Sell Ryanair while it remains a high-flyer

Politics makes FirstGroup risky; Keep Aga on the back burner
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The Independent Online

Is it time to call the turn on Ryanair? The budget airline has proved an astonishing success over the last few years, defying the sceptics and giving the flagship carriers a drubbing at the same time. But can it all continue?

Yesterday's figures showed no sign of a slowdown with passenger numbers soaring to 1.25 million in June, a 34 per cent increase on the same month last year. The load factor – the number of seats filled on each plane – rose to a thumping 88 per cent, from 83 per cent. And 91 per cent of tickets were booked over the internet, up from 77 per cent the year before.

The figures compare well with rivals, such as British Airways which earlier this week reported a 12 per cent fall in passenger numbers while KLM's figures are down 10 per cent.

All this means that Ryanair is taking market share as customers flock to the airline's rock-bottom prices. These are made possible through rapid turnaround times at airports (which means the planes are engaged in revenue-earning activities for longer), lower landing fees (achieved by flying to secondary airports ) and no-frills service, which means in-flight drinks and food are extra.

Meanwhile, Ryanair creams off far fatter profits by arranging add-on services such as car hire and hotel bookings.

But after a gravity-defying run it may be time to call the top. Allegations last month that certain budget carriers jeopardise safety to meet tight schedules dented confidence in the sector.

Secondly, flagship carriers such as BA are cutting prices on certain key routes to match the no-frills rivals. Added to this is the increase in the size of easyJet as a result of its takeover of Go. Sooner or later the budget carriers are going to be competing head-to head on the same routes. That will placed pressure on margins. Finally, there are rumblings of discontent emerging from disgruntled passengers about long delays and misdirected luggage and some prices not being that cheap after all. Meanwhile, the expansion continues apace, with more routes being added and a search for more hubs on the Continent, all handled by Ryanair's bumper order of 100 more Boeings over the next eight years.

Assuming full-year profits of £215m, the shares – up 10p to 371.5p yesterday – trade on a forward p/e of 21. That is a 20 per cent premium to easyJet and now may be a good time to sell.

Politics makes FirstGroup risky

There wasn't much for investors to get their teeth into in yesterday's trading update from FirstGroup, the bus and train operator. It said its business remains "strong and resilient despite the continued economic uncertainty and the problems on the world's financial markets". A single line told investors that the start to the new financial year had been good with trading in the first quarter in line with expectations.

In the UK the company is focusing on improving service in its bus division as well as adding to its three rail franchises. In the US it sees "significant scope" for growth across all its businesses.

Results in May showed a 5 per cent rise in underlying profits for the year with a 7 per cent increase in turnover. Analysts are forecasting profits of £163m for the current year. With the shares up 12p to 257p yesterday that puts the stock on a lowly forward p/e of 9 with a decent yield of about 4 per cent. This appears attractive but the UK transport sector operates under a political cloud where crashes, such as the one at Potters Bar, have added to the sector risks.

In May Moir Lockhead, FirstGroup's chief executive remained confident that passenger confidence would not be as affected as after the Hatfield crash. That may be, but the risk of political interference means the shares are best avoided.

Keep Aga on the back burner

Shares in Aga Foodservice, the company which makes the posh Aga and Rayburn cookers, have performed quite well in the past 12 months, comfortably outperforming the market. Formerly called Glynwed the business has been expanding the range of appliances to include fridges and making a stronger push into the United States. Project 10,000 is the name for its bid to increase the current number of units sold each year from 8,000 to 10,000 by 2003.

Yesterday, the group's AGM statement said that trading is in line with expectations ahead of the group's half-year results on 6 September. These are expected to show profits of £14m. Aga's is heavily second-half weighted and the guidance yesterday was that expectations for the full year (profits of £32m) are also unaltered.

Orders for Aga and Rayburn cookers in the first half are "encouragingly ahead" of the same period last year helped by the "iron Age" marketing campaign. The Rangemaster division is meeting expectations. The gloomy piece of news was that the cookers and refrigeration markets in the UK "remain subdued".

Aga is a stripped down catering equipment business after the sale of the old Glynwed pipes business last year. The key points remain whether its US assault pays off and acquisitions, such as the Fired Earth shops, can be integrated. Consumer spending in the US is buoyant but the stock market gyrations may yet pull the rug from under it. The shares rose 9.5p to 255p yesterday putting the stock on a forward p/e of 15. No more than a hold.