The Investment Colum: A long winter looms in property as Fletcher King fund is put in freezer

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The Independent Online

Edited by Cliff Feltham

Our view: Avoid

Current price: 48.5p (-15.5p)

When the property market hits a wall, the bricks don't stand a chance. The property services group Fletcher King pulled no punches yesterday when it warned that full-year profits would be hammered after institutions slammed the brakes on all investment in the commercial property market.

"At the time of writing there is virtually no institutional commercial property market," said the firm.

Warnings don't come blunter than that, and the shares predictably tanked, down 26 per cent at 48.5p, although volume was negligible.

The company was chugging along pretty well for the first three months of the year when it collided head-on with the juggernaut otherwise known as the American sub-prime mortgage crisis. Fletcher King, which manages its own in-house property fund as well as advising clients on buying and selling commercial property, was sidelined, and could only watch the carnage as banks and clients marched away from deals.

When banks stayed at the table they demanded more equity from purchasers who, depending on the stage of the transaction, either stumped up or wrote off what they had already invested. Any deals in the pipeline simply vanished.

The firm is not entirely transaction-driven and can continue to rely on fees from its other work, such as carrying out valuation and rating assignments. Its in-house property fund, where it co-invests with wealthy private clients, expects to go into deep freeze for the coming months.

Half-year profits, largely reflecting the efforts of the first three months, were strongly ahead at 470,000, and the dividend is bumped up by 25 per cent as a sign of the company's underlying strength. But the full year will fall well short of the 1.1m expected.

The company is well funded and poised for the first signs of an uplift in the property market. But it could be a long winter. Avoid.

Arriva

Our view: Hold

Current price: 747.5p (-14p)

Arriva is one of the largest private-sector operators of passenger transport in Europe, running trains, buses and coaches. But while it has control over its timetables and should be able to offer passengers a reliable and efficient service, it has little say over the cost of its main raw material: fuel. So the encouraging news to emerge from yesterday's update for the year about to end is that fuel costs, while a headache, do not appear to have derailed any of its operations.

On the buses, healthy growth in passenger numbers, particularly in London, has continued to offset increases in fuel. According to some estimates the annual bill has gone up by more than 4m a year. However, keeping to timetables has become more difficult because of disruption caused by street works, especially those related to the replacement of north London's ageing water and sewage systems.

The UK trains business delivered a smooth start to its new nine-year CrossCountry inter-city franchise which it snatched from Virgin Rail and Stagecoach. But profits of the rail division will be depressed at the year end by the cost of bidding for new franchises.

Arriva has been aggressively building up services throughout mainland Europe, with the aim of doubling revenue by 2011. Among deals during the period were the acquisition of 85 per cent of a train company in Germany, a bus business near Prague, and a bus company in Madrid.

The full year will be in line with management expectations, suggesting 121m at the pre-tax level, and further sound growth seems assured for 2008. Hold.

Electric Word

Our view: Buy

Current price: 8.3p (unch)

Electric Word is a specialist publisher with a knack of spotting gaps in the market. Its publications have proved remarkably resilient, and after a few years of sluggish progress the company is now moving ahead briskly.

The firm produces newsletters and magazines for groups such as teachers, health workers and sports professionals such as physios. These are mature, not fickle target markets, so revenue tends to be predictable, unlike, for instance, publications aimed at the fashion trade. A typical subscription is around 100 a year.

The recent postal strike caused disruption, although many of the company's services are now provided online, so full-year forecasts for the year just ended are on course with expectations and should come in around 1.3m.

The entrepreneur Nigel Wray remains a long-term holder while the fund manager Stuart Newton is also a major investor. At 8p selling on 11 times earnings, the shares look good value.

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