Railtrack is one to be aboard

The Investment Column

An extraordinary surge of 500,000 registrations for the Railtrack retail offer over the last week coincided with yet another bout of bad publicity for the flotation. Leaked documents suggested that the prospectus estimates for repairing bridges and tunnels were billions of pounds too low.

On close examination, it all turned out to be a pretty meaningless comparison of chalk and cheese. But even the scary headlines seem to have failed to deter the army of potential retail investors from putting their names down for the application pack. Something has clearly been happening in the undergrowth over the last few days that even Railtrack's advisers cannot firmly identify.

One reason is the shorter than usual application period. But given the low-key advertising campaign, the most convincing theory was that the personal finance pages have been so solidly favourable for the last few weeks on the grounds that the yield on offer is irresistible.

Railtrack is to pay a 17.2p a share final dividend in the autumn. This will be followed swiftly by an interim next February worth about 8.6 p. With a 10p discount on the first instalment the total benefit for retail investors is 35.8p, or 18.8 per cent on the 190p part-paid shares in the nine months to February.

Annualising this to 25 per cent over nine months, as some Railtrack advisers were doing yesterday, is not particularly meaningful for private investors going into this as a long-term yield stock rather than a quick punt. But even 18.8 per cent over the full year until the second instalment is due is handsome enough. This promise may have led to a belated snowballing of retail registrations, which reached 1.9 million at the close. If you assume conservatively that 30 per cent of registrants will apply for an average pounds 2,000 a go, then pounds 1.1bn of retail money will chase a minimum allocation of pounds 550m, making it twice subscribed.

Since it looks as if the retail element of the sale will be enlarged above the minimum 30 per cent, cutting into the institutional allocation, that in turn gives SBC Warburg a useful lever. In theory, the retail offer could rise to nearly 50 per cent, and it is certainly likely to top 40 per cent. The prospect of a shortage of institutional stock in early trading should help along nicely the book-building exercise that sets the price. It would not be surprising to see the gross dividend yield coming out well below the top of the 6.60 to 7.36 per cent forecast yesterday. A yield of, say, 7 per cent still puts Railtrack significantly above the water and electricity companies and BT.

With political risk from Labour looking less serious by the day, there is a very strong case to be made for Railtrack shares as a high-yielding utility stock. This is not one to miss.

Pain continues

at Courtaulds

It has been a dismal six months for Britain's textile groups. Last year the industry was caught between the rock of soaring raw materials prices and the hard place of depressed consumer demand, exacerbated by the unusually warm summer. That produced a crop of profits warnings around the turn of the year, including one from Courtaulds Textiles, which as well as the problems at home, had to cope with the impact of destocking by US retailers.

Although it said in February that the problems across the Atlantic were likely to continue until March, it is clear from yesterday's new profit warning that the pain has continued longer than expected. The glitch stemmed from US retailers and lingerie manufacturers being forced to run down stocks in November and December last year after over-estimating the growth in consumer demand last year. That naturally hit suppliers like Courtaulds Textiles, which supplies close to $200m of stretch fabric and lace into this market, representing around 12 per cent of the group's sales.

But continued destocking in the first quarter has cut sales in the business by 30 per cent and it now looks as if the US operation will make a small loss in the first half. Given profits last time, that will represent a pounds 6m turnround from the first six months of 1995.

Analysts yesterday pared their profit forecasts by between pounds 2m and pounds 7m, with UBS now looking for around pounds 42m for the current year. Whether that proves enough will depend on how the rest of the year turns out. Noel Jervis, chief executive, claims there are clear signs of a pick-up in the US. Orders are rising again as customers see light at the end of the destocking tunnel. Manufacturing activity is returning to normal and, meanwhile, the UK market is showing stirrings of life.

Even so, Courtaulds Textiles has a wall of credibility to climb before it can restore its reputation with the stock market. It has embarked on a rationalisation exercise. But its decision to move more manufacturing off shore has come late in the day.

The forward multiple of 12 and yield of 5.2 per cent may not be enough to sustain the shares, down 45p at 373p, in the short term. Unattractive.

Sage, safe

and sound

Think of a technology stock and it probably conjures up an element of glamourous, leading-edge products set to transform our lives. In that context Sage, the accountancy software firm, may be something of a disappointment, as boring and predictable as many of the customers it serves. Its unbroken profits record, however, is anything but dull.

Sage has built up a substantial following precisely because it is not prone to delivering the periodic profit warnings that dog the rest of the sector. Since being floated at the equivalent of 26p in 1989, it has hardly put a foot wrong and, in the last year the shares have outperformed a rising stock market by more than 100 per cent.

The Sage trick is to ensure that new customers become an annual stream of high-margin maintenance charges by signing them up for software upgrades, telephone helplines and training where competition is weakest. Of Sage's 870,000 registered users, 164,000 are covered by these support-service contracts that now account for almost half of total income.

Given this highly visible earnings stream, it is hardly surprising the latest half-year figures created few waves. Pre-tax profits grew from pounds 11.7m to pounds 16.1m on sales 42 per cent higher at pounds 71.8m. Significantly, new business in the form of primary software sales was 38 per cent ahead at pounds 33.7m.

Although the UK accounts for the lion's share of profits, France is the largest revenue area and margins there should improve as a more marketing-led approach with emphasis on recurring revenues is applied. Further expansion in Europe is also on the cards.

UBS is sticking with its full-year pre-tax forecast of pounds 30.3m, implying a p/e ratio of 23. The shares encountered some profit-taking yesterday, slipping 25p to 435p on the figures, but they remain among the safest bets in a notoriously volatile sector. The premium rating is deserved.

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