Investment Column: Transport cuts make Stagecoach a worry

International Personal Finance; Theo Fennell
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The Independent Online

Our view: Hold

Share price: 190.8p (+0.2p)

Everything looks different in the aftermath of Chancellor George Osborne's emergency Budget.

Financial results from the bus and train operator Stagecoach may have squeaked in above expectations yesterday. But with at least 25 per cent set to be carved out of the Department for Transport's budget in the coming spending review, it is hard to see how subsidies for transport operators will not come under pressure – forcing up prices or seeing services scaled back.

Stagecoach is no more exposed to the looming carnage in public spending than any of its rivals. And yesterday's mood was buoyant, despite its pre-tax profits falling by 24 per cent from £171m to £126m, on revenues up by 2.9 per cent at £2.2bn.

The laggard is the company's UK rail division, where profits slumped by more than a quarter to £42m. But the chief executive, Brian Souter, pointed out that the doleful performance was still better than expected at the start of the year, and improvements in the market are expected both here and in the US.

Meanwhile, Stagecoach's UK bus division – which serves more than 100 towns and cities – also held up well in what the management called "a challenging business climate". Operating profits were up by 0.4 per cent to £126m as like-for-like revenues rose by 4.2 per cent to £840m.

Mr Souter said: "These are a good set of results and we have met the challenges of a difficult trading year. We are now in an excellent position to benefit from the increasing signs of economic recovery and capitalise on opportunities to grow our business."

He also stressed the good start the company had made to the new financial year. There is plenty to recommend about Stagecoach's shares. Its debt is down to £297m from £340m last year and, although the shares have traded in line over the past quarter, they are an appealing 60 per cent higher than a year ago. But we cannot rid our minds of the image of Mr Osborne wielding his axe, so hold Stagecoach.

International Personal Finance

Our view: Buy

Share price: 219.8p (+0.6p)

After Mr Osborne's speech, a quiet cheer probably went up in the offices of the country's lenders. With housing benefit, child benefit and disability benefit all being cut, and VAT jumping to 20 per cent, those that the credit companies traditionally lend to look as though they are going to be in need of some extra money.

International Personal Finance (IPF) eschews the UK market, preferring instead to lend to borrowers in eastern Europe and Mexico. It argues that the people it lends to do not have credit problems per se, but come from countries that are just not as well versed in personal credit.

Indeed IPF, which reported yesterday that trading over the year to date was ahead of its expectations, said the various debt crises in Europe had had no effect on its business. "Credit issued is growing steadily and credit quality in all markets is good," the company said in a statement.

The upbeat picture is matched by IPF's share price, which has increased by almost 200 per cent over the past 12 months. Another slight increase yesterday indicated that the market is receptive to good news.

Lenders like IPF have had it tough over the past year or two, especially because the wholesale lending markets have contracted.

But we are encouraged by the company's latest update, and with a yield of 3.4 per cent and the stock on an immodest 2010 price-earnings ratio of 8.4 times, we would be willing to snap up some of the shares. Buy.

Theo Fennell

Our view: Buy

Share price: 35p (-1p)

Theo Fennell, the posh jeweller, is due to post its results next week. Yesterday it announced the acquisition of a 20 per cent interest in a design consultancy set up by its founder and namesake. Yet its share price is down about 25 per cent since the start of the year, which strikes us as rather odd.

Mr Fennell returned to the company he founded last year, bringing with him his design acumen, and we have been seeing steady signs of improvement in sales since then. The most recent trading update in January reported good demand for Fennell's wares.

The economy has been improving as well, of course, but at the same time, it would be unduly bearish to overlook the company's efforts. The valuation is also undemanding. The stock is on 16.2 times Seymour Pierce's forecast earnings for 2011. That falls – yes, falls – to 11.3 times on the numbers for the year after. These metrics leave Theo Fennell undervalued compared with similar luxury goods makers, so buy.