Arriva
406p -16p
Dana
1,402p +32pIN 2007, a rail franchise looked like a licence to print money, even if the governments rules meant it took a PhD in economics to make it. But look at what is happening now.
Reces
sion has had the effect of slashing rail passenger numbers. Earlier in the week the cracks started to show as National Express (NEX) became the subject of a hostile takeover by much larger rival FirstGroup.
National Express's chief executive Richard Bowker, the former head of the Strategic Rail Authority, had negotiated a deal to run the East Coast mainline at the top of the market.
That was in 2007 – and now NEX, being the bottom feeder of the top five rail and bus companies in the UK – is looking like easy prey.
The issue is the tough passenger revenue growth targets required to stay on top of figures. Both NEX, which won the East Coast franchise in 2007, and Arriva, which won the Cross Country franchise stretching from Aberdeen to Penzance, had set growth figures at 10 per cent. Fine if the passengers are being packed on to trains like sardines, not so fine if folk are opting to take the bus – or not travel at all if they have lost their jobs and no longer commute or if they decide to forgo weekend "staycations".
Yesterday Arriva, the Sunderland-based group, warned in its pre-close trading statement that passenger numbers were slowing. It said its Cross Country franchise only grew 2.4 per cent, while its Welsh service grew a more healthy 8.7 per cent – albeit this was down from 9.7 per cent.
But considering rail has enjoyed double-digit revenue growth every year since it came out of state ownership in the mid-1990s, it is a kick in the backside.
But it has been more of a kick for National Express than Arriva, which means Arriva is standing strong. Consolidation is a tricky business in such a highly regulated environment. As such only the weakest is likely to fall – and it is still far from clear that the competition authorities will just nod through a takeover of NEX by First.
Analysts disagree on which of the top five – FirstGroup, Stagecoach, Arriva, GoAhead, and National Express – are the most "defensive". Arriva has some good claims on the title. Its spread in Europe, for example must come as great relief to its chief executive David Martin. And bus is clearly where the bargain hungry travel market is at – its UK bus is up 5.2 per cent – and Arriva is the largest bus operator in London.
The others face their own challenges: Stagecoach has its disagreements with the Department for Transport on when subsidies due for falling passenger numbers kick in – and a disgruntled chief executive Brian Souter who accused the DfT of being "either dysfunctional or deceitful".
GoAhead has a small stake in aviation, a sector which has also inhaled deeply the vapours of gloom. And of course, National Express with its increasingly desperate need to raise an estimated £400m in a rights issue.
And now that the daddy of the market, First Group, is looking at facing up to the disruption of swallowing NEX, Arriva looks like a nice safe bet.
FOR what seems the umpteenth time in the last fortnight, rumours resurfaced that Npower owner RWE is looking at bidding for North Sea oil producer Dana Petroleum, although the logic of such a deal remains unclear, writes Hamish Rutherford.
Shares in Dana, a member of the FTSE-250, climbed 5 per cent early yesterday morning on renewed talk the German utility RWE is preparing an 1,800p a share bid. If talks are under way, Dana would have to issue a statement saying so, but even the idea that RWE would consider an approach has problems.
As the owners of Npower, which provides gas and electricity to more than six million British customers, the idea that RWE would be interested in buying a company with major gas reserves is logical.
Centrica is mulling a bid for Venture Production, another Aberdeen-based operator, to get its extensive gas resources, to offset the fluctuating cost of acquiring gas for its millions of British Gas customers.
But while Venture is dominated by gas, last year gas was just 37 per cent of Dana's output.
This is still around 14,500 barrels a oil equivalent a day, but it would not make a sufficient dent to its gas bill compared to the more than £1.6 billion it would have to pay for Dana, if the 1,800p a share rumour is accurate.
The real attraction of Dana is an impressive exploration record as well as strong exposure to the price of oil.
Chief executive Tom Cross recently tapped the market for £56 million after refusing to bow to pressure to hedge its oil production, and its shares rise and fall with crude prices.
With the long-term trend for the oil price almost certainly up, Dana's prospects, and those of its shareholders, are good, although the chance of a bid appears low for now.
David Keir of SWIP
ONE TO WATCH
Cable & Wireless
133.1p -1.2p
Scotsman says BUYFOR some time, Cable & Wireless (C&W) has been looking to de-merge its two core businesses, CWI (which offers mobile, broadband and fixed-line services) and Worldwide (which services large global telecoms users). The economic and financial turmoil of the last few years have made this difficult, prompting management to push back timing of this "value realisation".
Before any de-merger, though, the Worldwide division has to be turned around. The ability to do this will be key to driving share price performance in the medium term.
Much remains to be done to achieve the company's targets for revenue and earnings growth. But progress so far has been encouraging. The integration of two recently acquired firms, Energis and Thus, is on track and leaves the company as the market's clear number two, well-positioned to take market share from the leader through a higher value-added product offering and a focus on excellent customer service.
C&W continues to focus heavily on reducing costs and is already seeing the rewards of its efforts in the form of increased margins and improving cash flow. As the global economy recovers, increased corporate spending will provide an additional impetus. In the meantime, according to our conservative forecasts, the company looks inexpensive on a number of valuation metrics.
It also provides an attractive yield. Recent full-year results were taken badly by the market, but we see the resulting share price underperformance as an opportunity to buy into a turnaround story – one driven by a highly incentivised management team.
• Investment markets and conditions can change rapidly and as such the views expressed should not be taken as statements of fact nor should reliance be placed on these views when making investment decisions. Past performance is not a guide to the future.
Lower loss for Assura as revenue surges
SMALL BUT BEAUTIFULHEALTHCARE firm Assura Group has posted a narrower trading loss that beat its estimates and said yesterday that trading in the new financial year was ahead of last year and budget.
Adjusted trading loss for the year to 31 March came in at £2.7 million, on revenue of £48.3m. Assura had expected a trading loss of about £4m.
In the 15 months to the end of March 2008, Assura had posted a pre-tax profit of £12.6m, on revenue of £40.1m. Assura, which provides GP services, has a market capitalisation of some £100m, and said it would not pay a final dividend for the past year.
Chief executive Richard Burrell said: "We are focusing on execution and moving our business towards profitability."
Assura said it continued to see new opportunities emerge in the NHS.
Assura now has sufficient long-term financing in place to execute its revised strategy of focusing on GP provider organisations, it said. The company noted that its property portfolio had been significantly written down to the tune of £56m and it had a £31m unrealised deficit on its interest rate swaps.
Assura said that, on an annualised basis, its revenue rose 42 per cent for the year to March.
France clearance does little for health of Prostrakan shares
SCOTS STOCKS DRUG firm Prostrakan dropped 1.7 per cent or 1.5p to 86.5p yesterday, despite being given early clearance to launch a cancer pain drug in France.
The Borders-based pharmaceutical firm announced that it had agreed price terms with French regulators to sell Abstral, allowing it to launch the drug for sale later this month.
Scotsman owner Johnston Press was Scotland's biggest riser, increasing 19.7 per cent, or 3.25p, to 19.75p following Monday's announcement that the publisher had been given two months' breathing space to renegotiate its debt.
Ramco, the Aberdeen-based energy company, slipped half a per cent to close at 81p, as Fidelity cut its stake in the firm from 7.15 per cent to 4.7 per cent.
Fiedlity had bought up the entire 3.6m new shares placed by Ramco in April to provide working capital for its wind-farm business.
Shares in Dana Petroleum rose 2.3 per cent to 1,402p as traders cited renewed market talk of bid interest from Germany's biggest power generator, RWE.
Rumours of a 1,800p-per-share bid from RWE emerged earlier this month but sources close to the process denied bid talks were ongoing.
Shares in Edinburgh-based Cairn Energy bounced up 34p to 2,342p despite oil slipping back below $70 a barrel.
