The Investment Column: Avis Europe motors ahead

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The Independent Online
Profits at Avis Europe, Europe's largest car hirer, motored ahead in the six months to August, rising by a third to pounds 40.9m. Ignoring currency fluctuations, profits have risen by an impressive 57 per cent. Avis's market is booming, benefiting from the strong growth in the airport traffic which provides a big chunk of its customers.

The group's drive to attract more tourists rather than business customers is going well. Leisure users tend to hire cars for longer, which increases Avis's utilisation rates and reduces overheads.

Avis should continue to expand rapidly. It is planning a big push into Asia, including China and India. It should also be able to increase productivity rates by at least 5 per cent a year by improving its computer systems and continuing to cut costs.

However, competition is hotting up. Republic, run by US entrepreneur Wayne Huizenga, plans a rapid expansion in Europe after recently snapping up Eurodollar. German group SIXT also has grand European ambitions. Arch rival Hertz, hot from its stock market launch, could pose a greater threat.

Avis claims the changes in ownership at competitors will lead to a rise in hire rates, as it has done in the US. The argument goes that car manufacturers have now sold most of their stakes in the industry and new owners will be more concerned with generating decent financial returns and so will raise prices. Nevertheless, Avis could find life more difficult in the short term.

There is also a worry that Avis's profits rely too heavily on the rebates it gets from car manufacturers, rather than increases in utilisation or hire rates. Some analysts believe a 1 percentage point rise in the rebate could increase Avis' profits by 20 per cent.

Given Avis doesn't release rebate figures it is difficult to assess their true significance, but there is a suspicion that they flatter its profit performance.

Analysts forecast full-year profits at around pounds 75m, putting the shares on a prospective p/e ratio of 16. The shares, which have risen from April's flotation price of 124p to 149.5p, up 1p yesterday, look about right.