Bus firm will benefit from eco-engines

By Graeme Dickson
Updated: 13:38 EDT, 16 March 2011

Making a bus company sound like an exciting investment idea is hardly convincing, especially after the high-profile demise of Mayflower, a firm that previously had John Major on the board.

However, given the strong stream on newsflow coming from northern-based firm Optare (OPE), a recovery could well be on the way:

The company has previously been dogged with spiralling debts and a series of unfortunate events, culminating in a £5 million fund-raising and strategic alliance with India's Ashok Leyland, which owns about 26 per cent of the stock, followed by a £7.6 million general share placing at 2p a share.

The most recent fund raising, which helps reduce debt and more significantly, will help allow the company to secure a new processing plant in Yorkshire that will replace its ageing Leeds factory.

You only have to look at the buses on its website to get a feel for the design, which is highly popular with drivers and passengers.

More importantly has eco-friendly hybrid engines that will benefit from increasingly burdensome legislation from Europe.

The capital spending holiday caused by the global financial crisis of 2008 and 2009 has resulted in ageing bus fleets across Europe and the UK, which will soon have to be replaced.

Optare should be at the forefront to benefit from governments and bus operating companies renewing fleets over the next few years.

Not only has Optare managed to make good inroads in the UK market but it has penetrated into new markets including Malta and the Netherlands.

The Netherlands is a good country to showcase your portfolio given that fleet operators in neighbouring Germany, which is emerging from the recession very strongly, will be keeping a keen eye on alternatives to the likes of Mercedes-Benz.

Optare's has recently won several multi-million pound orders, with its order-book standing back in mid-February at a record £43 million.

The new site, which is going to be located much closer to the majority of its workforce, will be a state-of-the-art manufacturing facility that will produce both single and double deck buses. It also has the capability to double capacity to 1,200 buses per annum.

Additionally, the strategic alliance with Ashok Leyland will allow Optare to source spare parts from India at a much cheaper level than what could be achieved in Europe.

The company is realistic that the boom times will not last forever and to this end it is placing greater importance to its maintenance arm, which should help smooth over the cyclicality of the business when fleet renewals soften.

Housebroker Cenkos forecasts one pence per share in earnings for 2012. If that turns out to be accurate, then Optare trades on a forward price to earnings ratio of just three, something I find too cheap given that the current rate of contract win suggests that this forecast is likely to be met.

Update

Rheochem (RHEP) - tipped as a buy at 15.13p the stock closed a penny lower at 14.13p. Sit tight for now, given the recent positive news from the sale of its fluid business and possible events going forward on its Athena oil field and other North Sea exploration assets.

Evolution Group (EVO) – tipped as a buy at 78.5p the stock closed yesterday at 75.5p. Hold on as we await its preliminary results on 25 March.

OMG (OMG) – tipped as a buy at 43.75p, the stock closed yesterday at 41.5p: not ideal but not too bad either given the recent sell-off seen in the markets.

ZincOx (ZOX) – tipped as a buy at 60p, the stock closed at 50p. Disappointing in the short-term but construction of the South Korean facility begins next month ready to take the rotary hearth furnace being shipped over from the States. Sit tight for now and remove the stop suggested last week based on a close below 47p.

Pendragon (PDG) - tipped as a buy at 23p - it closed at 22p. Continue to hold and keep the stop based on a close below 20p.

Cyan Holdings (CYAN) – suggested to buy at 1.325p, the stock closed at 0.925p.Very disappointing but hold for now as we await developments.

GB Group (GBG) – suggested to buy at 36.75p, the stock closed yesterday at 34.625p.Keep the stop based on a close below 32p

Europa Oil & Gas (EOG) – suggested to buy at 30.25p, the shares closed below the stop of 32.5p and therefore should not be open.

SocialGo (SGO) – suggested to buy at 3.55p, the shares have drifted to 2.125p. Very disappointing in the short-term but Bell Pottinger, a leading PR agency, are working closely with SocialGo to get the latter more exposed in the media and other circles.

EMED (EMED) – suggested to buy at 12.25p, the stock closed yesterday at 15.5p. Yesterday it reported that the local Andalucian government had satisfied itself as to the legality of the transmission of the Rio Tinto mineral rights to EMED: this should help towards the restart of the mine.

Active Energy (AEG) – suggested to buy at 6.13p, the stock closed yesterday at 2.875p. The stock has been the worst performance to date. I will make further calls to see if this is a dead investment or if there is still life left in the company.

Edenville (EDL) – mentioned as a buy at 1.195p, the stock closed yesterday at 1.38p. Having already suggested to sell one's investment stake out at 2.51p, investors should now be enjoying a 'free ride' for those that followed this course of action. Hold the balance for now.

Weatherly International (WTI) – suggested to buy at 8.1p, the shares closed yesterday at 9.625p. At Optiva Securities we have taken advantage of the current weakness to buy more shares for some clients, albeit the short-term outlook for copper is weak and that is mainly weighing on the stock given that it is mid-cost producer. Hold for now and use any significant weakness to pick up more.

Toumaz Holdings (TMZ) – tipped as a buy at 8.625p, the stock closed at 6.75p. Two weeks ago Quanta Computer Inc. announced it had increased its investment in Toumaz to 2.22 per cent in the enlarged Group. On top of this, last month Toumaz announced that Dr. Patrick Soon-Shiong used his investment vehicle, California Capital Equity LLC to buy a 2.46 per cent stake at a premium to the stock market price of 8.83p a share. Continue to hold.

Renewable Holdings (REH) – tipped as a buy idea at 16.25p, it closed yesterday at 16.75p. The stock may actually benefit from the recent detractions of nuclear energy in recent days while its discount to its Net Asset Value will appeal to investors looking for a safer haven. Hold for now

Bowleven (BLVN) – tipped as a buy at 177.25p, the stock closed at 326p yesterday. Suggested 11 weeks ago to sell half after an initial 102.8 per cent gain, the balance should be retained as we await further progress from its Sapele-1 drilling campaign and the Etinde permit.

Tissue Regenix (TRX) – suggested as a buy at 16p, the stock has picked up from its lows and is now trading at 11.375p. Keep holding as we await trial results from its NHS trials, while its recent European patent application for the preparation of tissue for knee meniscus implantation should help the shares going forward.

The material for this report comes from Sharescope and a meeting with Optare. The writer does not hold any shares or derivatives in the above mentioned companies except EMED, SocialGo and Weatherly International.

Some clients of Optiva Securities may hold shares in the above named mentioned companies.