The Investment Column: Book a ticket for the long haul as easyJet starts to cut costs

Stock market's improvement makes Brewin Dolphin a buy; Stick with campsites operator
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The Independent Online

The pinned-back-in-your-seat take-off of the pioneering low-cost airline easyJet has been one of the great tales of UK entrepreneurialism over the past decade, but this is the bumpy bit where the company has to get through the clouds.

And so Andy Harrison's assumption of the controls yesterday heralds a new era. The former RAC boss inherits from Ray Webster an airline in robust shape, but there are threats and area for improvement that will mean his captaincy is concerned as much with the nitty gritty of financial numbers as with the sweep of European expansion.

First, how to mitigate the effects of much higher fuel prices (which rose 50 per cent in easyJet's last financial year and will turn out higher still this year)? This is a low-cost operator already, so it will be about nips and tucks rather than the sort of mass clear-out signalled by bloated rival British Airways this week.

Second, how to win in the ferocious battle for passengers, in the mature UK market and in the increasingly competitive German market? Here, easyJet does have the strength of its brand and rivals are likely to be squeezed hardest by any cost increases. 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 much stronger position if a sustained consumer downturn prompts others to retrench.

Third, how 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. The company is already talking about financial discipline and targets, just the sort of thing that encourages City-folk into a stock. 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 and might see a way through the complexities of cross-border airline ownership.

Long-term buy.

Stock market's improvement makes Brewin Dolphin a buy

It has been a great year for the stock market, and so a great year for stockbrokers. Brewin Dolphin, one of the City's biggest private client stockbrokers, 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 every reason to be optimistic about the coming year, even if next year's stock market activity is not quite as bullish as this.

Brewin has been winning more "discretionary" business, where it can choose how to invest its clients' funds rather than simply advising them. It had £6.9bn of discretionary funds under management at the end of the financial year, compared with £5.6bn at the start. The margins on this sort of business are higher and it has just surpassed the size of the advisory business.

The company also has a modest but strong corporate broking business, which contributed £2.8m of the group's £20.1m operating profit.

These good results would have been even better without the cost of hiring five new teams of staff and opening an office in Belfast, but of course this is an investment in the future and will contribute meaningfully to profits in the current financial year.

Altium Capital lifted its forecast for Brewin's 2006 pre-tax profit by 9 per cent to £27.0m. Down 2p at 146p yesterday, the shares are trading on 15 times earnings and have yield 3.8 per cent. We said buy at 93p last year. Again, buy.

Stick with campsites operator

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.

Adventure travel packages are enjoying particularly strong growth, and Holidaybreak saw sales in this sector grow 67 per cent over the year.

But excluding acquisitions, the performance was flat, and recent trading is grimmer than a wet weekend in Skegness. Sales are down 3 per cent, and the company blames the London bombings for a 4 per cent fall in short breaks.

Camping is also dampening the business. The company has been reducing capacity here, and a further 16 per cent is being removed next year. But current sales are 12 per cent down, so a substantial recovery is needed.

Holidaybreak faces an uphill challenge against prevailing consumer spending winds, but the company has a strong balance sheet, with only £22m in debt. Its dividend yield of 4.5 per cent will prop up the shares. Peg down your existing shares and hold on for the income.

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