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‘The business should prove resilient in any economic slowdown, with a heavy emphasis on government subsidy rather than farebox risk,’ says Investec analyst Joe Thomas, who recently upgraded transport group Arriva from ‘sell’ to ‘hold’. The upgrade followed a fall in the share price which now trades in line with Investec’s target price of 705p, and ‘the historic sector average of a 12 PE for calendar 2008’.

‘We expect them [the shares] to be supported by Arriva’s relatively defensive business profile in times of economic uncertainty,’ says Thomas. The upgrade even came before the company announced plans to enter the Hungarian and Slovakian bus markets following a deal to acquire an 80% stake in Interbus Invest, the holding company of Eurobus Invest. The acquisition will bring the number of countries in which Arriva operates to 12 and will provide a platform from which to develop potential opportunities arising from the imminent privatisation in the Hungarian regional bus sector and to consolidate in Slovakia. The deal also expands upon the company’s entry into Poland last year and acquisitions in the Czech Republic.

The greatest threat to Arriva, according to Thomas, is underperformance of the new Cross Country rail franchise ‘and where around 10% passenger revenue growth is needed per year to meet our profit targets’. On the positive side, he notes that fuel is well hedged at around 90% for the current year at around $100 per barrel.

In addition, Thomas remains ‘comfortable’ with the outlook for the company’s European business, with around 74% of revenues coming from government subsidies, and the UK bus division is also expected to remain resilient. Arriva posted a 16% hike in operating profit at £87.9 million for the UK bus division for the year ending 31 December 2007, with revenues up 7% to £814.7 million.

However, its rail arm was impacted by costs associated with bidding for three rail franchises in 2007 and profits were reduced to £7.5 million from £12.3 million a year earlier. Its group order book was up 79% to £12 billion. Going forward, Thomas believes that there are no obvious large acquisitions for Arriva to make in Europe and therefore, any expansion is likely to be through contract wins.