I have an admitted bias against investing in quoted British transport businesses. First, their markets, in terms of people travelling, grow slowly, if at all, which does not create much opportunities for sharp improvements in performance.
Second, they seem oddly accident-prone, in terms of expanding into other markets, especially America. Third, the rail franchise system that operates in Britain can mean an abrupt and hard-to-predict change in their fortunes, as such franchises are won or lost.
Stagecoach Group is among the more reliable of operators, in financial terms at least. Results for the year to the end of April came in a little better than expected, though this was mainly down to one-off factors, such as the renewal on favourable terms of insurance arrangements.
The rail side did better than expected, the bus side worse. Cheap fuel prices have meant that people were switching from public transport to their cars, in particular in the United States. Operating profits from the US division fell by 7 per cent, with its megabus business, which competes with Greyhound, especially affected.
The rail operations bear out my point about the unpredictable nature of that franchise system. Profits fell by almost 22 per cent as the two main franchises, East Midlands and South West Trains, neared the end of their lives, at which stage they are less profitable under the Byzantine rules that regulate the industry.
Operating profits at the Virgin Trains joint venture, though, rocketed from only £2.6 million to £28 million. In 2012 Virgin took over the troubled West Coast Main Line under a caretaker contract. This converted into proper commercial arrangements from last July.
Earnings at the bus operations were depressed by the cost of expanding its UK megabus operation onto the Continent, with 100 destinations now covered. This will take an additional £10 million off the bottom line this financial year, but can be rolled out further, providing one of those rare opportunities for growth.
The shares, up 10½p at 417p, sell on an earnings multiple for this year of 14 times. The main appeal is the prospect of a further return of capital, but this does not look imminent. Avoid for now.
Revenue £3.2bn
Dividends 10.5p
£80m Money invested in new buses
MY ADVICE Avoid for now
WHY Shares are on a high rating, with much of the good news seemingly in the price. Any further return of capital is not to be relied on
The profit warning from Elementis fits neatly into that category of warnings that the market really should have seen coming.
The company makes specialist chemicals that go into oil services, personal care products and other industrial applications, such as paint. There has been a further fall in oil-related projects in North America — about 11 per cent of the business; the Chinese market for industrial additives has slowed down; the weakness of some currencies in Latin America has made some of its products that go into personal care there uncompetitive against local producers; and the company has withdrawn from some unprofitable businesses.
Conditions in the second half, therefore, mean that full-year results will come in below expectations, with brokers downgrading forecasts by perhaps 10 per cent. A classic profit warning, but all the more significant because Elementis distributes half its cash balances at the year-end as dividends and this year’s payment will miss expectations. The shares, down 54½p at 257½p, still sell on 17 times earnings, which still does not suggest any immediate urgency to buy.
Forecast fall in sales to oil rigs 30%
MY ADVICE Avoid for now
WHY Profit warning should affect dividend payment
It may seem perverse rushing to buy six Scottish onshore wind farms for £246 million only a week after the government scrapped subsidies on the same, but, as ever in the world of renewables, things are more complex than they seem.
The Renewables Infrastructure Group, floated in July 2013 with a view to buying such assets and using the guaranteed income from them to fund a good yield for investors, is buying a half-stake in the wind farms from Fred Olsen Renewables, their builder, which is keeping the rest. They already qualify for the subsidy that is being phased out, in exchange for a less profitable one. The same will apply to the estimated 3.3 gigawatts of onshore farms, with perhaps £7 billion, that will come on stream before the bar comes down.
This means that there is scope for Trig to diversify further from its present 36 onshore wind and solar projects. The fund operates by using its borrowing facility to clinch the deals quickly and then paying this down by a subsequent issue of shares at a slight discount, a model followed by other infrastructure funds.
It has the authority to issue further shares worth perhaps £150 million this summer and the flexibility to adjust the size of the issue to match demand in the market.
The assets being bought bring in a return of about 9 per cent, well above the 5.7 per cent dividend yield the shares offer investors. At 105¾p, off ½p, they trade at a slight premium to the most recent net asset value figure. That dividend yield, as I have said of such funds before, is among the most attractive on the market and is pretty well guaranteed.
Amount paid for six farms £246m
MY ADVICE Buy for income
WHY Yield is high and pretty well guaranteed
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