The Investment Column: Prism on track for profits

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Prism Rail is one of a clutch of companies founded specifically to bid for the 25 rail operating companies sold off by the government as part of the privatisation of British Rail. The shares steamed ahead after it floated on the Alternative Investment Market last year as rail fever spread among investors. The logic ran that the rail companies, like Railtrack, were priced for a quick sale.

But there has been a growing suspicion that some of the companies are not the bargains they first appeared. In the clamour to win more franchises, some bidders may have pitched their demand for government subsidies too low, which could plunge them into the red. Prism has looked particularly at risk and its shares have nearly halved since peaking at 580p in January.

While there is no doubt that Prism's share price got ahead of itself, its slump looks harsh. So far its franchises are doing well. Passenger revenues grew 7.5 per cent last year and are now running up 9 per cent. Innovations such as combined rail and bus links, new rail cards and extra commuter services have proved a hit. And Prism is still brimming with new ideas: station lighting and security cameras are next on its list of improvements. It has also struck a good deal leasing 44 new trains and it now plans a pounds 15m refit of old stock, which should help passenger growth.

Prism made a profit of pounds 6.9m in the 14 months to March, before a pounds 12.4m charge to cover inevitable redundancy costs. Of course, so far it has done the easy bit, improving services which had been sadly neglected for years. It could find it harder going if the economy falters, which invariably means a tail off in rail passenger numbers. And profits will be lumpy as subsidies decline. Even so, the shares, up 20p at 300p, look good value on a forward p/e ratio of 6, assuming analysts' profit forecasts of pounds 15m are realised this year.