BAA worth holding for long haul

Filtronic looks dear, but don't sell just yet; Take some profit at the Hornby express
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The Independent Online

BAA, the privatised airports operator that owns Heathrow, Gatwick and five other major UK airports, is no stranger to political controversy. It successfully lobbied to be allowed a fifth terminal at Heathrow, and the Government's most recent policy pronouncement agreed to let it build another runway at the fast-growing Stansted airport in Essex. Even Heathrow may be allowed to expand further to accommodate the ever-growing demand for air travel - environmental targets permitting.

Yet there is a sense that the company is in danger again over how to fund expansion at Stansted. Airlines using the other, profitable London airports don't want to have to subsidise growth at an airport still used mainly by low-cost rivals. Shareholders may have to stump up. And there are growing calls for the whole company to be broken up to undo the stranglehold it has on travel into the South-east.

Nervous times for investors, then, and after a reasonably strong run for the shares many are starting to think of flying out of BAA. Certainly, many asset-based valuations fail to see much upside for the shares in the short-term.

As a long-term play, though, there is a strong case for holding the stock. As third-quarter figures yesterday testified, BAA's ambitious Heathrow Terminal 5 project is on budget and ahead of schedule. The management team, led by Mike Clasper, has steered an enviable course through disruption since 11 September 2001 and rising security costs have now been accommodated. Passenger numbers, after a wobble during the Sars outbreak, are strongly back on the up, especially at no-frills hubs such as Stansted and Southampton. Even airport shopping revenues have stayed buoyant despite the distractions.

It's risky, of course, and a dividend yield of 2 per cent is paltry compensation if BAA runs out of political and operational luck. But the projected long-term increase in passenger numbers is enough to make the shares worth holding.

Filtronic looks dear, but don't sell just yet

Filtronic, a supplier of components used in telecoms networks and mobile phones, has had a tough couple of years as the phone operators cut their spending.

But three months ago, apparently, that all changed. Purse strings loosened and operators have started to splash out again in the run-up to the launch of third generation, or 3G, services. Excellent news for Filtronic, which supplies some of the parts that sit in base stations as well as antennae for handsets.

Sales for the six months to November came in flat at £121.5m. Pre-tax profits were £2.2m, up from just £50,000.

In the group's wireless infrastructure division, its largest, demand has increased for base station products while Filtronic says it is also developing a record number of antennae for new mobile phone designs.

The shares, which closed at 454.25p last night, have had a storming run over the past year, and it is difficult to justify the share price on any fundamental valuation. The company also has a patchy track record that is likely to make it one of the sector's more volatile performers.

The company is understandably cautious, not least because its powerful customers are able to squeeze prices. It is also difficult to predict how big the 3G story will be. Nevertheless, given the interest that will likely surround 3G and the telecoms sectors in 2004, the shares are not to be sold at this stage.

Take some profit at the Hornby express

Hornby shares used to be a bit like their train sets: old fashioned-looking and chugging round and round in circles. Now they are more like the group's Scalextric slot-car racing sets: painted with go-faster stripes and racing ahead at full throttle.

Both sides of the business have been dragged into the modern age, with manufacturing shifted to China and a variety of new product launches to drive sales. A £500-a-pop "real steam" train set and a Harry Potter Hogwart's Express have become sought after collectibles. And Scalextric, too, is fighting back against the attractions of computer games, launching technology to link the sets to the internet to allow racing against other enthusiasts the world over. All the effort has improved profits fivefold and the share price tenfold.

Yesterday's update talked in measured tones about pre-Christmas sales having been "higher than the previous year". Hornby's broker reckons the sales are up a whopping 20 per cent. The reason the group was being coy is that it doesn't want to let the shares get ahead of themselves. At 1,117.5p, on 18 times the current year's likely earnings, the stock looks expensive and any operational wobbles could be severely punished.

While we were premature to advise readers to lock in some of their profits this time last year, it is even more tempting now. Keep some shares in the toy box, though.