Steel has no need of crystal ball :THE INVESTMENT COLUMN

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A year ago, British Steel was whingeing about state subsidies and flagrant undercutting by its continental competitors, while the European Commission attempted to knock heads together to bring order to the marketplace.

Yesterday, the worst abuse its chairman Brian Moffatt could point to was tiny Irish Steel, which employs 300 people in Cork and is seeking a pounds 50m subsidy from its government.

Far from berating governments for propping up inefficient companies, Mr Moffatt was praising them for the series of privatisations now under way, including Ilva in Italy and Usinor Sacilor in France, which he reckons will reduce the proportion of the industry in state ownership to under 20 per cent.

The steel crisis is clearly over, and the change in atmosphere over 12 months is quite extraordinary. It is amazing what a sudden rise in demand can do to a cyclical industry, by taking the pressure off closure programmes and rebuilding balance sheets as output and prices rise.

It is now a cast-iron certainty that market conditions will be favourable for another two and possibly three years, even if there is a pause or two in the rise - if the car industry stumbles or Eastern Europe's ageing steel plants start dumping.

The underlying issue for shareholders is the extent to which those growth years will be exploited to build up cash before the inevitable downturn and whether the relapse will be more muted than in the most recent recession.

On the first count, British Steel's track record speaks for itself. While European competitors have survived because of their government shareholders' deep pockets, British Steel has conserved cash and fought through on its own, to the point that last year, fresh from the recession, it could afford to expand its holding in Avesta Sheffield, buy GKN's stake in UES and acquire a rod mill in Scunthorpe.

On the second count, the biggest difference between this recovery and other recent ones is the rise in Asian demand, which has all but doubled in 10 years, and should underpin demand over the rest of the decade. Foreign investment last year was heavily concentrated in the US, and it will be a while before plans in Asia crystallise. But they represent long-term potential.

However, in any valuation these strategies must currently take second place to the company's financial performance. With a more or less guaranteed increase in pre-tax profits to maybe pounds 1bn this year, there is scope for a further sharp increase in the dividend. If it went as high as 10p, cover would still be 3.5, delivering a 7.5 per cent yield. On figures like that, crystal ball-gazing about the steel cycle becomes irrelevant. The shares have further to go on dividend grounds alone.

Losses are good news at Airtours

The market's sanguine reaction to Airtours warning on summer holiday sales - the shares fell just 2p to 418p - confirms that the real problems are likely to be faced at the bottom end of this highly fragmented market.

Competing on price against the big boys - Airtours, Thomson and First Choice - is not an option for the thousands of independent travel agents and tour operators. The top three control around 70 per cent of the overseas packaged holidays market and what they say goes.

Paradoxically, the increase in Airtours' half-year losses from pounds 11.8m to pounds 25.3m can be seen as good news, implying higher levels of activity and larger deposits paid out to airlines and hotel owners. The key statistic is an increase in market share, from 20.2 to 21.3 per cent, confirming the increased stranglehold of the largest players on the market.

But even at Airtours, margins are likely to be squeezed as the industry enters its customary last-minute dash to sell the remaining 2.5 million high-season summer holidays.

Late booking by the 25 per cent of British families who now buy packaged holidays has become habitual over the last 10 years, ever since International Leisure Group's audacious price war against Thomson underlined the benefits of waiting until the last minute.

Where Airtours scores over its smaller competitors is in its diversification from a two-branded tour operator to a fully vertically-integrated company, with five main earnings streams - retail, tours, hotels, a couple of cruise ships and an airline. In theory, if one leg stumbles, the others pick up the slack.

Airtours still has the scope to squeeze more profit out of the UK. Lucrative foreign exchange bureaux, for instance, have only recently been incorporated into its travel agencies, and the company has yet to make serious inroads into the long-haul market.

The door to more robust growth through acquisitions on the Continent is also still open after the successful purchase of Scandinavian SLG group.

Analysts reckon Airtours will raise full year profits from pounds 52.7m to more than pounds 85m. The shares trade on a forward p/e of 9 and yield a gross 3.6 per cent on expectations of a 17 per cent rise in dividends to 14p.

If earnings continue to grow at that pace, the market will rerate the shares and, having fallen 28 per cent since February 1994, they are good value.

Filofax advances

in good order

The history of Filofax, maker of the personal organiser that became the ultimate yuppie accessory, is a typical 1980s story of boom and bust. This one, however, appears to have a happy ending. The renaissance continued yesterday when the company announced pre-tax profits up 51 per cent to pounds 4.9m in the year to March on sales of pounds 31m. Since the dark days of 1990, the shares have risen almost 20 times from 13p to 232p.

Filofax has deliberately dropped the status-symbol image. The biggest buyers are now housewives and the prices have changed accordingly. In 1987 the cheapest organiser was pounds 57 - it is now pounds 15. Nearly two-thirds of buyers are under 35 and 16 per cent are under 20, which should ensure a steady stream of customers into the future.

The company is confident that the UK market is not saturated - more than half of sales are of binders as opposed to inserts - and there is plenty to go at in Europe. Scandinavia is a strong market and Germany is targeted for growth from a low base. Filofax has been moving more distribution in-house since 1992 to gain more control over the way the product is marketed.

The Filofax faces competition from electronic organisers such as the Psion 3, but Robin Field, chief executive, believes that many people still prefer to organise their affairs on paper. To cover itself, Filofax is selling a small Texas Instruments electronic address system in some ranges in Sweden, an idea that may be introduced here.

Mr Field has also been diversifying. Though the core organiser business still accounts for 75 per cent of sales and profits, the company has spent nearly pounds 15m on acquisitions since 1992. The Ling greeting cards company acquired last July is doing well, as are the Drakes message books subsidiary and Yard-O-Led the upmarket pen-maker.

House broker Hoare Govett is forecasting profits of pounds 6.3m for next year, which puts the shares on a forward rating of 14.3. Not too demanding, given expansion prospects.

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