Investment Column: TUI Travel shares are heading for the sun
Southern Cross Healthcare; China Biodiesel
Wednesday 10 February 2010
Our view: Buy
Share price: 258p (+0.04p)
Whether it's down to the grim weather or the realisation that the worst of the recession is over, consumers seem to have reached for their summer holiday brochures with gusto recently.
Yesterday, TUI lent support to this view by saying that it had increased the number of summer holidays it sells for the first time since 2007 and, more significantly, added that it would meet 2010 full-year profit expectations.
The tour operator, which owns Thomson and First Choice, said that its summer capacity had increased by 3 per cent in the UK and 11 per cent in the Nordic region. This upturn has been partly driven by strong demand for all-inclusive holidays, reflecting customers' desire to keep a lid on their budget, which have soared by 27 per cent over recent weeks. Popular destinations included the Dominican Republic, Mexico and Egypt. Perhaps more importantly, TUI has hiked the average selling price of summer holidays for UK customers by 9 per cent since the season first went on sale.
The big tour operators TUI and Thomas Cook have battled the recessionary storms by slashing capacity to bolster profit margins, but they have also been aided by the failure of smaller operators. TUI also touted a marked upturn in trading for its winter 2009/10 season since its last update on 1 December last year.
The improving trend was reflected in TUI's comments that it was "experiencing a significant improvement in profitability in the second quarter".
But this came after underlying operating losses widened to £107m for the first quarter to 31 December, largely resulting from reduced capacity and being up against a strong trading period last year. Despite TUI's sunnier comments on this summer, we don't believe that tour operators are out of the woods yet. But TUI – which trades on a relatively modest 2010 price to earnings ratio of 9.5 times – looks well-placed to benefit from a sustained recovery once it arrives. Buy.
Southern Cross Healthcare
Our view: Hold
Share price: 150p (unchanged)
The analysts at house broker Investec yesterday described the care home provider Southern Cross's first-quarter trading statement as "steady as she goes". For long-term investors, this will be the best news they have heard in a long while.
Two years ago, and let's be blunt about it, Southern Cross was useless. There was too much debt, it didn't have enough people in its homes and it had a management team putting out statements saying all was tickety-boo, only to issue a profits warning five weeks later. Investors rightly ran a mile.
The new man in charge, chief executive Jamie Buchan, is making progress. The company said yesterday that debt was down, and with the shares up by more than 100 per cent in the last 12 months, investors are clearly seeing improvements, even if Ebitda and occupancy followed debt down, albeit marginally.
For those that like the maths, trading on a 2010 price to earnings ratio of 10 times, the stock is not pricey, and on a sector basis, Southern Cross looks attractive.
The aces are just not with the company, however. Just as it recovers from its woes, so the gaping hole in the public finances could well scupper any strong improvement. The Investec watchers say: "We remain concerned about the outlook for both fee rates increases and occupancy as local authority spending comes under growing pressure and the resultant pressure this could put on our forecasts. We prefer to remain cautious for now." So do we, but we would give Mr Buchan and his team credit for the progress made so far. Hold.
Our view: Buy
Share price: 10.5p (+2.25p)
There were mixed implications from yesterday's trading update from China Biodiesel, a producer of biofuel listed here but focused on the Chinese market. In the second half of the financial year to December, the company benefited from global economic improvements, boosting shipments from its Longyan and Xiamen facilities in the final quarter and taking annual production to 39,000 tonnes, up from 25,000 the year before.
But margins are still under pressure from lower selling prices, and despite improvements towards the end of the year, revenue for the full year is expected to come in only broadly flat on 2008. Taking into account the array of subsidies and grants the company receives – the majority related to renewable energy and energy-saving initiatives – the company is forecasting 11m yuan (£1m) in profits for the second half.
China Biodiesel's balance sheet has benefited from the group's use of free cash generated in its second half to pay down bank loans by 14m yuan. Add to that our general optimism about the growth potential in the Chinese market, China Diesel in a buy.
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