Time to take profits at toppy RAC

Trade recovery makes Brambles a good bet; Reed's state of health still looking shaky

Stephen Foley
Thursday 26 February 2004 01:00

RAC has found it simple to navigate its way to a profitable future since transforming itself from an old banger of a car dealership, called Lex Service, into a souped-up motoring service organisation, via the acquisition of the historic RAC.

Its share price has motored ahead since we tipped the stock back in 2002, more than doubling in the past 12 months alone. Driving that growth has been the decision to follow the lead of Centrica, the owner of the AA, by attempting to sell other services - be they financial and legal help or windscreen repair - to its RAC customers.

Crucially, 13 per cent of RAC domestic customers now pay the group to provide more than one service, up from 11 per cent a year ago. Andy Harrison, the chief executive, would like that number to hit 20 per cent, but realises it will take a while to get there. Analysts calculate that every extra percentage point that the number rises adds another £750,000 to profits. The new software RAC has installed to help it understand its customers' needs better should be well worth the investment.

Yesterday's full-year results were good. Profits before tax, goodwill amortisation and exceptional items rose by 24 per cent last year to £86.7m. (Exceptional items were mainly related to its decision to sell its forklift truck hire businesses.)

RAC continues to focus equally on domestic and corporate customers, and saw reasonable organic growth from both arms of its sprawling organisation. The consumer division, home to its BSM driving school, grew sales by 7 per cent. Its business arm reported a 6 per cent sales rise, helped by winning major new contracts, such as a 10-year deal to manage British Airways' fleet of "airside vehicles" (that's vehicles such as crew buses and the tugs that move aeroplanes around the runway).

That said, the shares slipped 27p yesterday to 700p because although the results were in line with expectations, the market was looking to upgrade future profit forecasts. That won't happen yet because, with problems at its auto windscreen repair arm, where profits fell 15 per cent, the company is not firing on all cylinders. At this stage, it is worth taking profits.

Trade recovery makes Brambles a good bet

Brambles Industries has had to face a string of thorny problems since it arrived on the London stock market in 2001 through the merger of GKN's Chep pallets business with its Australian partner.

Chep's sheer size in the UK and Australia makes it a natural first point of call for businesses needing pallets to transport goods. But almost immediately after floating it admitted inefficiencies in the US, where it had trouble tracking and recalling the pallets it had lent, and more recently it said it had lost a staggering 14 million in Europe. Profit warning followed profit warning, and Sir CK Chow, the chief executive, packed his bags last autumn.

If there was a surprise in yesterday's interims, it was that there was no nasty surprise. The new management even felt confident enough to set out its "Objectives and Milestones" which, among the touchy feely guff, contained some concrete targets for sales and margin growth and returns on capital.

They weren't particularly ambitious, admittedly. But they suggest that while the City jury is still out, management is confident it will walk free from its period of disasters. A big programme of pallet repair is complete in the US, and restructuring in Europe continues apace. The second half of the financial year should show continued progress.

There is still much to be done to improve the internal systems at Chep, and the Cleanaway waste disposal business in Germany continues to be bogged down by the economic conditions there. Additionally, on 18 times this year's earnings, the shares aren't dirt cheap.

But with trade picking up once more, and expansion in Europe and the US on the medium-term agenda, the shares might be a profitable gamble.

Reed's state of health still looking shaky

It is probably no consolation to Reed Health shareholders to be told that at least the Government is getting more for taxpayers' money when it comes to spending on the National Health Service.

Concerted efforts to reduce the NHS's dependence on expensive temps from the private sector prompted a profits warning last week from Reed, one of the biggest suppliers of agency nurses. Yesterday, the group confirmed that interim profits were down 45 per cent and that the next six months would be just as tough.

Reed is not alone in suffering - Nestor Healthcare and Corporate Services are affected, too - and it hopes that a combination of cost cutting in its core London market and expansion of its branch network elsewhere will reverse the decline in profits next year. Its other businesses are mixed - it has won some good contracts to supply social care workers to local councils, but the placing of physiotherapists continues to be competitive - and all will come under the scrutiny of an increasingly efficiency-conscious health system. While procurement policies are still in a state of flux, the stock, at 80.5p, is to be avoided.

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