Investment Column: Punters need more faith in public transport
Punch Taverns; Interserve
Thursday 15 January 2009
Our view: Hold
Share price: 358.75p (-62.5p)
You might have thought public-transport operators were all the rage with investors, given the economic crisis. Surely punters are attracted to the idea that companies based on people switching out of their cars and on to low-cost buses and subsidised trains must be resilient in a downturn.
FirstGroup, which operates nationwide bus and train franchises, became, however, the second-worst performing stock in the FTSE 100 yesterday after saying in its third quarter update that revenue at its Greyhound bus service in the US was down 4.5 per cent. The stock fell 14.8 per cent in trading. The shares had already fallen by 38.1 per cent before the statement, which was a bigger decline than the FTSE 100's average fall last year.
Analysts at house broker Dresdner Kleinwort argue that, while the group's UK bus division is performing well, rail is slowing and so they have cut their target share price to 674p from 720p. They also cut their 2009 pre-tax profit target to £322m, from £345m.
But more than half of FirstGroup's revenue comes from subsidies and this should offer investors hope that the groupis resilient, although buyers should be aware that this message is not getting through to the market. A spokeswoman for FirstGroup said the fall in share price during 2008 came after a strong performance in 2007. The market also reacted well to the takeover of Laidlaw, which brought in Greyhound and, while last year's share-price performance was unfortunate, the shares are undervalued. We would say the market is not yet listening to that argument. Hold.
Our view: Sell
Share price: 39.75p (-18p)
Punch by name and punch by nature, or at least investors in Punch Taverns will feel like they have had a thump in the face from the pub group, which is firmly rooted in the 90 per cent club of companies whose share prices have dropped by 90 per cent in the past year.
The question for investors is whether the shares are now too cheap to ignore. The stock fell another 31.2 per cent yesterday after Punch Taverns put out a disappointing interim management statement saying that, "despite improved trading over the peak Christmas period, trading over the period since 4 November has remained challenging with the economic outlook deteriorating for the UK consumer." The update also said that like-for-like profits at its 7,560 leased pub estate dropped 12 per cent in the 20 weeks to 10 January.
The main issue is not operational performance however, but debt, and being geared 7.5 to eight times Ebitda, investors should be very wary about Punch Taverns. As much as 60 per cent of the share register is made of up of US hedge finds, which see the company as a geared equity recovery play, says a spokesman. Punch argues that it is working hard to bring down the debt and increase free cash flow: in the reporting period alone, the group bought £180m of its own debt, on an accreted basis, spending £145m.
The analysts do not like the look of it at all. Those at Evolution describe the market update as a "shocker", saying that things are only going to get worse: "Our 40p target price is based on 8.3 times Ebitda. On a multiple of 8.1 times Ebitda, the share price would be zero. Equity is now just three per cent of the enterprise value."
A little while ago, the pub sector was moaning about the poor weather and the impact of the smoking ban. Judging by Punch Taverns latest update, things are, in fact, more serious than that. Sell.
Our view: Hold
Share price: 217p (+0.25p)
All seems very well with the building and maintenance services group Interserve, which issued a trading statement yesterday telling the market that it is trading well and within management's expectations.
Interserve may not be the safe investment the headline figures tend to suggest, however. The market was impressed by the statement, sending the shares marginally up, but buyers have been scarce in recent months and the stock has halved in the past year.
The reason why is clear: Interserve has a burgeoning pension deficit, which at the last half-year was £110m. Actuaries will measure the amount of cash the company needs to inject in the coming months, but for investors this is a serious black mark. Analysts at KBC Peel Hunt argue there is value in the company, but there are few catalysts.
Interserve would be a screaming buy, especially with visibility on earnings in the UK and growth in the Middle East, but the pension deficit is a major stumbling block. Hold.
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