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 special investigation by Andy McSmith
  • 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

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: Client Services Assistant

£18000 - £20000 per annum: Recruitment Genius: A Client Services Assistant is ...

Ashdown Group: Junior Application Support Analyst - Fluent German Speaker

£25000 - £30000 per annum + benefits: Ashdown Group: A global leader operating...

Day In a Page

No postcode? No vote

Floating voters

How living on a houseboat meant I didn't officially 'exist'
Louis Theroux's affable Englishman routine begins to wear thin

By Reason of Insanity

Louis Theroux's affable Englishman routine begins to wear thin
Power dressing is back – but no shoulderpads!

Power dressing is back

But banish all thoughts of Eighties shoulderpads
Spanish stone-age cave paintings 'under threat' after being re-opened to the public

Spanish stone-age cave paintings in Altamira 'under threat'

Caves were re-opened to the public
'I was the bookies’ favourite to be first to leave the Cabinet'

Vince Cable interview

'I was the bookies’ favourite to be first to leave the Cabinet'
Election 2015: How many of the Government's coalition agreement promises have been kept?

Promises, promises

But how many coalition agreement pledges have been kept?
The Gaza fisherman who built his own reef - and was shot dead there by an Israeli gunboat

The death of a Gaza fisherman

He built his own reef, and was fatally shot there by an Israeli gunboat
Saudi Arabia's airstrikes in Yemen are fuelling the Gulf's fire

Saudi airstrikes are fuelling the Gulf's fire

Arab intervention in Yemen risks entrenching Sunni-Shia divide and handing a victory to Isis, says Patrick Cockburn
Zayn Malik's departure from One Direction shows the perils of fame in the age of social media

The only direction Zayn could go

We wince at the anguish of One Direction's fans, but Malik's departure shows the perils of fame in the age of social media
Young Magician of the Year 2015: Meet the schoolgirl from Newcastle who has her heart set on being the competition's first female winner

Spells like teen spirit

A 16-year-old from Newcastle has set her heart on being the first female to win Young Magician of the Year. Jonathan Owen meets her
Jonathan Anderson: If fashion is a cycle, this young man knows just how to ride it

If fashion is a cycle, this young man knows just how to ride it

British designer Jonathan Anderson is putting his stamp on venerable house Loewe
Number plates scheme could provide a licence to offend in the land of the free

Licence to offend in the land of the free

Cash-strapped states have hit on a way of making money out of drivers that may be in collision with the First Amendment, says Rupert Cornwell
From farm to fork: Meet the Cornish fishermen, vegetable-growers and butchers causing a stir in London's top restaurants

From farm to fork in Cornwall

One man is bringing together Cornwall's most accomplished growers, fishermen and butchers with London's best chefs to put the finest, freshest produce on the plates of some of the country’s best restaurants
Robert Parker interview: The world's top wine critic on tasting 10,000 bottles a year, absurd drinking notes and New World wannabes

Robert Parker interview

The world's top wine critic on tasting 10,000 bottles a year, absurd drinking notes and New World wannabes
Don't believe the stereotype - or should you?

Don't believe the stereotype - or should you?

We exaggerate regional traits and turn them into jokes - and those on the receiving end are in on it too, says DJ Taylor