Investment Column: Don't depart from Arriva's train just yet
Carillion; Lavendon Group
Thursday 04 March 2010
Our view: Hold
Share price: 563p (+33p)
Yesterday's preliminary results from Arriva held few obvious surprises for the City. The transport group, which operates in 12 European countries, saw revenues rise by 3 per cent to £3.15bn in the year to December. But operating profits were down by 7 per cent at £160m and pre-tax profits dropped by 19 per cent to £122m, which the company blamed on falling passenger numbers – particularly on the CrossCountry rail franchise – and a £60m increase in the group's fuel bill.
So far, 2010 is proving more amenable, with passenger revenue on CrossCountry up by 8.8 per cent, helping to offset the lower franchise support payments the business will receive from the Government this year. Arriva's management were upbeat yesterday, saying that cost control measures, including £15m savings in UK Trains, and pension and tax savings were "locked in for future years".
"Arriva has come through a challenging year with resilient earnings," David Martin, the chief executive, said. "We have entered 2010 with improved efficiency which is contributing to current trading in all three divisions."
Arriva's stock has already shot up in recent weeks, from 466p in mid-January to open at 533p yesterday, then hitting 551.5p in mid-morning trading. Much of the interest stems from January's acknowledgement of merger talks with Keolis, which is part of the French railway group SNCF.
Estimates from Panmure Gordon indicate a prospective price to earnings ratio of 11 times, on 2010 forecasts, and a dividend yield of 5 per cent. The numbers are attractive enough, but given the recent spike in the share price, we think improvements in the market in 2010 are already priced in. Not only are the merger talks too uncertain to be worth the risk at this stage, but the massive squeeze in public finances loom large. Hold.
Our view: Buy
Share price: 286.5p (-0.3p)
There is much to trumpet in yesterday's annual results from the building and support services group Carillion. The group weathered the storm in the recession-lashed construction sector thanks to well-performing public private partnership (PPP) contracts here and expansion abroad, most notably in Abu Dhabi. Pre-tax profits came in up 27 per cent to £148m, towards the top of City expectations, on revenues up 4 per cent at £5.4bn.
A key factor is the group's 4 per cent margin – up from 3.7 per cent last year – within which the support services division was up at 4.9 per cent. The order book is also healthy: worth roughly £18bn at the end of the year, with the slight reduction from the previous December accounted for by disposals and the sale of equity in PPP deals as expected. Strong cash flow of £268m left the group with net cash of £25m at the end of the year – also helped by the disposals and the PPP equity sales, but also boosted by cost savings of £50m per year from the integration of Alfred McAlpine.
But the construction business is the real interest. Excluding the Gulf, it managed a respectable 13 per cent share of the group's total operating profits. But the Middle Eastern construction business is the really stellar performer.
Last year saw the completion of the £350m Yas Hotel at Abu Dhabi's new Formula One Grand Prix circuit, and a string of further contracts with the Gulf state's Aldar investment vehicle are also underway. Alone, the division accounted for 21 per cent of Carillion's operating profits, helped by its 8.5 per cent margin.
The company signalled its confidence by hiking the dividend by 12 per cent to 14.6p yesterday. We're confident, too. Buy.
Our view: Buy
Share price: 69p (+7.5p)
The market has been hard on Lavendon, which supplies scissor lifts, van mounts, truck mounts and other aerial work platforms to maintenance contractors and the like.
The company's steps to strengthen its balance sheet have led to what Investec termed a "big reduction in net debt". Not only have such moves helped Lavendon to weather the downturn, but they leave it well placed to capitalise on the upturn.
The fragility of the recovery is an issue, but even if the UK keels over again, it's important to remember that Lavendon offers exposure to fast-growing Middle Eastern markets, particularly Saudi Arabia.
And yet, the company seems to have been unjustly tagged with the uncertainty surrounding the UK economy. Its shares, which offer a yield of 1.7 per cent, trade on multiple of just 7 times Investec's full-year forecasts. Investors appear to be ignoring Lavendon's focus on its finances and the diversity of its operations. Buy.
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