unacceptable". It is a phrase previously unthinkable from the gentlemanly Mr Swift. Railtrack claimed it had failed to meet its promises because of disruption from the constant reorganisations forced upon it.
The total sum that is under dispute amounts to pounds 333m. Mr Swift may be forced to show his teeth, in which case, the investment outlook for Railtrack may alter substantially.
His presence is a necessary curb of Railtrack's effective monopoly control of the railway lines over which the train operating companies (TOCs) run. As in all monopolies, the threat is that Railtrack could raise its access charges to the rail network to unfair levels. The present regime is fairly relaxed, allowingRailtrack to increase charges by inflation minus 2 per cent. Although a tight framework, it offers a high degree of stability.
The return of a publicly quoted rail sector may seem like a romantic whiff from the first golden age of rail, in the early Victorian era. Alongside Railtrack, there are other quoted companies, notably Prism and Stagecoach, as well as beneficiaries of railtrack infrastructure maintenance, such as Jarvis, whose fortunes depend on rail travel and freight. But a warning to investors: while many made their fortunes on the Victorian railways, stocks were notorious for their boom and bust tendencies.
Such an outcome is unlikely for Railtrack, however, because it has no competition and is protected from the vagaries affecting its clients - the TOCs - by strict contractual agreements. The key issue for future profits seems to be costs. Here, there is more room for manoeuvre, although it is unlikely to be the usual job-cutting bonanza seen at the other privatised utilities.The company was designed, as a spokesman put it, as a "lean machine", so job cuts will be, if anything, only a small proportion of any future savings. More fruitful is the heavy capital expenditure programme to maintain and upgrade the 22,000 miles of railway lines it manages.
The expenditure is broken down into two categories by Railtrack: on-going asset maintenance, which costs a hefty pounds 600m; and a further pounds 740m or so on "day-to-day" maintenance. At the first half-stage, announced in November, operating costs, however, had risen slightly to pounds 1,035m from pounds 988m. Nevertheless, there was a strong overall rise in profit after tax to pounds 145m from pounds 111m, helped along by a rise in sales to pounds 1,204m from pounds 1,139m.
A reduction in costs will come, but it looks as if the recently knighted part-time chairman Sir Bob Horton will have to chisel them away, rather than gouge them out.
Since Railtrack's controversial flotation, the bogey of what a Labour government may do has receded. The most likely outcome, if Labour is elected, seems to be some trimming of the regulatory framework. But as this is tied up in complex contractual obligations, it would take the Department of Transport many moons to unravel it - an unlikely priority for Tony Blair's first Cabinet. Rather, Labour will probably let sleeping dogs lie.
Meanwhile, the shares have more or less caught up in comparison to other privatisations. On a forward price-earnings ratio of 11.9 for 1997, the shares are in line with many other utilities. The gross yield of 3.7 per cent may be attractive and, at least operationally, there should be relatively little risk. And the general rejuvenation of public transport can only be good for the company.
But at current levels, Railtrack must be close to hitting the buffers. The shares are now ripe for some profit taking, and the prospect of a possible Labour government can only flush out the sellers.
Share price 584.5p
Prospective p/e 11.9*
Gross dividend yield 3.7%
Year to 31 March 1995 1996 1997* 1998*
Turnover (pounds m) 2,275 2,300 2,361 2,409
Pre-tax profits (pounds m) 189.0 190.0 289.0 314.0 Earnings p/s (p) 20.2 42.8 48.8 53.2 Dividend p/s (p) n/a 13.8 22.1 23.6
*BZW Research forecasts
- 1 Howard Jacobson: Let's see the 'criticism' of Israel for what it really is
- 2 Gingers face extinction due to climate change, scientists warn
- 3 Brazil vs Germany World Cup 2014: In defence of Mesut Ozil - the Arsenal midfielder works magic in the shadows
- 4 BBC’s new Game of Thrones slayer 'The Last Kingdom' relies on Saxon appeal, creators say
- 5 PornHub begs users to stop uploading video clips of Brazil getting beaten 7-1
Game of Thrones author George RR Martin says 'f*** you' to fans who fear he will die before finishing Westeros saga
Jennifer Lawrence face palms Emma Watson at Christian Dior show in Paris
Gingers face extinction due to climate change, scientists warn
Pamplona Running of the Bulls 2014: Briton critically injured in San Fermin festival
Israel's deadliest Gaza air strikes yet kill five children from same family as Palestinian rocket barrage continues
Sustained immigration has not harmed Britons' employment, say government advisers
British jihadist calls for 'flag of Islam' over Downing Street and Buckingham Palace
Australia facing international condemnation after turning around Sri Lankans at sea
7/7 memorial defaced on anniversary of 2005 attacks with ‘Blair lied thousands died’ graffiti
Even when it brutalises one of its own teenage citizens, America is helpless against Israel
There’s a nasty smell in the political air – and it’s coming from the Tories
iJobs Money & Business
£52000 - £57000 per annum + bonus, pension, private healthcare : Ashdown Group...
£60000 - £90000 per annum: Harrington Starr: A leading provider of buy side tr...
Negotiable: Harrington Starr: Electronic Platform Engineer (Linux, UNIX, Perl,...
£25000 - £30000 per annum: Harrington Starr: Market Making Support Analyst - (...