The Week In Review: You could take a flier on BAA, but it's a long-haul trip

BAA, the privatised airports operator that owns Heathrow, Gatwick and five other major UK airports, is in danger. Airlines using the other, profitable London airports do not want to have to subsidise a new runway at Stansted, still used mainly by low-cost rivals. Shareholders may have to stump up. And there are growing calls for the whole company to be broken up to loosen the stranglehold it has on travel into the South-east.

BAA, the privatised airports operator that owns Heathrow, Gatwick and five other major UK airports, is in danger. Airlines using the other, profitable London airports do not want to have to subsidise a new runway at Stansted, still used mainly by low-cost rivals. Shareholders may have to stump up. And there are growing calls for the whole company to be broken up to loosen the stranglehold it has on travel into the South-east.

Nervous times for investors, and after a reasonably strong run for the shares many are starting to think of flying out of BAA. But as a long-term play, there is a strong case for holding the stock. BAA's ambitious Heathrow Terminal 5 project is on budget and ahead of schedule. The management team has steered an enviably smooth course through disruption since 11 September, 2001, and rising security costs have now been accommodated. Passenger numbers are back on the up, especially at no-frills hubs such as Stansted and Southampton. Even airport shopping revenues have stayed buoyant despite the distractions.

It is risky, and a dividend yield of 2 per cent is paltry compensation if BAA runs out of political and operational luck. But the projected long-term increase in air travel is enough to make the shares worth holding.

CHRYSALIS

Chrysalis' radio stations, led by its flagship Heart brand, are relatively new arrivals on the air and have grown spectacularly. In London, Heart's listener figures briefly overtook Capital's 95.8FM and it should be able to pull permanently ahead after the departure of Capital's breakfast show presenter, Chris Tarrant. Chrysalis will make an attractive partner for several UK radio groups. The shares are hard to recommend as a buy at the present price, but it is equally hard to foresee any big setback. Hold.

THE INNOVATION GROUP

One year on from the introduction of a new management team, Innovation seems to be delivering on its promises. The company, which sells technology solutions to improve efficiency in insurance and related industries, has reversed the effects of the over-diversification in which its founders indulged at the height of the boom. It seems reasonable to believe a new enthusiasm for technology investment will encourage insurers to spend more with Innovation but, despite the hype, the recovery is still young. No need to rush in.

ARC INTERNATIONAL

The great deluge unleashed on the technology sector after the sins of the boom years has spared few companies, and ARC International was certainly no safe haven. One of the youngest players in the field of microchip design, it has so far failed to really establish its products on the scale that will be needed to turn a profit. Talk of a break-even position this time next year trusts a lot to luck and the £37m cash pile is dwindling fast.

FILTRONIC

Filtronic, a supplier of telecoms components, has had a tough couple of years as phone operators cut their spending. But customers have started to splash out again readying for the launch of third generation, or 3G, services. Excellent news for Filtronic which supplies parts that sit in base stations and antennae for handsets. The company is cautious but the shares are not to be sold at this stage.

HORNBY

Hornby shares used to be a bit like their train-sets: old-fashioned-looking and chugging round in circles. Now they are more like the group's Scalextric slot-car racing sets, painted with go-faster stripes and running at full throttle. A £500-a-pop "real steam" train set and a Hogwart's Express have become collectibles. And Scalextric, too, is fighting back against computer games, launching technology to link the sets to the internet. Taking a profit after the share rally is tempting, but keep some shares in the toy box.

CHEMRING

Chemring's products stop military aircraft getting shot down over Iraq, Afghanistan and other theatres of war. Sales are - unsurprisingly - sharply on the up. Countermeasures such as chaff to confuse and decoy missiles account for more than half this defence contractor's revenue. The shares still trade at an unjustified discount to the sector. Buy.

CARE UK

Care UK floated in 1994 running nursing homes, but is now extending its tentacles across the social services and the NHS. Most exciting, it is preferred bidder for three new "treatment centres" for simple day-surgery. There are many risks, political and clinical as well as financial. But for those willing to place a long-term bet on the Government's drive to involve the private sector, Care UK shares could be profitable.

EURODIS ELECTRON

Eurodis distributes electronic components. It is a middle-man between component manufacturers and 17,000 customers in the PC, automotive and medical instrumentation industries. Its profit margins will always be wafer thin, and since the start of the economic downturn the group tipped into losses. Management (again) says its latest cash call will be enough to see it through. The shares are worth a punt at these levels.

LONMIN

The investment judgement on the mining group Lonmin depends on your view of the price of platinum, its only product, and of the value of the rand relative to the US dollar. Platinum production increases are not expected to catch up with demand (from fuel-cell technology, catalytic converters to cut vehicle emissions, and jewellery beloved in Asia) for another couple of years. The rand, in which Lonmin has to pay its miners, has shot up against the dollar, depressing profit. The opportunities and risks seem in balance. Hold.

GREENCORE

Greencore is the world's largest maker of sandwiches and also the group behind ready-meal quiches and pizzas sold under supermarket own-brands. This is a tough industry. Heavyweight grocery chains are always able to demand low-fat prices from suppliers. Green-core is struggling to pass on raw materials inflation the like of which hasn't been seen since the mid-1990s. The shares are vulnerable.

Power to the people is a sure winner

Scottishpower has put as much energy into generating customers as it has the electricity to light up their homes. It has topped four million in the UK, largely thanks to the advent of internet price comparison charts where it scores well against competitors.

Leave aside that such price transparency will put long-term pressure on profit margins, as customers shop around for the best supply deals. For now at least, ScottishPower is a net winner, since internet customers almost always pay by direct debit and are cheaper for the company to deal with.

This is a company that can still trumpet impressive organic growth at home, as well as cost efficiencies and opportunities abroad. Regulators of the US business, PacifiCorp, are about to allow price rises there and ScottishPower has done well to mitigate the effect on sterling profits of the falling dollar, thanks to complicated currency hedging on the foreign exchange markets.

The company's disappointing decision to slice its dividend by a third is now some distance behind it and it does seem that there are profitable uses for the cash. In particular, its unregulated PPM business in the US is set to start generating real returns from investments in wind farms by this time next year.

The growth is on track and the dividend should rise rapidly. A yield starting at 5.5 per cent this year is attractive. Buy for income.

Independent Partners; Do you need financial advice on your investments, pension or insurance? Book a free consultation with an independent Financial Adviser at VouchedFor.co.uk

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