To express a personal view for a moment, the UK transport franchise operators are just the sort of companies I dislike investing in. The earnings are notoriously lumpy and can be upset by the vagaries of the weather. The whole thing can be derailed (sorry about that) by some upset such as the loss of an important rail franchise.
FirstGroup is in the middle of a significant restructuring that should see it generating sufficient free cash to support its hefty debts. For every business in the group that is heading in the right direction, though — these transport metaphors seem unavoidable — there is another going into reverse. FirstGroup shares have been poor performers over the past year, as the graph shows, though they perked up 6p to 97p on some in-line figures for the close of the financial year to the end of March.
FirstGroup set out margin guidance for the three parts most in need of improvement at a capital markets day for the City in January. First Student in the US, which runs college buses, and its UK bus operations should be seeing 10 per cent, while Greyhound in the US is shooting for 12 per cent.
First Student was hit by the poor weather in the early months of this year. UK buses, where prices were reduced a year or more ago to tempt more passengers on to the network, saw the rate of revenue increase slow, in part because of difficult weather in Scotland. Greyhound has been affected by the falling price of petrol in the US, which has tempted people back into their cars, and margins here are actually falling again year on year.
The UK rail operation exemplifies those uncertainties. It won the extension of the First Great Western franchise to 2019 and the smaller First TransPennine Express. How it will do in the other franchises coming up for grabs is anyone’s guess, though we are assured that in its present form the business is generating cash.
The last financial year and this one will see negative cashflow because of the loss of two rail franchises. Thereafter it will be positive, sufficient to cover two bonds repayable in 2018 and 2019. Investors are entitled to wonder if FirstGroup has reached the nadir of its fortunes. I suspect so, but upwards progress does not look immediate.
Estimated cash outflow 2014-15 £100m
MY ADVICE Avoid for now
WHY Share price has fallen so far that it may be at its low point, but doubts remain and there is no obvious catalyst to move the shares forward
Portugal, as anyone who knows the country can testify, is not a bad place to go for underperforming loans. It is one of the most damaged economies in Europe, and last year its banks, under pressure from the European Central Bank to clean up their balance sheets, started to seek buyers for their own bad debts.
This is why it was the second port of call for Arrow Global. Arrow specialises in buying distressed consumer debt at large discounts to its face value and then collecting however much of this that it can. The company, which has most of its operations in Britain, started on its own account in Portugal in 2009. Yesterday it announced a chain of deals that reinforced its position there.
Arrow has entered into a five-year agreement with Carvel Investors, an existing US-owned partner, to buy debt in tandem and is buying a collection business owned by the latter for €47.8 million. It is buying another collection agency and a raft of loans at a face value of 6.5p in the pound.
This discount is comparatively high and indicates how cheap such debt is in Portugal — or, if you prefer, how much trouble the lenders are in. Arrow has a good record of collection, and the deal should work well.
The shares, up 12¼p at 260p, are difficult to value, and one concern would be the backwash from any further clampdown on doorstep lenders, which Arrow is not. They sell on nearly 13 times earnings. Attractive long term, but no pressing reason to buy.
Value of loans bought €565.6m
MY ADVICE Avoid for now
WHY Business is attractive, but no obvious upside
At first sight it might seem odd that Evraz, the Russian steelmaker, has decided to buy back as much as 8 per cent of its share capital after a year in which it suffered a $1.28 billion net loss.
Nothing is quite as it seems, though. The collapsing rouble has meant that production costs at its Russian plants are significantly lower, down by a quarter or more for steel slabs. Cashflow is still strong, despite the weaker domestic market.
The return allows investors, including Roman Abramovich, who has a 31 per cent stake, to take some money out — the company does not pay dividends. Evraz is offering to buy the shares at $3.10, equivalent to a 10 per cent premium to the last quoted price.
The losses are down to expected one-off hits — $1 billion from foreign exchange losses and a $540 million writedown on the value of the assets. The debt fell from $6 billion to $5.8 million. The tender offer puts this back up again, but at this level it is affordable.
Evraz, which gained 10p at 197½p, is not an ordinary investment. Nearly four fifths of it is locked up with various key investors. Sell into the tender offer by all means, but otherwise avoid.
Maximum tender offer $375m
MY ADVICE Avoid
WHY Sell into tender, but shares remain high risk
And finally . . .
Real Good Food is a small company with big ambitions, but these have been curtailed by the low price of sugar across the European Union, which has also hit producers such as Associated British Foods. The company owns the Napier Brown sugar distributor, and its underperformance last year led to a profit warning and a 14 per cent fall in the share price. There is a chance that Napier Brown may be sold, which would strengthen the balance sheet and allow Real Good to focus on its profitable baking ingredients operation.
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