Investment Column: VT sets a sensible course to outsourcing

Our view: Hold for now

Share price: 539.5p (-19p)

Change is in the air at VT Group. In its previous incarnation as Vosper Thornycroft, the company has a rich history as one of the UK's premier naval ship builders. In the next three years, however it is set to drop shipbuilding altogether in favour of outsourcing.

The group announced its interim results yesterday, showing that underlying profits in the six months to 30 September were up 13 per cent, compared with the same period last year. More impressive is the 70 per cent spike in the size of the outsourcing order book, which now stands at £4.6bn for next year and takes the group close to capacity.

VT's remaining shipbuilding projects are bound up in BTV, a joint venture with BAE Systems, which VT will have left by 2011 and for which it will receive a £380m cash settlement.

For investors, all this change may be unsettling, but undoubtedly the group is moving to more fertile territory. Bidding for government contracts, and government is in the habit of outsourcing increasing amounts of work, is serving the group well, with projects ranging from school building, to work on naval submarines.

Buyers do, however, face a quandary as far as outsourcing is concerned. On the one hand the companies that serve the public sector are as robust as any other heading into a recession. On the other, the shares in most such groups are expensive.

VT's own stock is up more than 15 per cent in the last month, and analysts at UBS reckon that the share price will be on a par with its current level in 12 months' time: "[our] price target reduction [from 700p] reflects the falls in the market and the peer group, and would put VT on a 2010 price earnings of 12 times, a small discount to Serco and a 20 per cent premium to Babcock."

VT should be applauded for its full steam ahead move to outsourcing, but perhaps there are better punts available in the sector today. Hold for now.

Aer Lingus Group

Our view: Sell

Share price: €1.18 (+0.005c)

The airline industry is troubled. With the recession on the way, carriers are being hit by falling consumer demand, high fuel costs (still historically high despite the recent falls in the price of oil) and weaker interest from business clients. All this has led Michael O'Leary, vocal boss of the budget airline Ryanair, to predict that only four European airlines – Air France, British Airways, Lufthansa and of course, his own – will survive the impending maelstrom.

Aer Lingus, the Irish flag carrier, will not be surprised to have missed Mr O'Leary's list, but does concede that things are "exceptionally tough" both for the industry and for the company specifically. In a market update yesterday the group said that its attention was on managing costs: plans to increase the long-haul fleet to 11 planes by next year have been shelved, with the group announcing that the number will actually be reduced to eight. Services between Dublin and Los Angeles have been cut, with overall long-haul capacity for the coming winter slashed by 11 per cent.

Despite the rather bleak picture, investors can take some comfort from Aer Lingus. The shares are held in big blocks, with Ryanair and the Irish government holding more than 55 per cent between them. This should protect the stock from wild movements, and as such Aer Lingus is not a bad airline to hold.

Moreover, according to Davy Stockbrokers, "the shares in Aer Lingus continue to be cheap... A combination of aircraft, Heathrow slots and cash [there is €800m on the balance sheet] certainly results in valuations well north of €2."

However, with the exception of aviation enthusiasts, it is tricky to see why buyers would want to hold anything in the industry at all. The flight to quality that investors traditionally seek in a downturn should not include Aer Lingus, or any other carrier. Sell.

SCI Entertainment Group

Our view: Hold for now

Share price: 22.5p (-0.5p)

This month, the video game maker SCI Entertainment will launch the latest instalment of its series of Tomb Raider games. Sadly, Tomb Raider has not done for SCI what it has for the actress Angelina Jolie, with the company's stock price sinking by 93 per cent in the past 12 months. There was, however, better news yesterday when the group issued a trading update saying that it was still in line to hit full-year targets.

Investors might think that the low rating presents a great opportunity, especially with the imminent launch of the new game. Indeed, the shares are cheap compared with others in the sector, and Time Warner has been building a stake in the company, but we would wait to discover what its intentions actually are and for sales figures from the group's eggs-in-one basket Tomb Raider. Hold for now.