Patrick Corp should offload Virgin Blue, says analyst

MELBOURNE - Budget airline Virgin Blue has become a noose around the neck of majority stakeholder Patrick Corp, according to broker Citigroup Smith Barney.

Citigroup analyst Jason Smith said the logistics and ports operator would have a brighter future without its 62.4 per cent controlling stake in Virgin Blue.

"Virgin Blue continues to be a noose around Patrick's neck, with fuel prices remaining high, with [Qantas low cost rival] Jetstar adding 30 per cent capacity in the next year and with Virgin Blue's muddled attempt at trying to be something to everyone," Smith said in a client note.

Virgin Blue was also trying to cope with management change, a rising cost base, successful segmentation of the market by Qantas, Jetstar's strong growth and recent disappointing operating statistics.

"The unfortunate thing is that without its 62.4 percent holding in Virgin Blue, we believe that Patrick would be the stand-out stock in the sector on a two-to three-year view," Smith said.

Patrick's future earnings were expected to gain from the expansion of its Fisherman's Island and Port Botany ports, the introduction of auto straddle technology in Brisbane and the removal of a container movement levy in mid-2006.

The outlook for Pacific National - Patrick's joint-venture rail operations with Toll Holdings - was also very robust as governments spend more on improving rail infrastructure, the expansion of Pacific National into Queensland and the return to normal grain harvests following good rains in June.

But following Virgin Blue's recent operating statistics Citigroup has cut its estimated reported net profit for Patrick Corp by 5.5 per cent to A$210.4 million ($NZ236.85 million) for the 2005 full year and by 9 percent to $A248.8 million for 2006.

It warned that further downside risk was possible given Jetstar's rapid expansion, with fuel costs unhedged and with Virgin Blue's decision to expand internationally.

Patrick shares fell 2Ac to A$5.51 while Virgin Blue was steady at A$1.65.

- AAP