Investment Column: Outlook is bleak but don't turn over Page

EasyJet; Falkland Islands Holdings
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The Independent Online

Our view: Cautious hold

Share price: 193p (-8.75p)

There does not seem to be too much going right for the recruitment group Michael Page International.

The company announced its full-year numbers yesterday, saying that profits were down 5 per cent in 2008. More worryingly, perhaps, is that the outlook is bleak with no sector emerging unscathed: as for light at the end of the tunnel, not so much as a glimpse of it.

According to the chief executive Steve Ingham, the group is doing what it can to mitigate the issue by removing as many "weak" employees as possible, with another 450 jobs earmarked to go yesterday. The impact is limited, admits Mr Ingham, as salaries are aligned with profits, although the restructuring costs are also minimal.

Despite all the aforementioned woe, the group's share price is actually holding up rather well and in the last three months it was up 10 per cent, before a small fall yesterday. Mr Ingham says that investors understand the long-term strategy and while the stock might plateau in a downturn, Page is still winning market share and will outperform in the good times.

Incidentally, Mr Ingham claims not to have encountered any shareholder angst after the board rejected a 400p approach from the Swiss recruiter Adecco in August. Maybe, but we are not so sure the stock will reach those heady heights again for some time.

Analysts at Cazenove argue that the shares are at the point they reached at the bottom of the 2000 to 2003 downturn, but that "trading is worse than in the 2003 downturn". They added: "In the previous downturn, for example, the EPS [earnings per share] fell by 64 per cent from peak to trough but we now believe that EPS will fall by 82 per cent from peak to trough." The watchers rate the stock as "in-line" with the other recruiters in no better position, which makes us nervous about the sector as a whole. We do think that Page is one of its stronger players, however. Cautious hold.


Our view: Buy

Share price: 296.75p (-14p)

After a pretty dull performance during most of 2008, shares in the budget airline easyJet have really taken off in the past quarter, improving by nearly 14 per cent, before yesterday's February passenger numbers caused a small amount of turbulence.

The group said that passenger numbers are 6.8 per cent down on February last year, but is quick to add the load capacity – bums-on-seats to you and me – is 2.4 percentage points up in the same period. The stock was nonetheless down by 4.5 per cent yesterday.

The group will next produce numbers for the market on 6 May when its interim results are published. Some close to the industry say that the low-cost carriers can benefit this year from lower fuel costs, business travellers switching from the likes of BA for short-haul trips, and the capacity for the sector to close down unprofitable routes without many problems. Those at Citigroup agree, arguing that the business model is "proving resilient in downturn environment".

There will be pressure from fewer holidaymakers making foreign trips, but the relative resilience of the share price indicates that the market thinks the industry will ultimately gain from the downturn. The Citigroup watchers reckon that easyJet "should benefit from customers trading down, weak competitors and sterling weakness as a net exporter. Our target price [of 360p] is based on price-earnings ratio of 12.5 times mid-cycle EPS of 29 per cent based on a 6 per cent Ebit margin."

We think easyJet is about the best of the airlines and would be tempted to hop on board. Buy.

Falkland Islands Holdings

Our view: Hold for now

Share price: 257.5p (-27.5p)

Most companies claim to diversify but few do it like Falkland Islands Holdings (FIH). At the risk of using the entire column to explain, the group operates hotels and tourism businesses in the Falklands, the Portsmouth to Gosport ferry route and Momart, a company that handles fine art and antiquities. As a legacy from having a 150-year-old Royal Charter, it also owns a 16.3 per cent stake in the exploration group Falkland Oil and Gas.

This breadth of activities, and the fact that it is one of the increasingly few AIM-listed dividend payers, is a real plus. The problem, and the reason for the 9.7 per cent drop yesterday, was that FIH announced that it will report a full-year adjusted pre-tax loss after Momart suffered in a poor commercial art market. The group's other operations are fine, it says. Investors liking the diversification argument may yet be put off by the stock's jump of 34 per cent in the last quarter. Analysts at FIH's broker, KBC, are still upbeat, saying that des-pite the rises, the stock's value is "still undemanding", and that the short-term share price will move on the exploration activities of Falkland Oil and Gas. We would wait to see how that goes before going all in. Hold for now.