Investment Column: Punters need more faith in public transport

Punch Taverns; Interserve

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.

Punch Taverns

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.

Start your day with The Independent, sign up for daily news emails
ebooksA celebration of British elections
  • Get to the point
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Guru Careers: Software Engineer / Software Developer

£40-50K: Guru Careers: We are seeking an experienced Software Engineer / Softw...

Ashdown Group: Trainee Consultant - Surrey/ South West London

£22000 per annum + pension,bonus,career progression: Ashdown Group: An establi...

Ashdown Group: Trainee Consultant - Surrey / South West London

£22000 per annum + pension,bonus,career progression: Ashdown Group: An establi...

Recruitment Genius: Claims Administrator

£16000 - £18500 per annum: Recruitment Genius: This is an excellent opportunit...

Day In a Page

Fishing for votes with Nigel Farage: The Ukip leader shows how he can work an audience as he casts his line to the disaffected of Grimsby

Fishing is on Nigel Farage's mind

Ukip leader casts a line to the disaffected
Who is bombing whom in the Middle East? It's amazing they don't all hit each other

Who is bombing whom in the Middle East?

Robert Fisk untangles the countries and factions
China's influence on fashion: At the top of the game both creatively and commercially

China's influence on fashion

At the top of the game both creatively and commercially
Lord O’Donnell: Former cabinet secretary on the election and life away from the levers of power

The man known as GOD has a reputation for getting the job done

Lord O'Donnell's three principles of rule
Rainbow shades: It's all bright on the night

Rainbow shades

It's all bright on the night
'It was first time I had ever tasted chocolate. I kept a piece, and when Amsterdam was liberated, I gave it to the first Allied soldier I saw'

Bread from heaven

Dutch survivors thank RAF for World War II drop that saved millions
Britain will be 'run for the wealthy and powerful' if Tories retain power - Labour

How 'the Axe' helped Labour

UK will be 'run for the wealthy and powerful' if Tories retain power
Rare and exclusive video shows the horrific price paid by activists for challenging the rule of jihadist extremists in Syria

The price to be paid for challenging the rule of extremists

A revolution now 'consuming its own children'
Welcome to the world of Megagames

Welcome to the world of Megagames

300 players take part in Watch the Skies! board game in London
'Nymphomaniac' actress reveals what it was really like to star in one of the most explicit films ever

Charlotte Gainsbourg on 'Nymphomaniac'

Starring in one of the most explicit films ever
Robert Fisk in Abu Dhabi: The Emirates' out-of-sight migrant workers helping to build the dream projects of its rulers

Robert Fisk in Abu Dhabi

The Emirates' out-of-sight migrant workers helping to build the dream projects of its rulers
Vince Cable interview: Charging fees for employment tribunals was 'a very bad move'

Vince Cable exclusive interview

Charging fees for employment tribunals was 'a very bad move'
Iwan Rheon interview: Game of Thrones star returns to his Welsh roots to record debut album

Iwan Rheon is returning to his Welsh roots

Rheon is best known for his role as the Bastard of Bolton. It's gruelling playing a sadistic torturer, he tells Craig McLean, but it hasn't stopped him recording an album of Welsh psychedelia
Morne Hardenberg interview: Cameraman for BBC's upcoming show Shark on filming the ocean's most dangerous predator

It's time for my close-up

Meet the man who films great whites for a living
Increasing numbers of homeless people in America keep their mobile phones on the streets

Homeless people keep mobile phones

A homeless person with a smartphone is a common sight in the US. And that's creating a network where the 'hobo' community can share information - and fight stigma - like never before