Rolls-Royce could be purring nicely soon

Find some room for Workspace; UBC is on the right wavelength
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The Independent Online

Rolls-Royce, the jet engines maker, hasn't exactly got off to a roaring start on its new stint in the FTSE 100. Back in the blue chip index yesterday after a three-month break, the shares went into reverse. But investors should not bet that is the start of a trend; the stock is still a "buy".

That's not what the majority of analysts will tell you. They will reel off a list of now familiar complaints and come to a negative conclusion. The pension deficit is a whopping £1.1bn, they say (but the extra cash payments are already accounted for in City forecasts); the group has a string of potential liabilities not included in the balance sheet, they say (but these are well understood and unlikely to crystallise); and the civil aerospace market remains depressed by terror, Sars and economic malaise, they say.

Okay, Rolls-Royce is not for the widowed, the orphaned or the otherwise faint of heart.

Yet even after an extraordinary rally that has seen the shares double since March, these shares can keep going. Why? It may not have felt like it yesterday, but the City's fund managers are looking into the medium term and the economic spring that lower interest rates should put in the corporate step.

If Rolls-Royce's earnings return to just the average of the last five years, then the price-earnings ratio of the shares falls from 11 now to below 7, so there is clearly scope for considerable upside in due course. In the meanwhile, the trading performance is at least not deteriorating. The lucrative market for spares and maintenance is holding up, even if new engine sales are weak.

Rolls-Royce sells its engines to the defence and marine industries, too, and these markets are picking up some of the slack.

There is scope for Rolls-Royce's cashflows to improve. This decade is not likely to witness the vast investment in new engine design that was required in the Nineties, when many new types of plane were being developed.

The dividend looks, on a balance of probability, safe and would give new investors the confidence of a 6.4 per cent yield on top of significant potential for capital growth.

Find some room for Workspace

Workspace, the property group which grew out of the old Greater London Council's industrial property portfolio, is celebrating its tenth year on the stock market with a tenth set of record figures. Not bad since the unsettled state of the UK economy might be expected to hit Workspace's small business tenants hard.

Not so, says Harry Platt, Workspace's long-serving chief executive. There are always new entrepreneurs along to take the place of those whose businesses fail or who give up. Indeed, at the end of March, 89 per cent of Workspace's properties - factories, warehouses and railway arches converted into architects' studios, IT workshops and garages - were occupied, about the same as last year.

Best of all, the company was able to post a big jump in average rents and, as a consequence, an 11.6 per cent year on year uplift in the net asset value of the portfolio, which is now the equivalent of 1,510p a share. In September 2001, when the group sold its Midlands properties to concentrate on the South-east England region which has been the engine of economic growth, Mr Platt promised to double the asset value per share in five years. He is 43 per cent of the way there already.

Workspace reports that the outlook is still sunny and inquiries from potential new tenants are still strong. Because the group offers the sort of short-term, flexible leases that small business needs, there will always be the risk that a downward economic lurch could undermine Workspace's plans this year. But that doesn't look as likely as another year of growth and the shares, which used to trade on a par with net asset value per share, are now unjustifiably far below it at 1,160p. Buy.

UBC is on the right wavelength

UBC Media, a tiny radio company, yesterday reported results no better than forecast, yet its shares leapt a quarter to 33p. This is a loss-making business. What's going on?

UBC is a bet on the potential of digital radio and there was a lot of excitement about this medium around. Digital radio is clearly becoming established among consumers and compelling content is being produced.

UBC has a traditional business, radio production, which makes programmes for other broadcasters, including the Hit 40 UK chart show, which is syndicated across the commercial sector. This business provided £2m of the £10m group turnover for the year to March. The pre-tax loss was £1.5m but the company made an operating profit of £75,000.

UBC owns the Classic Gold series of retro pop music digital stations and half of One Word, a books and comedy station. Best of all, it is a leader in digital radio data services which it provides to operators such as Capital Radio, enabling them to broadcast information about songs and programmes. This technology could in future be used for transmitting pictures of football matches to mobiles.

UBC is expected to make another bottom-line loss this year but the continued progress of digital radio ought to at least support the shares. GWR and Guardian Media Group hold stakes so a takeover is also possible. Hold.

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