Investment Column: Rolls-Royce to recover and fly once more
Ted Baker; Speedy Hire
Thursday 18 November 2010
Our view: Buy
Share price: 599.5p (+10.5p)
More than £1bn was wiped off the value of Rolls-Royce after a Qantas Airbus was forced into an emergency landing in the wake of the near disintegration of one of its Trent 900 engines. This was despite the company saying last week that the financial impact would be limited (analysts came up with about £25m after putting what the company said into their spreadsheets).
Part of the reason for the fall in its share price was fears about the long-term impact of the near-disaster and whether it might affect other parts of the business. At present, that seems very unlikely. Rolls-Royce appears to have got a grip on the problem, having worked out what caused it and set in train measures to correct it within eight days. In this case the shares, which have yet to fully recover their poise, could bounce back.
The news from the company's array of other businesses has been positive. Indeed, its performance has helped to cushion the blow caused by the engine difficulties, which should be only a short-term issue if it handles things correctly from here.
And yesterday the company added another order to its steadily growing docket – albeit for Airbus engines too, though not the same ones that caused the problem. Rolls-Royce is still not the cheapest of shares, however, trading on 15 times this year's earnings based on consensus forecasts while offering a moderate prospective yield of 2.7 per cent. But you expect to pay a premium for quality. There is still a risk of complications about those engines, but we would be willing to take it. These are shares to buy.
Our view: Hold
Share price: 640p (+19.5p)
Ted Baker continues to impress, with sales up just more than 20 per cent during the past quarter, according to the interim management statement the retailer released yesterday. The figure was artificially high, with a 76 per cent increase, year on year, in less profitable wholesale sales. Part of the reason for this is the timing of buyers' purchases and the strength of the pound. Still, retail sales were up by almost 9 per cent on the same quarter of last year, which is none too shabby given the icy headwinds blasting down the high street just now.
Ted Baker is no flash in the pan, having increased earnings per share by at least 10 per cent a year in each of the past 10 years. Its secret is a sensibly paced expansion, both domestically and in international markets, that has not compromised the brand's value.
But investors know this, and that's the downside to the stock. The broker Execution Noble puts it on a valuation of about 14 times 2011 earnings, broadly in line with its long-term average, and at a small premium to comparable businesses. On the upside, there's an outside chance of a surprise, with new stores in the Middle East and the Far East picking up pace. Still, the UK outlook, even for this premium brand, is unnerving, so hold.
Our view: Buy
Share price: 26.25p (+1.75p)
Speedy Hire shares were in demand yesterday. Gains were triggered by the tool hire firm's half-yearly results, which revealed a bigger interim loss but cheered investors with news of recovering trends. Speedy Hire said revenues, average hire rates and volume trends in Britain were all moving in the right direction. While factors such as the group's on-site facilities at the Olympics park, its contract wins in the construction market and beyond, and its growing international presence all bode well, the investment case rests on the valuation which is cheap.
Speedy is rated in line with its sector peer, Lavendon, which is on 6.6 times forecast 2013 earnings. However, Speedy sits on a 20 per cent discount to the value of its net tangible assets (what it owns, its orders and so on). Lavendon trades at a 40 per cent premium. Speedy can catch up, so buy.
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