The Week In Review: Bet on easyJet to fly higher
Saturday 03 December 2005
Andy Harrison, the new boss at easyJet must work out how to mitigate the effects of much higher fuel prices at the same time as coping with a ferocious battle for passengers in both the mature UK market and the increasingly competitive German arena.
Many expect consolidation of the low-cost industry around the two dominant players, easyJet and Ryanair, and long-term shareholders ought be able to imagine easyJet in a stronger position if a sustained consumer downturn prompts others to retrench.
However, a third challenge is to close the valuation gap between easyJet's share price and that of Ryanair. That can only be achieved by raising easyJet's operating margins from less than 4 per cent towards its rival's 20 per cent.
It will be a turbulent period, but the view through the clouds is lovely. The scope for expansion eastwards across Europe, the market to be stolen from the high-cost carriers, is huge. And then there is the possibility of a bid from Icelandair, which owns 16 per cent of the shares. Long-term buy.
London Merchant Securities has a buoyant portfolio of £1.1bn of commercial property. But it also has a £219m investment portfolio, with stakes in early-stage technology ventures and companies serving the oil and gas industries. Now it is splitting the two businesses. The benefits of this move will accumulate over 2006, making now a good time to repeat our share tip of June 2002. Buy.
Arla's milk position is secure, and its branded business is also growing rapidly, but rising costs will make the coming year difficult. Speculation that Arla Foods amba, the farmers' co-operative that owns 51 per cent of the company, may launch a full takeover bid should stop shares curdling. Keep in the fridge.
DE LA RUE
De La Rue is by far the biggest player in global currencies, but this is a mature market and there is only limited room for further growth. De La Rue also faces the inevitable decline in paper money on a worldwide scale as electronic-money transfers grow in prevalence. Still, it will be a long time yet before cash is no longer king and the company can continue to bolster its margins from its steady banknote business. Hold.
Britons' obsession with home makeovers has helped Topps Tiles, the country's largest tile retailer, deliver stellar growth in recent years. Its latest results show pre-tax profit growth of 16 per cent, but it too is now being affected by the retail gloom and had to admit that like-for-like sales have begun to slide. Even so, over the long run, the company's growth prospects are well underpinned because the DIY market should continue to grow. Hold.
Homeserve is the company behind many utilities' own-brand insurance policies that protect homeowners if there is a problem with their gas, electricity or water. It has also expanded into the extended warranties sold by furniture retailers, housebuilders and vendors of electrical and electronic goods. The profit from these policies was £10.4m in the six months to 30 September. Hold.
DEBT FREE DIRECT
There is an alternative to bankruptcy for the thousands of people who have fallen into a spiral of debt. It is called an individual voluntary arrangement, or IVA, where your creditors write off a significant proportion of your debts in return for an agreed monthly sum over five years. Debt Free Direct is the best of the specialist IVA arrangers that have sprung up, and prospects are good. We advised buying the shares in January at 128.5p - since then they have gone up 69 per cent. Again, buy.
It has been a great year for stockbrokers. Brewin Dolphin, one of the City's biggest firms, posted a 15 per cent increase in pre-tax profits for the year to 30 September, and gave its shareholders a 29 per cent dividend increase. There is also every reason to be optimistic about the coming 12 months. Buy
Holidaybreak is not just about boggy campsites these days. Thanks to the acquisition of two Dutch travel companies, 22 per cent of its revenues come from Benelux customers and the company just announced a 14 per cent leap in annual profits to £32m. The company faces an uphill challenge against prevailing consumer spending winds, but has a good dividend yield of 4.5 per cent. Hold on for the income.
The above are recommendations from the daily Investment Column.
After 2002, Jarvis is on the road (or rail) to recovery
It is surprising that Jarvis is still here. The rail engineering, road maintenance and facilities management business almost collapsed under a weight of debt and the fall-out from the Potters Bar rail crash in 2002, which happened while it was responsible for track maintenance.
Jarvis is concentrating now on two divisions: rail and plant, and roads. The former lays track for Network Rail and hires out mechanical equipment to the network's in-house engineers, who have taken over day-to-day maintenance. This is a cash generating business. There will be less work in the future, now that a big programme of track renewal is drawing to a close, and Jarvis is going to have to replace some of its ageing equipment. But there will also be fewer contractors working on track-laying, and Jarvis is hopeful of gaining market share. The road repair and white line painting business is running at a loss currently, but efficiencies will feed through to improved cashflows from here.
Any glitches or delays, and all Jarvis's careful financial plans could be left in tatters, but management - both the current chief executive, Alan Lovell, and Richard Entwistle, the chief operating officer set to replace him next year - are worth backing. Buy.
Independent Partners; request a free guide on NISAs from Hargreaves Lansdown
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