Investment Column: FirstGroup moves into a smoother gear

Thomas Cook Group; Playtech
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The Independent Online

Our view: Buy

Share price: 252.5p (+43.25p)

It was something of a bittersweet day for FirstGroup's investors yesterday. The bus and rail operator's shares were up 20.7 per cent as it said in a trading statement that 2008 full-year results will hit the company's expectations. An announcement that the group is aiming to take £200m of costs out of the business must also surely have helped.

But all that follows what can only be described as a miserable recent performance by the stock, which is down 60 per cent in the last year, and has lost nearly half its value in the last three months alone.

The market has been worried about the company's ability to withstand the onset of the recession, and while its UK bus division, which operates non-London routes, has performed well, growth in the group's UK rail division has slowed, even if it is still expected to hit 7.6 per cent for the full year. About 75 per cent of FirstGroup's US revenue is generated from contracted services, such as school bus runs. Even though its Greyhound service is rather limping along, it does only represent about 10 per cent of earnings.

Analysts at Killik Capital point out that there was no mention of debt levels in yesterday's statement and that the £2.2bn of net debt announced last September might still be considered a concern. A spokesperson for the group said that the market can expect the debt level to rise to between £2.4bn and £2.5bn by the time of the full-year results.

The Killik experts argue that the group is well within its banking cov-enants, regardless of the debt, and that the strong full-year performance, coupled with the fact that 50 per cent of the group's revenue is contracted, makes FirstGroup a safe bet. Buy.

Thomas Cook Group

Our view: Buy

Share price: 240p (+12p)

Even though people are losing their jobs at a rate of knots, and more worryingly for consumer-focused com-panies, many more think they might find themselves unemployed in the coming months, holidaying seems to be one of the things that is holding up better than most.

Manny Fontenla-Novoa, the chief executive of Thomas Cook, would have every right to say that he told us all so. The group announced a strong trading update yesterday, saying that it is expecting to meet its full-year expectations. Mr Fontenla-Novoa, however, concedes that things are tougher and that while he is confident, there is still unsold capacity in Thomas Cook's summer holiday market. "It is not yet in the bag," he warns.

Yesterday's update detailed that while the last four weeks have shown tremendous growth in the group's winter holiday sales, against last year, sales are down 7 per cent.

Investors, however, should be warned against worrying too much about the sales drop. Mr Fontenla-Novoa points out that while sales are down, margins are protected to some extent by the fact that about 25 per cent of capacity has been taken out of the industry, both deliberately and due to the collapse of smaller rivals.

Despite the perception that holiday groups must be suffering in the downturn, the market has not punished the company, with the stock rising 27 per cent in the last quarter.

Watchers at Royal Bank of Scotland say that, trading on 7.8 times its 2009 price-earnings ratio, the shares are a buy. Despite our scepticism a few months ago, we would now be inclined to agree. Buy.

Playtech

Our view: Buy

Share price: 408p (+4p)

It may sound counter-intuitive in the middle of a recession, but a lot of gambling companies are doing rather well, and while none will stick their necks out and say that they are actually recession-proof, investors might still want to take a flutter.

Playtech, the company that provides online programmes to gaming groups, announced a bumper set of full-year results yesterday, saying that pre-tax profits were up to €41.5m, from €26.8m last year. The dividend was up 49 per cent to 7.6 cents.

Cynics would argue that it is too late to buy the stock, given the 25 per cent growth in the shares over the last quarter and the lukewarm reaction yesterday. While the company uses the now rather tired "recession resilient" phrase to explain its position vis-à-vis the economy, it is actually difficult to tell since the online gaming industry has never been through a recession.

Its chief executive, Mor Weizer, says that diversity is the key and that being in several sectors and at least 45 countries is doing the group a great service.

Goldman Sachs reckons that a recent deal with William Hill has ensured that the year has started positively and the stock is on their "conviction buy" list. Trading at 8.2 times its 2009 price-earn-ings ratio, Playtech comes at a discount to peers. Buy.

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