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Grounds for optimism at Arriva

Cattles; Axis-Shield  

Friday 08 March 2002 01:00 GMT
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Fraser Patterson from Tottenham in London is the UK's bus driver of the year. He works for Arriva, one of the country's biggest bus and train operators, and the company fêted him in its annual results statement to the stock exchange yesterday.

Well it might. Personnel is Arriva's number one issue at the moment, with high staff turnover disrupting the bus business while on the trains side, staff shortages have crippled services and a major pay dispute with the members of the RMT union promises at least five more days of strike action in the North of England. With employees in such a strong position, it is no surprise that wage costs put the brakes on profit growth in Arriva's main businesses.

Last year's operating profit of £68.4m in the UK bus division was slightly down on 2000, despite a 5 per cent increase in turnover. Most of that increase came in London, where the transport authorities are pouring new investment into bus services ahead of the introduction of road charges. With "encouraging signs of reduced staff turnover" and prospects of a rebound in tourism, which should boost Arriva's London Pride sightseeing tour business, the UK bus division looks likely to make renewed progress in 2002.

The prospects for UK rail are more problematic – the Government's shadow is forever over the sector now – but here too there are grounds for optimism. While Arriva has been on one-year contracts to run its Northern and Merseyside franchises, the process of bidding for longer tenures and additional franchises has begun.

A group profit of £76m, up from £72.1m in 2000, was helped by a resurgent car dealerships and commercial vehicle hire business, and by some judicious expansion overseas. All these trends look set to continue in 2002. And the company's robust cash position means that earnings per share, up 11 per cent last year, can continue to be buoyed by share buy backs. With the shares, up 10p to 342p, trading on less than 10 times earnings and with a rock-solid dividend, Arriva's investors should stay on board despite the controversial journey ahead.

Cattles

Cattles proved again yesterday that loan sharks can make money for their shareholders and at the same time be cuddly with their customers. The company, which specialises in providing credit to higher-risk borrowers snubbed by the high street banks, achieved a 19 per cent hike in pre-tax profits last year. Bad debts in its main operations hold steady at 8 per cent, despite the economic slowdown. Séan Mahon, the new chief executive, puts the performance down to Cattles' fast-growing branch network, which helps managers retain a cosy relationship with customers and makes it easy to catch – and assist – likely defaulters early on.

As is to be expected from a company aggressively growing its loanbook – which sits at £1.1bn – group net debt has soared, from £541m to £717m during 2001. Cash outflows were £23.6m last year, and would have been higher but for £185m of new financing. Mr Mahon won't say when the group will be cashflow positive.

The worry is that unemployment will soar and Cattles' customers will begin defaulting in their droves, thus reducing the cash inflows from the loanbook. That said, economists have become less willing to argue there will be a sharp jolt in unemployment later this year. Let's just say the situation remains somewhat uncertain.

The City is confident Cattles is capable of delivering earnings growth of about 15 per cent for the next couple of years at least, hence a 7p jump in the shares to 322.5p yesterday. Merrill Lynch forecasts pre-tax profits about £90m this year, with earnings of 21p per share. That puts Cattles on a forward multiple of 15. That may look cheap given the growth on offer, but it reflects the risks. Buy, but keep a close eye on the domestic economic outlook.

Axis-Shield

Axis-Shield, developer of a range of laboratory tests for diagnosing people at risk of complaints such as heart disease or Alzheimer's, has broken even. Three cheers, then, but also the start of a painful process of adjustment where the shares will be clearly judged against the earnings provided for shareholders. Happily, after a giant tumble from the peaks of 2000, they are looking cheap.

On current forecasts, the shares, up 22.5p to 352.5p, trade on 34 times 2003 earnings, with the prospect of accelerated growth from 2004 when the group will start to sell the fruits of its recent research investment. It has a series of simplified tests under development so doctors can make more diagnoses at once, in the surgery.

For the time being, growth is driven by tests for heart disease and alcoholism, and revenues in 2001 were up 16 per cent to £49.8m. The company still has £9.4m in the bank, but is now generating cash of its own. Buy for the long-term.

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