PLANES and boats and trains - the transport sector has not had its troubles to seek over the past year due to much-needed investment in a creaking infrastructure and the fall-out from September 11.
It might appear a sector for investors to steer well clear of, but there is money to be made.
One company that has suffered more than its fair share of bad news over recent months - from Strategic Rail Authority fines for poor service to industri
al disputes with its drivers - is Arriva.
Despite this, its shares have maintained their value, due largely to a steady performance and strong cash generation.
Growth could come from new franchises - Arriva is bidding for five, but these are expected to be low-risk, low-margin projects, while its bus business, which is feeling the pinch from higher labour and insurance costs, is not expected to expand far beyond London. However, it is generating cash for Arriva to invest elsewhere and buy back shares.
Perhaps ironically, land rather than sea is the main source of interest to ports investors.
Edinburgh’s Forth Ports is a good example in that it is the development of its harbour-side land that's attracting investors.
The ports business itself was weak in the first half of the year, with profits down £3.5 million to £12.4m, due largely to last year's poor grain harvest.
This year’s harvest is better though, so profits are expected to rebound.
Analysts are forecasting a pre-tax profit, before exceptional gains, for the year of £42.1m.
Forth Ports is a solid company with limited downside risk. Worth a punt. However, analysts reckon Associated British Ports’ results to be the most impressive so far from the ports sector. The main UK ports and transport business saw underlying profits grow four per cent to £71.5m, through a 13 per cent increase in container volumes.
At Southampton Container Terminals, 49 per cent-owned by ABP, throughput grew by 16 per cent.
These figures offset a fall in property rentals which dropped to £3.4m from £4.1m, while development profits slipped 47 per cent to £4.2m. ABP has sold £151m of property since January 2000 and has set a £200m disposal target by late 2003.
Insurance hikes in the wake of September 11 added £3m on to ABP’s costs, which dented margins.
Meanwhile, Stagecoach’s share price hit an all-time low last month as problems at its US subsidiary Coach USA prompted another profits warning. This time, it came with a dividend cut and the departure of chief executive Keith Cochrane. However, the business is unlikely to be sold off. Brian Souter, Stagecoach’s founder, has too much riding on it.
In contrast, the company’s UK businesses have been performing strongly, though the future of the South West Trains franchise looks uncertain following the SRA’s decision to curtail Go-Ahead’s operation of the south central franchise.
Go-Ahead’s knack for identifying growing markets has helped raise bus operating profits 14 per cent to £33.3m. However, slower rail passenger growth has combined with declining government subsidies to push the Thames Trains franchise £300,000 into the red.
Go-Ahead’s airport ground services arm only produced £4.7m profit last year as a result of the aviation downturn, but the company is seeking to seal more deals with low-cost airlines. The FTSA Review Committee has confirmed that British Airways will fall out of the FTSE 100 on Monday. BA shares have fallen 36 per cent since September 11. Also relegated are EMI and International Power. The three companies will be replaced by Rexam, Tomkins and Alliance Unichem.
Many assume shares relegated will fall while those entering the index might be expected to rise, but research reveals that this isn't necessarily so.
Over the past year, ten of the 13 companies deleted from the FTSE 100 have outperformed the index in the month after the change, while only eight newcomers have outperformed.
Therefore, investing in BA might not be so reckless.
Drew Johnston is a business writer and MD of Blueprint Media
