VALUE INVESTING
Prism Rail – The Trainspotters Value Share

By Stephen Bland (TMFPyad)
June 23, 2000

Continuing my series of brief analyses of value shares, though not necessarily full pyad value shares, the latter being very thin on the ground, Prism Rail (LSE: PIM) caught my eye.

Here are the fundamentals, at a price of 435p:

• Market Capitalisation – £112m
• Earnings Per Share (EPS) for year ended 31/03/00 – normalised 39.2p, actual reported (FRS 3) 30.0p
• Price to earnings ratio (P/E) – historical 11 (based on normalised EPS for y/e 31/03/00
• Dividend Yield – 3.8% (historical
• Price to Book Value (P/BV) – 2.7 ('99 figures)
• Net cash ('99 figures) – 393p per share
• 12 month share price high/low – 500p / 300p
• 1 year share price relative strength (RS) – +11.9%

P/BV and Net Cash are based on the year ended 31 March 1999 because the full figures for the 2000 year are not out yet as I write, only the preliminary announcement giving EPS and dividend being available.

The company operates passenger rail franchises of which it has four as far as I can establish, one of which is the London - Stanstead airport link.

In January the company announced that it had received possible bid approaches (note the plural), which pushed up the share price to around 500p. By April the opposite happened and they announced that bid talks had terminated. On this news the price then fell to around the low 300p mark, subsequently rising to its current level of 435p.

The earnings forecasts look good. EPS for the year to 31/03/01 is consensused at about 41p, a slight increase over 2000, from three brokers, with a dividend forecast at 20p. This gives us a forecast P/E of 11 and yield of 4.6%. Not massive value by the standards of many of the shares featured on the value board, but reasonably attractive.

For what it's worth, for 2002, two brokers consensus forecast EPS of about 70p and a dividend of 40p. A very large rise in both which, if accurate, drops the P/E to only 6 and drives the yield up to a handsome 9.2%. Be wary though of forecasts so far out, one year is chancy enough, the second year out is something to which I normally pay little attention given the risks of forecasting.

Note that one of the brokers, Charterhouse, is the tame house broker to the company. Incidentally they rate the shares a buy, what a surprise, and a negative feature for those value players possessed also of stronger than average contrarian instincts.

What's the smell? Not too bad in my view. Transport of various kinds does have certain attractions at certain times. This may well be one of those certain times. It is often a cyclical industry, tied to the general level of prosperity in the economy. A slight question mark over the chairman's comments recently upon the preliminary 2000 results. This was fairly non-committal rather than positive statements about rising profits. However more may be said when the full annual report is published shortly. Keep an eye on that if you are interested in the shares as directors' comments can be a very important part of this strategy.

I am surprised at the very substantial increase in eps being forecast for 2002 and even if somewhat over optimistic, this does leave quite a lot of room for error. Turning to marginal points, the RS over the last year is a positive 11.9%. If I pay attention to this feature, which as I say is of only marginal interest to me, I like to see strong relative weakness, not relative strength. It is very much a secondary point though and would not alone put me off a share. In fact some players actually like to see a little positive RS in their value shares.

In conclusion then, not a pyad share but a possible play for those who don't require value as deep as me.

What's your view on Prism Rail? Please let us know your thoughts on the Value Shares discussion board.