The Investment Column: Buy into BHP Billiton's boom time

RAC stalls on flat membership numbers - AB Ports is worth sheltering in for the long term
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Record turnover, record earnings growth and a record share price to match. It is boom-time for the mining giants, and none more so than BHP Billiton.

Record turnover, record earnings growth and a record share price to match. It is boom-time for the mining giants, and none more so than BHP Billiton.

This company has an ideal mix of assets and is unusual among its peers in having about one-third of the business in oil and gas, where prices have remained stubbornly high. Coal, too, has surged, and base metals prices hover in the region of two-decade highs, helping BHP Billiton record a net profit for the six months to 31 December of $2.8bn (£1.5bn), up 127 per cent on the same period the year before.

And it is not just about China. Chip Goodyear, the chief executive, was at pains to point out yesterday that the emerging Asian giant accounts for 10 per cent of BHP's earnings. Of course this has been a significant engine of growth for the company and the whole group benefits from the higher commodities prices that incremental demand from China is causing. But BHP shares need not go up and down with every word from a Chinese minister about growth in that country. In all likelihood, the Chinese economy will continue to expand for many years and the supply/demand ratio for commodities is unlikely to tip away from being in the miners' favour at least until large numbers of new projects come onstream towards the end of the decade.

Yesterday, BHP "rebased" its dividend and that was not a euphemism for a cut. The pay-out has been raised by 69 per cent, a very strong signal that it expects the current level of cash inflows are sustainable. And that despite a growing number of short- and long-term investments in new mining projects across commodities and across the globe. Analysts have taken their cue from BHP and its peers and again upgraded their expectations for future commodities prices.

BHP has proved itself an efficient company, wringing continuing savings from the merger of BHP and Billiton, and investors need not fear it making a white knight bid for Australia's WMC, which is being stalked by Xstrata. Buy for the long term.

RAC stalls on flat membership numbers

One man's half-empty petrol tank is another man's half-full. So it was with RAC yesterday, the motoring organisation that provides consumers and businesses with a huge range of services, from driving lessons to vehicle leasing.

Annual figures topped forecasts, with particularly strong growth from its support services division (responsible for, among other things, British Airways' entire airport vehicle fleet), and its Hyundai importing business.

But a peek under the bonnet showed not everything at RAC was firing on all cylinders in 2004. Its consumer division, which aims to sell RAC members other financial products, from car insurance to legal advice, spluttered home with only a 5 per cent increase in underlying profits. Just 13 per cent of RAC members also take out one of its other products, a long way off its 20 per cent target.

Andy Harrison, the chief executive, hopes its recent decision to take control of an insurance joint venture it had with AXA will accelerate its cross-selling opportunities. Just 2 per cent of RAC members also buy their car insurance from the organisation, for starters, which Mr Harrison sees as a big growth opportunity.

Analysts are less convinced. Membership numbers were flat last year, while the renewal rate fell. The company says the trend has since improved but the market wants to see more evidence.

The shares, up 43p to 708p yesterday, have stalled since we advised taking profits 10 months ago. Until the RAC can show that its strategy is working, investors should continue to seek thrills elsewhere.

AB Ports is worth sheltering in for the long term

From the myopic perspective of the City of London, the Humber might seem very far north. In fact, it is pretty centrally situated, and is gaining in popularity as a destination for goods being shipped in from abroad. Southern ports are congested and Associated British Ports, which handles 25 per cent of the UK's seaborne trade, is dramatically increasing the scale of its operations on the Humber.

Investors are starting to look through a dull 2005 to the opening of two new projects on the Humber next year. A third is in progress and there could be exciting details later this year of a fourth. AB Ports is careful not to give the green light unless it has new users already signed up on long-term contracts.

Results for 2004 were held back by the compensation it is paying customers for delays outside its existing Humber ports. It also lost a customer to a cheaper, rival port. Underlying profit growth was 4 per cent, but this was wiped out by a £45m write-off of its investment in a container port project in Southampton, which was refused planning permission.

The shares look well up with events, buoyed by a share buy-back scheme and interest in the sector thanks to the bid battle over Mersey Docks & Harbour. AB Ports is too big and too lean an operation to attract much private equity interest, but it is well run and has modest, robust growth prospects that justify holding for the long-term.

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