It operates under a licensing agreement with Cendant (owner of Avis in America) that allows the company to use the Avis name until 2036.
Leisure and car-replacement customers account for 60% of sales. The company has branches at Europe’s 75 largest airports and business is boosted by an agreement with British Airways.
Avis Europe is run by chief executive Murray Hennessy and deputy chairman Alun Cathcart.
The two experts below have been selected for their skill in several investment areas. They, or the funds they manage, may buy or sell shares in the companies or sectors that are discussed in this column.
Andy Brough, fund manager at Schroders: The market is by now familiar with the fact that Avis Europe is facing a challenge to its revenue growth rate, not just from cyclical headwinds but from a structural change.
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It all seemed so different when Avis Europe came back to the market in 1997. It was believed then that carmakers who owned car-rental operators might behave in a more commercial fashion. The expectation was that this would lead to more stable rental pricing.
This scenario has failed to materialise. The internet has brought explosive growth to the sector in the past seven years, and this has thrown price transparency wide open for an industry where all the extras such as collision waiver, insurance and other items that cost you money tended to limit transparency.
Brokers have set up and entered the market without car fleets of their own. The internet has lowered the barriers to entry so operators are willing to supply inventory to these brokers at marginal prices.
The impact on Avis has been dramatic. In 1999 the group made pre-exceptional profits of £111m, earnings per share of 14.3p and paid a dividend of 5.4p. Let’s compare this with 2005, when analysts expect the group to make profits of £20m, generate earnings of 2½p and not pay a dividend. Investors in the past have recognised car rental as a cyclical business, but this time they are starting to question if and when the cycle may actually turn upwards.
Avis has started trying to boost returns. It is looking to improve internet distribution, especially in the leisure area of the market. It had growth of 62% last year in the internet business, an area where Avis should have an advantage with its strong brand name. The internet should also help it to meet changing customer demands. This will cost £10m of investment in 2005.
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D’Ieteren, the international motoring-services group, owns 60% of the company, and the cynics among us may think all this bad news is to get the price down to a level where it can buy it on the cheap.
Judgment: Buy, as you know the firm will be trying harder.
Tim Steer, fund manager at New Star: I met the new chief executive of Avis Europe, Murray Hennessy, in September. He was upfront and downbeat about the short-term prospects for the company. Hennessy said price gains were limited, costs were increasing to support his strategy for profitable growth and he believed the business had not fully addressed the challenges of the internet.
I admired his brutal honesty, but he was inheriting a situation that was not of his making. Since then Avis Europe has ceased paying commission to travel agents on certain corporate business, trashed its investment of €40m-€45m (£28m-£31m) in a new automated system that didn’t look as if it would work, and centralised its back office to Budapest.
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The trouble is that car rental is not a terribly attractive market in Europe. Internet competitors such as Lastminute.com, through its acquisition of Holiday Autos, are challenging the conventional business model. The car-hire market is a reflection of GDP growth and that is expected to slow this year in Europe.
Other car-rental companies such as Europcar and Hertz are owned by manufacturers that may have different agendas (profits from car hire may not be one of them), and airline- traffic growth is all with the low-cost carriers. At the high end, investment bankers don’t do car rental. Well, not the sort of cars Avis rents anyway.
The shares have been very poor performers in the past year, but have been driven up recently by speculation that 60% shareholder D’Ieteren would bid for the company — not a chance in my view as D’Ieteren, like Avis Europe, has high debt. Nor are there any Icelanders that I know of on the share register.
Avis Europe is adapting to a changing business model in a highly competitive commodity-type market. By Hennessy’s own admission, the market will remain difficult this year. If and when it improves, Avis Europe — with £700m of debt — may need fresh equity capital to grow.
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Judgment: Avis must try harder — avoid.
AVIS EUROPE AT A GLANCE
Share price: 59p
Market value: £345.6m
Year end: December 31
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Consensus forecast for 2004 pre-tax profit: £36.8m
Consensus forecast for final dividend: 1.3p