The Investment Column: Rising fuel costs mean investors should sell BA

Chesnara's closed life fund business is worth holding; Spurs are a punt for football fans
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The Independent Online

This might seem a surprising view to come over the tannoy to investors in the UK's flag carrier. The shares have performed very well indeed since it hauled itself back into the black and as business travellers resumed their globe-trotting, and most City analysts think they have higher still to fly.

Yesterday's new passenger figures were strong, showing a 7.8 per cent increase in passenger traffic (as measured in passenger kilometres) last month. Best of all, "premium traffic", up in business and first class, was 11.6 per cent higher than in September 2004 - vital, as this is where BA makes the bulk of its profit. The issue is whether this is as good as it gets.

The City as a whole says no. Forecasts are for good earnings growth next year. But private investors might want to pay attention to a little safety demonstration by Andrew Lobbenberg, ABN Amro's highly rated transport analyst, who has just issued a "sell" recommendation on BA shares.

His thesis, you may not be surprised to hear, is grounded in the rising price of fuel, which has been going up in line with the oil price and because of the shortage of oil refining capacity in the world. BA, in common with most other airlines, has been slapping a fuel surcharge on customers, but these have not compensated fully for its own rising fuel bills. If the oil price flattens out, it won't be able to justify further surcharges, but its own bills will continue to rise as the supplies fixed at earlier, lower prices fall away.

In order to believe that earnings can keep going higher, you have to believe in substantial premium passenger growth - that is, you must see a continuing boom in merger and acquisition activity that will keep accountants, lawyers and bankers jetting around the world - and you have to believe that Willie Walsh, who took over as BA chief executive this week, will be able to dramatically improve productivity (for which, read slash jobs) without provoking the strikes to which BA appears so prone.

Don't confuse European network airlines with value-creating companies, Mr Lobbenberg says in the rudest part of his note - and it is hard to disagree. Airline shares are for trading. Board at the bottom of the cycle, and get out when things look great. Growth rates now look as good as they are going to get, but fuel shocks and internal disruption lie in wait. Sell.

Chesnara's closed life fund business is worth holding

Chesnara used to be part of the same group as the Countrywide estate agency chain. It was the life insurance arm, selling mortgage endowments to Countrywide's customers. Now, of course, endowment mortgages have collapsed out of fashion and the compensation bills for mis-selling have mounted. It was spun out as a standalone company in May 2004, having shut its doors to new customers. It expects the vast majority of its existing customers to drift away over the next decade, either dying or moving elsewhere.

It is playing a numbers game. It has more than enough money to service the life policies of its existing customers. The excess, as defined by the Financial Services Authority's strict rules on solvency, can be spent on acquisitions or given to shareholders in dividends. And boy, what a dividend. When we tipped the stock at 119.75p in March, it had a yield of 10 per cent. Despite the 40 per cent rise in the share price since then, the yield is still over 7 per cent. It still looks a good medium-term investment.

Chesnara's own broker, Numis, has a "reduce" recommendation on the shares, pointing out that interim results yesterday showed a higher-than-expected provision for mis-selling compensation. This in itself is a one-off, but it will mean that some aggrieved customers are likely to head off to other providers earlier than hoped. Chesnara says it has a grip on these issues. Meanwhile, there are savings to be pocketed by integrating the acquired City of Westminster Assurance, another closed life business. It is likely to find more luractive acquisitions. Hold.

Spurs are a punt for football fans

Football pundits have been bemoaning the lack of entertainment in this season's Premier League but there has certainly been no shortage of incident when it comes to the companies that own the clubs.

West Ham and Aston Villa have been the subject of takeover rumours, while Manchester United is still learning to live with its new owner Malcolm Glazer.

The US sports tycoon's takeover of the Old Trafford club leaves Tottenham Hotspur as the leading quoted football business. A decent set of full-year results published yesterday helped the Spurs share price rise 0.75p to 43.75p. A year ago the price was 27p, so something must have been going right at White Hart Lane.

On the pitch, the club is up to a heady third place in the Premiership although it is out of the Carling Cup, so one source of revenue this season has already disappeared. It is early days in the season but the team look capable of finishing in a European spot, which could mean a financial windfall starting this time next year.

For the 12 months to 30 June, the company's operating profit, before player trading and depreciation, was £14.6m, up from £11.5m, while net debt - the scourge of many clubs - is just £1.4m.

But football is fickle and results ultimately drive commercial success. Spurs shares are tightly held, making it a less liquid stock than many, but it is a well-run business. For fans wanting a football investment, buy these shares rather than any other. Otherwise, stick to the pools.