Companies involved in private finance initiative (PFI) schemes are in a much worse position after th...
Companies involved in private finance initiative (PFI) schemes are in a much worse position after the demise of Railtrack, according to Mark Costar, director at JO Hambro.
Risk profiles have increased, the visibility of earnings has reduced and he anticipates a significant rerating of such stocks.
The key issue is the perception that the Government may not be prepared to stand the cost of financing schemes.
However, Robert Moss, manager of the Invesco Perpetual UK Core Fund, argues that projects will still need to be completed and says that those companies that are diversified in a number of different projects should not be badly damaged.
'Companies that are involved in PFI are generally engaged in a variety of activities and have a range of customers,' he says.
He cites Amec, which has moved from construction to project management, as a company that is involved in PFI but also has a number of other business arms. That said, Moss does not find the majority of companies involved in PFI attractively priced.
He says: 'I would question some of the valuations because the market is expecting quite a lot in terms of performance from these companies. Many people got on the bandwagon, so the upside is much less than it has been in the past.'
Costar adds that PFI companies are increasingly at the mercy of conditions over which they have no control. 'The terms and conditions of companies are increasingly being set so that the company has less, if any, control over the ability to lay off staff if it needs to reduce its cost base,' he says.
With the possibility of the London Underground PFI being delayed even further, Moss points out that the cost to the Government may be more because the risk of investing in these projects is now seen to be higher. He is also critical of the Government's handling of the Railtrack events.
'People are concerned about the Government saying one thing and doing another,' he says.
Some PFI projects have been directly put at risk by the uncertainty caused by Railtrack's bankruptcy, adds Costar.
The West Coast Mainline is unlikely to see the second phase of a planned upgrade, which makes the £2bn worth of investment in rolling stock that has been committed by Virgin seem extravagant, he says.
The most vulnerable companies are Jarvis, Balfour Beatty, Amec, WS Atkins and Carillion, says Costar, but he also thinks train operating companies are at risk.
He predicts that train companies may have to fill the vacuum created by the departure of Railtrack from the scene and that they will have to have a much higher level of capital investment and the risk that is attached to it.
He says companies such as National Express, Stagecoach, First Group and Go Ahead are the most likely to face criticism as they take on some of the responsibilities carried out by Railtrack.
Railtrack became effectively insolvent on 7 October by the Government's decision not to provide financial support and to remove the rail regulator's powers to review the company's financial situation.
The Government has refused to pay the £3.60 per share that investors were demanding.
Many PFI companies have other assets.
Some have moved into project management.
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