The Investment Column: FirstGroup riding high with successof American deal
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Your support makes all the difference.Current price: 692p (+3.5p)
Our view: Buy
Amid all the doom and gloom in the markets at the moment, up popped FirstGroup yesterday with a bit of good news. The £175m it planned to raise from shareholders to help finance its £1.8bn purchase of Laidlaw – the company that owns America's Greyhound buses, along with a fleet of 40,000 of those iconic bright yellow school buses – will not be needed. Cashflows have been so good in both businesses that First reckons it can comfortably borrow the money it needs and still retain its credit rating.
The company will have to sell a fair number of buses to satisfy US competition watchdogs (about 3 per cent of the fleet), but that is relatively easy medicine to swallow.
Despite the overlap between Laidlaw and First's existing US business, however, it is only promising synergies of $75m a year. This is probably down to "expectations management", so the company will be able to surprise on the upside with upgrades later on. Certainly Investec thinks so, estimating that there should be scope for up to $120m over time.
In the meantime trading across the group looks chipper, with the bus business showing healthy growth and improving margins, and the rail operations chugging along happily. FirstGroup is not the most exciting business in the world, but it does what it does well.
For the year ending March 2009 (the first full year with Laidlaw), Investec puts the shares on 13.6 times earnings, bang in line with the peer group, with a 2.7 per cent yield. But if (as expected) extra savings are wrung from the US operations, that would fall to 12.5 times. On that basis it is worth tucking a few of these away. Buy.
Shanks
Current price: 223p (–0.25p)
Our view: Hold
Steady as she goes was the message from the waste management company Shanks yesterday. Its trading statement was solid ahead of the half-year figures with phase two of its flagship Private Finance Initiative project – the East London Waste Authority – now complete following delays due to supplier insolvency earlier in the year. The substantial businesses in the Netherlands and Belgium are also doing well.
Long term there is much in Shanks' favour. With rising landfill taxes starting to bite, its recycling expertise will increasingly be called upon, and expertise is not something it is short of given the businesses it has in the Netherlands and Belgium, both of which are well ahead of Britain in the recycling stakes.
There was no new news on fresh PFI work yesterday, and that is not expected to change during the current year. But there should be plenty of work in the pipeline, not least from the forthcoming London Olympics.
At 18 times full-year forecast earnings, yielding 2.8 per cent, the shares are not cheap, although they were a lot higher in the summer. But the wind is still blowing in this company's direction and it looks like a good long-term bet. The credit crunch may have taken the possibility of a bid from one of those ubiquitous infrastructure funds that have been sweeping up assets off the table for the moment. But once things calm down, and given the company's attractive portfolio, that could change. Fundamentally, this company is a solid long-term play. So hold the shares.
Holidaybreak
Current price: 770p (+25p)
Our view: Buy
Politicians are desperately keen to waffle on about education. Sadly, all too often, their actions do more harm than good. School trips have again been in their sights in recent weeks (the Tories picked it up again yesterday), without anyone addressing the real fear they bring to the poor teachers and schools who know only too well the potential legal nightmare they face if one of the little darlings gets into trouble.
All this, however, is grist to the mill of companies such as Holidaybreak. It yesterday announced the £47.2m acquisition of NST, a provider of group travel to schools and colleges throughout the UK. Using an operation like NST takes a considerable portion of the grief away from harassed education professionals.
And, from a business standpoint, combining NST with its existing PGL – which focuses more on activity centres than tours and whose visitors have a younger age profile – makes all sorts of sense. The two combined operate in a growing market that should have some insulation from a downturn in consumer spending, and the fact that the deal should be earnings-enhancing in its first year is a plus.
The rest of the business – short breaks, adventure holidays for adults, camping, is ticking along nicely too. The market certainly took note yesterday with the shares finishing strongly ahead, recovering some of the ground lost in the summer.
Pre-deal Landsbanki had the shares on 12.5 times 2007 earnings and 12.9 times 2008, with an attractive prospective yield of 4.2 per cent. The shares are not cheap, and there is a downside risk from a consumer slowdown. But the deal offers scope for the shares to be re-rated. Buy.
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