BAA still expected to be among the high flyers

Isis is an ambitious play; Royalblue looks less than regal

The delays suffered by British Airways passengers at Heathrow this month are nothing compared with the delay to the scheduled passenger forecasts from BAA, the company which owns Heathrow and six other UK airports. BAA normally puts out its annual (and usually accurate) forecasts in March, but the uncertainty caused by Sars and the war in Iraq meant that its latest estimates only finally landed in shareholders' in-boxes yesterday.

They might turn out to be conservative. BAA predicts 4 per cent more people will pass through its boarding gates in the year to March 2004 than in the previous 12 months, when it saw off or greeted a record 127.7 million passengers. The numbers for Heathrow, dependent on depressed international travel, are forecast to be flat, but any signs of life in business travel later in the year could lead to upgrades.

The long-term growth of air travel has not been stalled by the indignities of security checking since 11 September 2001, and BAA's long-term prospects look assured.

Unfortunately there were some nasties in yesterday's first-quarter results. In particular, the costs of increased security and the associated extra staff, and the costs of maintenance and insurance, all came in much higher than the City had been expecting. That's always a worry at a company as big as BAA, and it led to a rash of downward profit forecast revisions by analysts. But the company insists this was a one quarter wonder and it is too early to panic. On the big ticket items, such as the £4bn Heathrow Terminal 5 project, costs are on target and the building work is ahead of schedule.

The bulls could take heart that the growth of low-cost airlines at BAA's airports at Southampton, Stansted and Gatwick is offsetting some of the pain at Heathrow, and spending in airport shops has also proved remarkably resilient. With BAA shares trading at a discount to the value of the regulated assets, they are still a buy.

Isis is an ambitious play

Bear markets are no picnic for fund managers, and Isis Asset Management - the renamed Friends, Ivory & Sime - has endured its fair share of difficulties.

But Isis was yesterday able to tell investors that despite a 10 per cent drop in profits, revenues for the first six months of the year were higher than had been expected and costs were lower. That's a good combination in a sector struggling to attract new customers and which has seen fund values and fees plummet.

Isis bought the fund management arm of Royal & SunAlliance last year, bringing its funds under management to £60bn. It has taken out £25m in costs, and is now a top 10 UK fund manager with more acquisition targets in its sights. About two-thirds of the funds under Isis's management are the insurance funds of Friends Provident and Royal & SunAlliance. These are long running contracts that provide it with a steady income stream.

Isis has also fared well because about two-thirds of its funds are invested in fixed-interest stocks. These have held up while equity markets have crashed, but demand for bonds looks likely to be past its peak.

Isis is 67 per cent owned by Friends Provident, making the stock relatively illiquid for its size. But the upside is that, in order to keep its parent happy, Isis pays out a pleasant dividend, a yield of about 5.5 per cent at the current share price.

Up 3p to 207.5p, the stock is trading at nearly 17 times forecast earnings. That's a little expensive for a play on uncertain stock markets. Isis needs another good acquisition to bring about growth but at least we know it has that ambition. Hold.

Royalblue looks less than regal

It is never usually the case that less is more.

Royalblue, a forgotten star of the technology bubble, had figures yesterday which boasted it has updated its business model for the Noughties, and now gets half its revenues in the steady form of rental income, rather than one-off sales and consultancy fees.

The trouble is consultancy fees are falling off faster than they are replaced by shiny new recurring revenues. Profit for the six months to 30 June fell 3 per cent to £3.8m. And the prediction of a further slide in consultancy fees in the second half sent Royalblue shares down 6 per cent to 382.5p.

The company has developed Fidessa, a software system sold to investment banks and other traders of securities which helps automate the trading process. With customers having been mauled by the bear market, sales have been sluggish. It will only be when the nascent recovery in market sentiment feeds into greater IT spending that we will be able to measure the true potential of Fidessa.

The shares trade on an optimistic 19 times forecast earnings. Recurring revenues are rightly more highly valued by the stock market than consultancy, but in this case less overall revenue is less profit, which is less for the foreseeable future than shareholders had been led to hope. Avoid.

Comments