UPDATE 3-Avis Europe shares sink after warning


(Adds background in par 2, placing in par 5, analyst comment in pars 13-16)

By Victoria Cutler

LONDON, June 27 (Reuters) - Shares in Avis Europe Plc sank by a more than quarter on Thursday after the car rental firm warned investors that profits this year would be as much as 15 percent lower because companies had reined in travel budgets.

Avis Europe rents cars in Europe under marketing agreements with Avis Rent A Car System Inc, a unit of U.S. property and hotel company Cendant Corp . Avis Europe is not a subsidiary of Avis Rent A Car.

Avis Europe said it now expected full-year profits in euros before tax, exceptional items and goodwill amortisation to be up to 15 percent down from 2001 and does not see a recovery in corporate volumes in the second half.

Its shares, which had been recovering from a slump in the wake of the September 11 attacks in the United States, sank to their lowest levels since November and were down 47-1/2 pence or 27.5 percent at 124-1/2p by 1120 GMT.

The stock was also knocked by a placing of 15 million shares by Dresdner Kleinwort Wasserstein at 123 pence per share. Market sources said the shares were placed on behalf of a single institution.

Shares in Belgian car importer and retailer D'Ieteren , which owns 57 percent of Avis Europe, fell more than 10 percent and were downgraded by Bank Degroof to "hold" from "accumulate".

Avis said its group revenue after September 2001 fell five percent below the previous year in the final quarter and although business from the leisure sector continued to improve steadily, corporate rentals, which account for about 40 percent of sales, had weakened.

"I think everyone had been expecting economic recovery to support more corporate activity," Chief Executive Mark McCafferty told Reuters.

"We're not seeing that in our business yet, so we've taken out our expectations for a recovery, particularly in the fourth quarter this year."

"As soon as economic growth genuinely starts to improve then we would expect that the confidence of our corporate customers to start investing in their businesses again would return."

He said the firm was assuming a recovery in corporate business would now not happen until 2003 at the earliest.

European leisure volumes, which made up about 30 percent of group revenues last year, were now above the previous year.

"We knew that they were having a weak first half. It's just a matter of the degree of it and the assumptions for the second half," said ING Barings analyst Mike Stoddart.

"We were all expecting them to make good the first half deficit and a bit more with the second half bounce back from the post-September 11 trading."

Stoddart said he had cut his forecast by the full 15 percent for the current year to 78 million pounds in pre-tax profit before exceptional items and goodwill and would keep his "sell" rating on the stock.

He had previously forecast pre-tax profits would edge up to about 93 million pounds, he said.

The company said it had reduced its fleet and staff by about seven percent each compared to a year earlier, adding that full-year fleet costs would be in line with expectations.

McCafferty said most of the adjustments would come from not taking on as many seasonal staff as before for the peak third quarter summer season and from not buying as many new cars. The business typically only keeps cars for about six months.

"These two areas are over 70 percent of our costs, so if we adjust those, we've addressed most of the issue," he said.

The company said in late February it expected growth levels to recover in the second half of 2002, but remained cautious about a recovery in corporate travel.



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