Investment Column: Rolls-Royce will engineer future gains

Stagecoach Group; Hammerson
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The Independent Online

Our view: Buy

Share price: 443.1p (-8.6p)

Yesterday's management statement from Rolls-Royce – the engineering giant – was a modest affair. Trading is in line with expectations, underlying revenues are still expected to grow in 2009, and underlying profits are still forecast to remain broadly flat on those achieved last year.

Sir John Rose, the chief executive, was downbeat. "Global economic activity remains depressed," he said. "Whilst some emerging economies have shown signs of recovery, there is no evidence yet of a sustained and general return to growth across the group's markets."

But Rolls-Royce nonetheless has a record order book, still growing despite some cancellations as the economic downturn took hold last year. And although Rolls's aviation business is expected to take a hit in December's annual results, strong performances from the group's defence, marine and energy businesses more than made up for it in the six months to July.

Not everyone is bullish on Rolls's shares. Nick Cunningham, at Evolution Securities, says price-earnings ratio estimates of 25.4 times for this year and 26 times for next mean the stock "looks expensive", and the fact that it has outperformed peers such as EADS and Boeing make it "likely to come off slightly".

In July, we put a buy on Rolls-Royce stock, then at 408p. For the reasons outlined by Mr Cunningham, the shares are not expected to continue on that trajectory for another four months. But over the longer term, the group's potential is enormous, particularly in the nuclear sector. Rolls has already set up a 450-strong division to make the most of the renaissance of atomic energy in the UK, and given that the global civil nuclear market is forecast to be worth £50bn in 15 years' time, there is considerable room for export growth. Even at the current price, Rolls-Royce is still a buy.

Stagecoach Group

Our view: Hold

Share price: 140.7p (-2.5p)

Unusually, the top team at the transport group Stagecoach decided not to do interviews yesterday to coincide with its trading statement. The reason given was that the chief executive, Brian Souter, and the rest of the board were worried that all the questions would centre on Stagecoach's struggling bid for its troubled rival National Express.

Avoiding questions also enabled Mr Souter and his colleagues avoid some tricky questions about Stagecoach's own performance, however.

The company warned that trading remained tough, albeit within expectations, and that revenue growth "remains below the growth rates observed in recent years".

The analyst at Panmure are upbeat on the stock, however, arguing that "the shares have underperformed the market by about 35 per cent over the past year and look attractively valued at an earnings multiple of 9 times 2009/10 and 8.2 times 2010/11".

We would worry that the while the group's UK bus division and its Virgin trains franchise are going great guns, with revenues up 4.3 per cent and 6.9 per cent respectively, the rest of the company is stalling, particularly its North American business. Add in the conundrum at National Express, and investors face a great degree of uncertainty.

The shares may also be more representative of the market than the Panmure watchers suggest, with those at Royal Bank of Scotland pointing out that on an enterprise value to Ebitda analysis, the stock trades in line with rest of the market on 6.2 times.

The attractive dividend yield of 4.7 per cent is enough to persuade us to keep the shares, but there is too much uncertainty about Stagecoach to convince us to be buyers. Hold.


Our view: Buy

Share price: 390.5 (-1.7p)

A year ago, you would not have gone anywhere near Hammerson.

Like most of the other real-estate investment trusts, the group's shares got a pounding as property prices shrank in the aftermath of the financial crisis. But now the nuclear winter is passing, and while the stock is still a shadow of its former self, a 26 per cent rise in the last six months is evidence that confidence is returning.

Encouragingly, property markets are improving and occupancy rates are up; the number of tenants going into administration has fallen, the group says.

There is little special about the shares, however, say those at Cazenove: "The recent round of profit-taking has meant that the shares are now trading at a discount of 11 per cent to our 2011 net asset value forecast of 439p and only a small premium of 6 per cent to our 2009 forecast of 371p. This looks fair value to us."

True, but with a dividend yield of 5.1 per cent, Hammerson has to be a buy.