The Investment Column: Surprise cash call should make investors wary of Balfour Beatty
Aer Lingus; Informa
Friday 16 May 2008
Our view: Hold
Share price: 439.75p(-13.75p)
It is difficult to keep Balfour Beatty out of the news. Whether it is being investigated by the Office of Fair Trading, along with others as part of the investigation into tendering arrangements in the construction sector, or yesterday's out-of-the-blue announcement of a £180m rights issue, the company has a habit of making the headlines.
The new equity for the construction group led to a 3 per cent drop in the stock and was described by analysts as "surprising" and "cheeky". In a trading update, the group said the money is to fund acquisitions. Experts do not think there are any firm plans, adding that there is already plenty of spare cash, between £130m and £150m, on the balance sheet.
The move will have annoyed existing shareholders, especially as it looked opportunistic. On the other hand the company is performing well, and in the statement the group said it will come in at the top of analysts' expectations for the full year, with the order book already showing £11.4bn worth of contracts.
The company is in good shape, but it already trades at a premium to its peers, with watchers saying that the shares are already fully valued. According to watchers at Panmure Gordon, the group trades at 11.4 times earnings, against a weighted sector average of just under 10 times. Stocks such as Interserve and Carillion offer better value, they say, adding that it is difficult to see how Balfour Beatty's value will grow.
Others are a little softer on the group. Observers at Kaupthing, while conceding that the group is valued "a long way ahead of its peer group," say that the premium is justified because Balfour Beatty has little exposure to residential building contracts, and anyway, the group is the benchmark for the industry.
On a fundamental basis, the group is a pretty safe bet. The problem for investors currently without the stock is that there is no room for the shares to grow, especially if, at the first instance of favourable-looking markets, the company issues more equity. Hold.
Our view: Sell
Share price: 189p(unchanged)
A slowdown in consumer confidence, plus oil prices hitting 120-odd dollars a barrel, plus a credit crunch, equals a nightmarish scenario for airlines.
And on a fundamental basis there are few reasons to suggest why investors should buy the Irish flag carrier Aer Lingus. It is not a special airline and it is exposed to the same risks as each of the others. Buyers with the option to buy across a host of sectors may well wish to buy stocks in more defensive markets.
However Aer Lingus, which yesterday posted a 10 per cent increase in revenues for the first four months of 2008 with passenger numbers up 11 per cent in the sameperiod, argues that it has a compelling investment case. The company's shares are held by a limited number of owners; the Irish government holds about 25 per cent, while Ryanair has a stake of just short of 30 per cent. As such, the stock is illiquid, which means that it tends to fall less during bad times. This makes the group a defensive option versus the rest of thesector.
Aer Lingus is trying to mitigate high fuel prices, which the head of corporate affairs, Enda Corneille, concedes are here for the long term. But, he points out, even the group's fuel surcharge covers only 50 per cent of the extra cost per passenger.
Goldman Sachs says that Aer Lingus is "easily the cheapest airline we cover... [it] has a strong balance sheet and on our estimates its estimated 2008 forward P/E is just 3.6 times." Lufthansa trades at 9.9 times.
The problem with Aer Lingus is that it is an airline, and every airline is struggling. Against the rest of the sector, Aer Lingus is a buy. In an open market, it is not. Sell.
Our view: Hold
Share price: 374p (-9.75p)
The publishing sector has had a pretty rough week, and no doubt investors will still feel bruised by news of Johnston Press's difficulties on Wednesday.
The other media stocks are exposed to the same troubles, but some, such as the publishing and events group Informa, are making good progress: a trading statement yesterday said that the group is trading in line with expectations.
The chief executive, Peter Rigby, reckons the market does not give Informa enough credit for its exposure to booming sectors such as the Middle East, and says that the £1.1bn debt is manageable. As a media stock, the company is well diversified, and watchers at Numis "continue to believe the group to be more resilient than a market rating of 9.5 times 2008 [earnings] suggests".
One thing that could persuade reluctant investors is news that private equity, in the guise of Carlyle and Apax, are circling the group, and that would help the share price if the rumours persist. Mr Rigby, probably disingenuously, argues that the buyout firms cannot afford them.
Yesterday's update says that the company's markets, particularly in the US, are expected to slow. That said, Informa does look better than its rather cheap rating. Hold.
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