Investment Column: Recovery should keep easyJet flying high

William Hill; FFastFill
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The Independent Online

Our view: Hold

Share price: 385.2p (+6.3p)

easyJet has become the acceptable face of budget airlines. It does many of the things Ryanair does, in terms of pricing flights cheaply and then topping up with charges for almost anything its people can think of.

But the company seems to do it with a smile on its face, unlike its great competitor, whose passengers all too often feel they are getting the finger. Yesterday's passenger figures from easyJet showed that its model is still working well enough and its aircraft are fuller than they were a year ago.

But there is more to it than that. As Deutsche Bank notes, the company is building up a useful slot portfolio at Europe's primary airports – the ones that are actually near the cities they claim to serve. This is enabling easyJet to snatch market share from "network" airlines (Lufthansa, BA, Air France etc) which cannot hope to match its cost base. Once it has a sufficient frequency of flights it should be able to lure more business travellers, whose cost-conscious employers will love the prices easyJet charges, and who provide higher yields than penny-pinching leisure travellers.

It's not all plane sailing, though. EasyJet is still quite reliant on the UK, where a weak pound and general economic gloom is restraining travel. But, airlines are cyclical and based on an improving economic outlook there are grounds for hoping things will pick up.

The shares have performed very strongly over the past few weeks and now sit at 59 times this year's forecast earnings, but that falls to 12.9 times next year's when earnings are expected to recover with the economy.

That still compares favourably to Ryanair (which has been treading water) at 14 times. We last looked at easyJet in March when we said buy at 296.75p. We wouldn't blame anyone for taking profits after that, but we still think there is enough in the fuel tank to make these shares worth holding.

William Hill

Our view: Buy

Share price: 167p (-5.2p)

There is no question that William Hill, like most boomakers, will have taken a beating over the weekend. Plenty of turfistes backed the odds-on favourite Sea The Stars in Sunday's Prix de l'Arc de Triomphe just to be a part of his triumph. And there's no doubt the horse will be mentioned in more than a few trading statements over the coming months. Times are not easy for the turf accountants, for whom football results have also been poor, largely thanks to a paucity of draws and the "big four" Premiership teams performing well.

This has cast a pall over the sector but that could present an interesting buying opportunity. Sports results do occasionally go against bookies (it's the nature of the beast) but once a pattern is established they inevitably price to take account of it and start clawing back from punters. Sea The Stars was a one-off but could attract new punters to the sport of kings.

Who will lose? Collins Stewart has William Hill trading at just 8.5 times its full-year 2009 earnings, which is undemanding to say the least (Ladbrokes, for example, is at 9.5 times and Paddy Power is well above that). The 4.5 per cent prospective yield is stable and Hill's debt, at just two times earnings before interest tax, depreciation and amortisation is low (Ladbrokes is at three times). The company also seems to have sorted out its difficulties, with its online operations and chief executive Ralph Topping both seen as doing a good job. We see a real opportunity here, so buy.

FFastFill

Our view: Buy

Share price: 7.25p (+0.375p)

So Barack Obama is pushing plans to regulate derivatives trading in an attempt to shine more light into the workings – and therefore cut risk – of the opaque industry worth trillions of dollars. This would include clearing trades in the exotic instruments through a central body rather than off-exchange away from the eyes of the regulators. That could be good news for Ffastfill, which makes derivatives trading software, as more and more banks would clamour for its products. The board issued a trading update in line with expectations yesterday, saying that the company should report a profitable first half compared with a £500,000 loss last year.

It did suffer as clients (the banks) cut back on huge swathes of spending as the downturn hit. Yet it has retained a solid roster of clients including JP Morgan, MF Global, ICAP and Mint Equities – and there should be more of an upside from these relationships.

In the wider market, conditions are stabilising and bringing in more customers. Revenues from the software services business are still growing and analysts expect increases in recurring revenues and a lift in profit margins as the business builds. Analysts at FinnCap put the stock at 11.8 times 2010 earnings, before falling to 8.8 times the following year. It's worth a look, so buy.

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