First firm over Express deal

Scrutineer

First Group

366pp -4.75p

ASOS

361p -19p

THERE are plenty of reasons why First Group should think twice about buying its smaller rival, National Express.

Yet yesterday the Aberdeen transport giant made clear it has every intention of pushing on with the deal despite a rebuff from Birmingham-based National Express and despite strong arguments against it.

The first issue is debt. First Group already has its own £2.5 billion debt burden to consider. Some would brush this fact aside by saying its covenants have been extended to a post-recession friendly 2012. But not everyone is so blasé, especially as an acquisition of National Express would give First a further £1.2bn debt load. And that is without the money it would have to raise to pay for National Express, even if it was all in shares.

But estimates that National Express shareholders would get 500p a share seem over-egged – this is not likely when its share price last Friday was 260p and not when its need to raise £400 million from its shareholders would be so dilutive.

Arguments in favour of the deal are that the Aberdeen company knows exactly what it is getting into.

This is partly because First Group would have bid for nearly every franchise National Express currently holds in the UK, and also because the Aberdeen group would have had to fight its rival for market share in the US, particularly in the lucrative school bus business. National Express has 12,000 yellow school buses in the United States and Canada, but First has nearly 50,000. Most of these contracts are still controlled by school boards and First has been making a good fist of grasping this market and giving it a good shake – and making comfortable margins to boot.

National Express supporters have tried to point out that it has already tried "self-help" measures – renegotiating more headroom with its lenders and selling its London bus operations. But not many have been convinced by this argument.

Frankly, National Express has a weak hand. It is not about putting up a fight against Sir Moir Lockhead's rough wooing, but whether or not he's got the stamina to take his prize back to Aberdeen.

And then there is the question of the east coast main line – is it a prize or a Trojan horse? That is what Lockhead and his chairman, Martin Gilbert, have to find out.

Undoubtedly the banking crisis has played its role in the problems facing the east coast franchise. The trip from London to Edinburgh once had one of the highest levels of first class passengers on the network, but then "downtrading" took its toll as corporate travellers went in search of cheaper tickets.

So not only are there fewer passengers, but some firms, including Lloyds Banking Group, part-owned by the government, have banned certain staff from travelling first class.

First Group say its board will refuse to countenance any deal that won't be earnings-accretive. But the Department for Transport remains intransigent – there will be no negotiations on franchise agreements, even for a new owner. But then, as one analyst speculated: "Maybe First know something."

POOR Asos, writes Jane Bradley. One of the few success stories of the past few months, the online retailer now seems to have become a victim of its own overachievement – the wünderkind of retailing is now beating itself up for reporting a sales increase of only 52 per cent for the first three months of this year!

Chief executive Nick Robertson said yesterday the chain was facing "much tougher comparables" in the current year and warned the growth in online sales had "begun to moderate".

Yes, the figures are down on its previous year's meteoric doubling of turnover. But we are in a recession – most retailers are lucky if they have achieved flat sales this year; many more are collapsing completely.

That is not to say that Asos' rapid expansion is necessarily right for the long term.

Over the past year, it has launched a huge number of new services – Asos designer brands, Asos Maternity and kidswear brand Little Asos, in addition to securing deals with G-Star, Reiss, Warehouse, to name but a few, taking its number of external brands to 820 compared with 600 a year ago.

As a fervent follower of the Asos religion, I have recently been mourning the old days of a couple of years ago when the site's turnover was more in the region of £40m and the "As Seen On Screen" ethos still prevailed.

I liked those days. In addition to one or two of the harder-to-get-hold-of brands, the mainstay of the website was Asos' own, very affordable label of designer rip-offs – usually accompanied by a picture of whichever star had been spotted wearing a similar style.

If Asos' is to remain ahead of the trend, it needs to pull back and focus on providing something a little different again – something that has, perhaps, as its full name suggests, been seen on screen.

Terrace Hill reclaims a little lost ground on £1m rental deals

SCOTS STOCKS

SHARES in Terrace Hill, the Glasgow headquartered property company, have been hit hard by the recession, with a fall in housebuilding and problems in the commercial property market sending the stock diving.

For a time it was Scotland's largest Aim-listed company by market value, but shares dropped to 13.5p this month – a quarter of the level of last September.

Yesterday brought better news, however, as it announced the letting of a building in Middlesbrough and part of a building in London, deals that will bring in around £1 million a year in rent. Shares rose 1.5p or 10.7 per cent to 15.5p.

Logistics company John Menzies continued its rise on the back of last week's reassuring trading statement. The Edinburgh firm's shares pushed up 13.5p to 173p, the highest level since October.

Medical diagnostics company Axis-Shield also continued its recent rally, climbing 4.5 per cent to 350p, the highest level in close to three years.

Oil producer Venture Production rose 7.5p to 814p on hopes that British Gas owner Centrica will soon table a rumoured 850p a share bid.

Interbulk, the bulk goods logistics company rose 21 per cent on strong interim results. The East Kilbride firm increased its operating profits by 30 per cent to £9m, pushing shares up 0.38p to 2.13p.

Senior flying high after reducing its debt

SMALL BUT BEAUTIFUL

ENGINEERING firm Senior continues to trade satisfactorily, with profitability in line with its expectations for the first half of 2009, the group told investors yesterday.

Strong cash generation and currency benefits helped it to cut its net debt significantly more than anticipated in the six months to 30 June.

Senior, which makes aerospace and automotive components,

said customers Boeing and Airbus had seven-year order books, but for the first five months of the year, they reported a combined net order intake of only 21 aircraft, as there were 76 cancellations.

However, Senior, which has a market value of about £140 million, said it was strongly cash generative and financed for the longer-term.

It added: "Whilst the group's end markets are expected to remain challenging for the foreseeable future, Senior is gaining market share … and can look forward to significant future organic growth from new aircraft programmes such as Boeing 787 and Joint Strike Fighter."

Senior saw a modest improvement in production of land vehicles outside of North America and a further weakening of the business jet market in the second quarter. The bankruptcy of General Motors and Chrysler in the period had little effect.

Bryan Johnston of Brewin Dolphin

ONE TO WATCH

BAT

1,688p +3p

Scotsman says HOLD

BRITISH American Tobacco, or BAT, sells in more than 180 markets. Brands include Dunhill, Kent, Lucky Strike and Pall Mall. Dunhill is sold in more than 120 countries and, for the year to 31 December, 2008, 37 billion cigarettes were sold in markets that include South Korea, Malaysia, Taiwan, Saudi Arabia and Australia, while 63 billion Kent cigarettes were sold in more than 70 countries.

Many investors dislike the idea of investing in the industry, although, ironically, major tobacco giants make a colossal contribution to a national exchequer as their core products are taxed aggressively.

The fact is that the tobacco industry, globally, employs a huge number of people, often in more deprived areas of the world. BAT's main exposure lies in emerging economies, with developing markets representing more than two-thirds of the company's sales, and growth in these regions is likely to continue even as western markets mature.

BAT's shares do not look expensive. It made a little under £4 billion in 2008 and around this should be achieved again in the current year, implying a prospective p/e of around 11. Most of BAT's revenue is generated outside of the UK, where it benefits, during periods such as these, on relative sterling weakness. Debt is quite high, around £10bn, but, like all tobacco firms, BAT is hugely cash-generative so this is not really an issue. In any event, it still has a comfortable debt facility margin on which to draw if necessary.

The tobacco sector has not figured to any great extent in the market's recent rally but is arguably one of the best defensive prospects. With BAT shares yielding a prospective 6 per cent, the group's commercial appeal looks well established.

• The value of your investment could fall and you may get back less than you invested. You should take professional advice if you have any doubt about the suitability of this company for your portfolio.