Investment Column: Tui due a break after stormy times

Betfair; United Utilities
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The Independent Online

Our view: Hold

Share price: 148.5p (-6.4p)

Tui is another of those companies which we bought towards the end of last year (at 225.9p) before the sovereign debt crisis brought a fresh whirlwind of woe to the economy.

The shares were again taking a battering yesterday and it's not hard to see why. One thing Britons appear reluctant to sacrifice is their holidays. But with spending cuts biting, pay freezes, high inflation and rising unemployment, that may very well change.

That said, Tui has proved remarkably resilient. Compared with rival Thomas Cook, which has issued profit warnings and lost its chief executive, its waters have been calm. Yesterday's statement said the group would meet expectations. It has sensibly cut capacity and has some defensive qualities, such as its specialist offering to older, and wealthier, customers.

We remain concerned: Tui wants to pass on higher input costs (fuel and the like) to customers, resulting in price rises of 5 per cent or so, while maintaining margins. Is this tenable? We're not sure. However, on valuation grounds Tui looks interesting at just 6.7 times 2011 forecast earnings while yielding 7.5 per cent. What's more, its majority German owner, Tui AG, should provide a floor for the price. Hold on.


Our view: Avoid

Share price: 723p (-60p)

It is rather painful to observe what's happened to Betfair since its hotly anticipated flotation at the giddy heights of £14 last year. After all, this is a huge British success story, a business which has revolutionised its market, created a lot of jobs, and exported its product successfully overseas.

However, cold, hard financial facts have to be applied to the investment case. And they still don't really stack up. This column last looked at Betfair in December, when we said avoid at 990p. That's proved to be the right decision because the shares continued to slide, but they have been in recovery mode recently.

Yesterday the company's chairman, Ed Wray, was in bullish mood at Betfair's annual meeting, waxing lyrical about growth opportunities, while pledging to boost margins and return excess cash to shareholders (though he was notably short on specifics).

Mr Wray – one of the group's co-founders – is to relinquish his role and to his credit Betfair has been moving to comply with best corporate governance practice. However, the amount of change among Betfair's top management is a tad worrying. And while Mr Wray said the search for a replacement for David Yu as chief executive was "going well", the rumour mill has gone rather quiet. For all the upheavals, that will be the key appointment. If Betfair can secure a big hitter (such as Paddy Power's Breon Corcoran) it would be a real statement of intent and we might be inclined to change our view.

However, at nearly 18 times this year's forecast earnings – more than double the multiples that William Hill and Ladbrokes trade at – the shares still look pricey. That partly reflects the fact the latter two are badly undervalued, and it could be argued that Betfair, which has been building a fixed-odds platform to add to its exchange, deserves some sort of premium. But not that much. We'd still steer clear.

United Utilities

Our view: Buy

Share price: 601.5p (-8.5p)

We've been holders of United Utilities since 2005 and reiterated that advice last September at 573p. The shares have proved exactly why that was sage advice. Even with a tough(ish) settlement from regulators, and the fact they are funded by debt to an uncomfortable degree, UU and its peers know that its customers simply have no other choice but to pay for its product.

As such, as long as it keeps a lid on costs while avoiding controversy (so, keeping leaks down and being sensible about digging up roads), UU should prove to be a solid investment.

Yesterday's update was bang in line: first-half revenue was higher than last year, largely down to the regulated price increase for 2011-12 of 4.5 per cent. Operating expenses are expected to rise, principally because of infrastructure spending and depreciation, alongside other inflationary cost pressures. But this has been flagged.

At 17 times this year's forecast earnings, the shares are not so cheap. But the company's selling point is its yield. It's 5.2 per cent and UU is committed to growing the dividend at RPI inflation plus 2 per cent until 2015. Now look at the returns from cash (pitiful) and on trustworthy bonds, corporate or sovereign (also poor). Suddenly boring old UU starts to look compelling.