Railtrack shares fall again before FTSE ejection

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The Independent Online

Railtrack will be formally ejected from the FTSE 100 index today, putting fresh pressure on the embattled network operator after a renewed plunge in its share price.

The rail infrastructure company's shares fell a further five per cent in the first hour of trading today after yesterday's 17 per cent fall. Its place in the FTSE 100 will go to High Street clothes chain, Next.

The damage was done by an apocalyptic research note from the brokers ABN Amro, which warned that the company was worth only 58p a share or £298m ­ and might even be "worthless" if its debt levels continued to rise.

Today the shares fell to 346.5p. well below the 390p at which they were sold to investors in 1996. Two years ago the shares were worth nearly £18, valuing Railtrack at £9.3bn.

The note, from ABN Amro's transport analysts Phil Oakley and Christian Cowley, advised investors to "withdraw their equity before it is wiped out" and also warned: "To construct an investment case depends on a radical transformation of the company's operating performance, but more importantly requires a huge transfer of wealth from the taxpayer to shareholders. Both are subject to considerable uncertainty and require a huge leap of faith."

ABN's controversial method of valuing Railtrack was based on taking its regulatory asset value, then subtracting its net debt of £3.3bn. This produces a best-case valuation of 308p a share or £1.6bn, and a worst- case valuation of 58p a share.

"Based on what we see as a likely outcome, we believe Railtrack is worth no more than 58p per share at present," the note said. "The rising levels of debt threaten to engulf the value of the regulated assets, rendering the equity worthless."

The research was not shown to Railtrack before it was published, and last night there was a degree of scepticism among rival broking houses about its methodology. Nigel Davis, the top-rated analyst with WestLB Panmure, said he had found the valuation "remarkable" and thought that the two ABN analysts had "completely missed the point". He also noted that if the same methodology was applied to the airports group BAA, whose house broker is ABN Amro, then it would be worth 373p rather than last night's closing price of 624.5p.

"I am sure BAA would love to know this is how their house broker is valuing them," he said.

Chris Tarry of Commerzbank said the price range suggested by ABN Amro was outside any valuation he was able to compile. "You can always grab a headline by coming up with a dramatic figure," he said. "But the issue which will determine the share price of Railtrack is confidence, and the company's management knows that comes down to delivery and performance."

The ABN note added that whilst it was possible that Railtrack's equity value could be "completely destroyed, Railtrack could still be solvent and take the role of a shell to facilitate investment in the railway".

Railtrack's shares have been on the slide since last October's Hatfield crash. They renewed the plunge last month when the company reported a £534m loss for last year and revealed a £3.6bn "black hole" in its funding needs that would have to be met by government subsidies and commercial borrowings.

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