The Investment Column: Rolls-Royce can motor as aircraft industry prepares for take-off

Get by with a little help from Friends Provident on hopes of pension boost; Take risk on improving Wetherspoon and prove analysts wrong

Management was in ebullient mood yesterday as it took analysts and investors around its ultra-modern factories in Derby. The message of the day: the cost-cutting drive that Rolls-Royce put in place during the turmoil after 11 September 2001, together with renewed investment in the past two years, means it has more efficient operating practices and will be substantially more profitable this time round, now that demand for engines is soaring again.

New super-size planes developed by Boeing and Airbus, both of which can take Rolls-Royce engines, are not the only reason for the upturn, though they represent some of the most lucrative sources of future work. The growth of airline travel in Asia, and of low-cost airlines in the West, are also boosting orders. Rolls-Royce continues to pinch market share from its main rival, General Electric of the US.

Best of all, existing planes are in the air for more of the time, which means the vital servicing and maintenance work comes round more often. This after-sales work is the most profitable for Rolls-Royce, and was a major focus of the investor presentations yesterday (available for interested investors to watch on www. rolls-royce.com). As its number of engines in service increases, and as the relatively young pieces of equipment out of the current 11,000 gradually age, Rolls-Royce is going to be making yet more money out of after-sales work, and its margins can trend upwards towards the 20 per cent enjoyed by General Electric, which is already heavily maintenance focused.

The civil aircraft cycle has considerably further to run, and this should outweigh any defence spending cutbacks the US or the UK might plan from next year. Meanwhile, the power generator and marine engines businesses tick along nicely. Rolls-Royce profit forecasts are likely to rise, with dividend payouts becoming more generous than they currently seem. Buy the shares.

Get by with a little help from Friends Provident on hopes of pension boost

Much rests on Adair Turner's Pension Commission report, due out this month. While the Government is praying Mr Turner will deliver voter-friendly solutions to the UK's £27bn-a-year savings shortfall, life insurers such as Friends Provident, as the main providers of private pension plans, hope he will do them a favour, too.

One uncontroversial proposal expected by Turner watchers would enable companies to require staff to opt out of pension schemes (they must currently opt in). That would be a fillip for group pension providers and Friends is one of the best placed to capitalise. Even without reform, Friends is making steady progress in the group schemes market. Overall in the UK, its nine-month new business figures, announced yesterday, were up 11 per cent to £300m on the same period last year - including £159m of group pension sales, a 27 per cent gain.

The main worry yesterday was Friends' admission that sales of protection products - life and health insurance policies - are down 11 per cent.

But while increasing competition has contributed to this downturn, the housing market slowdown has been a more significant factor, because protection plans are so often sold alongside mortgages. With the property market stabilising, so too should Friends' protection business.

The company offers greater international diversification, too. In January, it bought Lombard International, the Luxembourg-based life insurer, so overseas sales have more than doubled.

It is easy to overlook Friends, which has a market share of just 4.5 per cent in the UK. But its life and pensions boss Ben Gunn insists he will not chase growth at the expense of profits - a strategy that recently cost Friends' rival Standard Life dear. At 177.75p, the broker Bear Stearns says the shares are on a below-average rating for the sector. Buy.

Take risk on improving Wetherspoon and prove analysts wrong

The City's analysts are near unanimously negative on JD Wetherspoon shares. For 10 sell recommendations on the pubs chain, there is only one positive tip. It is tempting to see this highly irregular imbalance as a screaming buy signal.

Debt is high and interest cover low in this company - scarily so - a hangover from its aggressive expansion to its current size of 650 pubs and which had to be halted for safety's sake when trading deteriorated. So Wetherspoon will only be for investors willing to take risks, but it seems 2005's balance sheet is as bad as it gets, with 2006 healthier.

Any moderation in the vicious trading environment will feed through quickly to profits, and things appear to be stabilising. Like-for-like sales, which had been down 1.7 per cent in August, were only 0.9 per cent lower when the whole of the 23 weeks to 23 October are counted. The new licensing laws will allow extended opening hours, and Wetherspoon plans to run coffee shops and breakfast bars from 9am, unique among the big operators. There is also at least an extra hour of boozing at night. With the expansion of real ales, this looks like a cocktail for winning back market share.

Prices could also rise under cover of tackling binge drinking.

The shares look pricey on 17 times existing forecasts. The lonely "buy" case is that the existing forecasts are too cautious. Have a punt.

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