Investment Column: Go-Ahead and buy transport firm's shares
Ashtead Group; Plant Impact
Friday 19 June 2009
Our view: Buy
Share price: 1277p (-60p)
Late last year, we wrote that investors should be careful about buying into the bus and rail operator Go-Ahead. Unlike many companies, the group claimed not to be feeling the hardship of the economic downturn, but we were more worried about the company renewing its Southern rail franchise: why buy with such a big contract in the balance, we thought.
The situation has now reversed somewhat. Our concerns about the Southern rail franchise turned out to be unfounded, and the agreement has now been signed. We do think, however, that the argument for the ultra-defensive nature of the company is unravelling a little. It was always thought that with three London rail commuter services, passenger numbers may come under a small amount of pressure as the unemployment rate starts to hike: yesterday's trading statement detailed that while full-year passenger numbers are up, the rate of increase is slowing.
We do not fear for investors in Go-Ahead, however. The company is in good shape, boasts a healthy balance sheet and still clearly has resilient features, given the fact that more than 50 per cent of revenues in its bus division are generated by regulated operations. Given that we have been banging the "safety-first" drum for such a long time, we would buy Go-Ahead, believing that while it may be coming under increased recessionary pressure, it is still a fundamentally safe stock.
However, there are better bets in the sector. The analysts at Killik point out that trading at 10.2 times earnings, the stock trades at a premium to the industry. And it is unwarranted, they argue, pointing out that Go-Ahead has all its eggs in the UK basket. Others such as First Group, with cheaper shares, offer a more diverse investment.
We would also favour First Group, but would still argue that it would be prudent to be overweight in the transport sector. Buy.
Our view: Avoid
Share price: 56.5p (+3.25p)
"There may be too much expectation in the price and not enough reality," say the experts at Panmure Gordon of Ashstead's shares.
We agree, and for the reasons we are tempted to buy Go-Ahead – generally defensive markets and visible earnings – we would not be backers of Ashtead, the equipment hire group, which makes 80 per cent of its money in the US. The company issued its full-year numbers yesterday saying it is confident about the coming 12 months, despite predicting a tough year for the construction industry and reporting a 22 per cent drop in 2008.
Despite conceding that market conditions are tricky, the chief executive, Geoff Drabble, says there is a clear investment case. The group is financially strong, he argues, while its biggest market, the US, will return to health next year, aided by the huge US stimulus package. The market in the US is highly fragmented, says Mr Drabble, and will consolidate to the benefit of the bigger players, including Ashtead.
We take all this at face value, and for those prepared to put their money into something a bit risky, Ashtead might well be a decent punt.
But we are not convinced that the investment case is very compelling. Ashtead operates in a very nervous market, while there are plenty of companies out there that are performing well in much more defensive sectors. There may well be a time to buy Ashtead shares, but we think today's investor may suffer over the next 12 months.
Mr Drabble concedes that visibility is weak, and although he might turn out to be right that the group is a good punt, we would be cautious about anything that is so closely linked to the still toxic construction sector. Avoid.
Our view: Buy
Share price: 33.5p (+3.5p)
Plant Impact, an Aim-listed group that develops technology to assist crop growth, issued a bizarre trading statement yesterday, which took a swipe at "malicious chatter" on the internet.
The chief executive, Peter Blezard, said the group felt compelled to issue the update after a spate of erroneous "chatter in internet chatrooms" about the state of the company's finances. Mr Blezard was keen to stress that the group is on the cusp of "going global" after signing a licensing deal with Arysta LifeScience, a Japanese company that will help to commercialise Plant Impact's pesticide products. The contact ensures a sure financial footing, says Mr Blezard.
In spite of a few techies slagging off the company's performance, the shares have had a stellar time of it in recent months, climbing from its 8.5p year lows in February. Yesterday's reassurance did no harm at all with the stock up 11.7 per cent, and we reckon the shares are worth a punt. Buy.
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