Investment column: BAA sales struggle to take off as shares languish on runway

PITY POOR Mike Hodgkinson, the fresh face in the chief executive's chair at BAA, the country's largest airport operator. The day he was promoted to the post last month, BAA warned that its sales performance had been clobbered by the abolition of intra-EU duty free. The group yesterday posted pre-tax profits down 47 per cent as one-off charges and the end of duty free took their toll.

In the three months to 30 September, profits fell 17 per cent following duty free's abolition on 1 July. The United States operations went into the red in the half year amid increased competition. Meanwhile, the group took a pounds 147m goodwill writedown for the US and the troubled Asian operations. Overall underlying pre-tax profits were flat year-on-year. BAA shares took a 25 per cent drop on the back of the October profits warning, so is all the bad news out now?

Mr Hodgkinson is bullish. He believes BAA will eventually win permission for a fifth terminal at Heathrow. He sees solid passenger growth in the UK, fuelled by the growth of low-cost airlines whose passengers spend their savings in his shops. Indeed, UK passenger numbers rose 5.1 per cent in the half-year. There are plans to add 150,000 sq ft of retail space, boosting the total by 15 per cent. The Heathrow Express is set to post maiden profits in its first full year of operation and full-year results should also benefit from pounds 60m proceeds from disposals, more than twice the expected figure.

However, BAA's real task is to eliminate consumer confusion over the current status of the discounts BAA's European shops offer post-duty free. Although Mr Hodgkinson says that the sales trend is now running in his favour, a full recovery is expected to take 12 to 24 months.

Analysts expect full-year pre-tax profits of pounds 520m, including disposals, or 36.3p per share, putting the shares, up 8.5p at 455p, on a forward price/earnings ratio of 13. Yesterday's assurance that things aren't getting worse may have helped to put a floor under the share price, but investors cannot expect great things for a while. Hold.