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The Investment Column: FirstGroup has a ticket to growth

NETeller looks odds on to keep punters happy - Dividend promise makes Kiln a compelling buy

Wednesday 06 April 2005 00:00 BST
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Things are still on track at FirstGroup. The company has won two important new franchises in the past 18 months, the ScotRail contract to run all the trains into Scotland, and the TransPennine Express, which are now contributing to profits, and enabled the company to broadcast a bullish trading update over the tannoy yesterday.

Things are still on track at FirstGroup. The company has won two important new franchises in the past 18 months, the ScotRail contract to run all the trains into Scotland, and the TransPennine Express, which are now contributing to profits, and enabled the company to broadcast a bullish trading update over the tannoy yesterday.

A strong performance has been achieved across all the franchises (which also include First Great Western and the Croydon Tramlink), it said, and it is looking forward to the next round of franchise bids. Intriguingly, the company is already on the shortlist for London's Docklands Light Railway, currently run by Serco.

It shows a significant recovery from the nasty war of words between Moir Lockhead, the chief executive, and the Strategic Rail Authority, which so alarmed investors. There could be a healthy uptick in the share price if First wins any of the franchises for which it is bidding.

The group is one of the UK's largest transport operators, with some 62,000 employees across the country and in North America. It is big on the buses, operating one in five of all local bus services and carrying 2.8 million passengers every day.

This is never going to be the biggest margin business on the stock market. The Government cannot allow big profits to be made from vital public transport services, but operating efficiency First-style can mean a company makes a decent return on a predictable business.

The worry, such as it was yesterday, focused on the UK bus operations. You have to read between the lines of the statement to understand the share price fall but it was the phrase "notwithstanding ongoing cost base pressures..." which did for the stock. Those cost pressures inevitably include the cost of fuel which, thanks to the oil price spike, has been soaring. First hedges its fuel costs, paying for certainty, but the fuel bill next year is likely to be significantly higher, and some analysts indicated they could trim their profit forecasts a little yesterday.

Overall, though, First remains a steady business and a worthy investment. With its operations in UK rail and buses, and a strong North American operation (in school buses and transits), it is throwing off cash and pays a dividend yielding more than 4 per cent. Buy.

NETeller looks odds on to keep punters happy

The legal status of internet gambling in the US is cloudy, to say the least. It is explicitly outlawed in many states, others are trying to regulate and tax it, but the Federal government is taking a prohibitionist stance. And yet the numbers of Americans, in common with people across the world, who are punting on sports betting sites or playing internet poker has been growing exponentially.

The traditional banks won't touch their money, though, and NETeller has grown into a significant business (and a stock market hot property) as a result of this opportunity. It operates an e-wallet, ferrying money between the gambler and the betting website and taking on the task of verifying users' identities and checking for credit card fraud. An average of 1,800 people signed up to NETeller last year, and it made £45m from its cut of transactions. Of that, £25m was pre-tax profit, indicating just what a licence to print money this business is. We tipped the stock after its flotation last April at 197p and it had shot up to 640.5p yesterday.

NETeller shares have attracted the attention of short-sellers, inevitably, and it did get one black mark yesterday, having paid more tax than expected in the months before it moved its operations to the Isle of Man tax haven. This is small and historic when you consider that profit is expected to double this year, but nervous investors will want to make sure the company is keeping control of administrative costs.

The opportunities continue to outweigh these risks for investors with a bit of gambling money available. NETeller has just made an acquisition of a payments company in the Far East that will allow it to expand into gambling-mad China, where its expertise in cross-currency transactions puts it ahead of the local banks. Keep buying.

Dividend promise makes Kiln a compelling buy

The past 12 months have been unusually harsh for the general insurance industry, with the tsunami following just months after the end of one of the worst US and Caribbean hurricane seasons on record.

On such a backdrop, Kiln's 2004 results - which obliterated analysts' expectations as they were unveiled yesterday - were all the more impressive.

Kiln - which specialises in marine, aviation and special risk insurance lines - was badly stung by the hurricanes, taking a hit of about £35m. Nevertheless, even after this, its combined ratio (a key measure of insurers' performance) was well below the 100 per cent which represents overall group profitability - and remains one of the best in its sector.

When we looked at this stock a year ago, prospects did not look nearly as good for the insurance sector, with an imminent softening in rates looking likely. We said avoid. Since then, the string of natural disasters have helped to reinforce rates, while Kiln shares are also now significantly cheaper.

With yesterday's news that it is to remain committed to a full-year dividend of 3p (a fivefold increase on last year) for the remainder of the insurance cycle, Kiln is now one of the most compelling stocks in its sector. Buy.

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