The Investment Column: BAA shares will take off when the duty free issue is resolved

IN COMMON with many former state-owned companies, BAA, the airport operator awaiting the outcome of the review into European duty free, is perceived as being unable to deliver earnings growth from its regulated asset base.

Since 1995 the shares have underperformed the market - despite investments in activities outside the regulated UK airports business. However, yesterday's annual results suggest the core business is BAA's most promising division. But investors expecting a re-rating should not hold their breath.

BAA's UK airports and their retailing activities account for 90 per cent of BAA's profits. Passenger numbers increased 7.6 per cent last year, ahead of expectations. Retail income per passenger rose by a meagre 0.4 per cent, but that masks an interesting upward trend. In the fourth quarter it grew 5 per cent as BAA stepped up its marketing and consumer confidence returned.

With air passengers set to increase by 5 per cent annually for the next 20 years, BAA has almost-guaranteed earnings growth from its UK airports such as Gatwick, Stansted or Heathrow's proposed Terminal 5. Meanwhile, it aims to grow income per head in line with inflation. These factors should more than mitigate the expected pounds 30m hit from the loss of duty free trading in Europe, expected on 1 July.

Yesterday the shares added 22.5p at 693p, well below their net asset value of 792p, and despite the optimistic outlook.

Part of the problem is perception. BAA is not seen as the defensive stock it is because of the uncertainty hanging over duty free, the hefty investment in the Heathrow Express rail-link and the impending departure of chief executive Sir John Egan. The other problem is the piecemeal nature of BAA's non-regulated activities which have tied up much of its capital in poor-performing activities.

BAA's core skill is managing airports, but it would run foul of the regulators by buying more UK sites. Local authorities in the US, BAA's target market, are loathe to sell airports. So Sir John has instead invested in disappointing overseas duty free activities, where most of the cut goes to the government, or on non-airport retailing in the UK. Combined operating profits from these are just pounds 61m.

With analysts forecasting pre-tax profits of pounds 490-530m and earnings of 37-40p next year, the shares are on a forward p/e of 17. Until Sir John's successor is named and the duty free situation is clarified, the shares are likely to continue to underperform.

Start your day with The Independent, sign up for daily news emails
Life and Style
love + sex A new study has revealed the average size - but does that leave men outside the 'normal' range being thought of as 'abnormal'?
Arts and Entertainment
TV
Voices
The Palace of Westminster is falling down, according to John Bercow
voices..says Matthew Norman
Sport
Steve Bruce and Gus Poyet clash
football
News
Graham Norton said Irish broadcaster RTE’s decision to settle was ‘moronic’
TV
Arts and Entertainment
Jake and Dinos Chapman were motivated by revenge to make 'Bring me the Head of Franco Toselli! '
arts + ents Shapero Modern Gallery to show explicit Chapman Brothers film
Arts and Entertainment
Kurt Cobain performing for 'MTV Unplugged' in New York, shortly before his death
music Brett Morgen's 'Cobain: Montage of Heck' debunks many of the myths
ebooks
ebooksA special investigation by Andy McSmith
Life and Style
life
Sport
Brendan Rodgers
football The Liverpool manager will be the first option after Pep Guardiola
News
Amazon misled consumers about subscription fees, the ASA has ruled
news
Arts and Entertainment
Myanna Buring, Julian Rhind-Tutt and Russell Tovey in 'Banished'
TV Jimmy McGovern tackles 18th-century crime and punishment
Arts and Entertainment
Paul Whitehouse as Herbert
arts + ents
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Recruitment Genius: Sales Executive - OTE £40,000

£15000 - £18000 per annum: Recruitment Genius: This is a great opportunity for...

Austen Lloyd: Law Costs HOD - Southampton

£50000 - £60000 per annum + Excellent Salary: Austen Lloyd: An outstanding new...

SThree: Recruitment Resourcer

£20000 - £21000 per annum + uncapped commission: SThree: As a graduate you are...

Ashdown Group: Junior Application Support Analyst - Fluent German Speaker

£25000 - £30000 per annum + benefits: Ashdown Group: A global leader operating...

Day In a Page

Syrian conflict is the world's first 'climate change war', say scientists, but it won't be the last one

Climate change key in Syrian conflict

And it will trigger more war in future
How I outwitted the Gestapo

How I outwitted the Gestapo

My life as a Jew in wartime Berlin
The nation's favourite animal revealed

The nation's favourite animal revealed

Women like cuddly creatures whilst men like creepy-crawlies
Is this the way to get young people to vote?

Getting young people to vote

From #VOTESELFISH to Bite the Ballot
Poldark star Heida Reed: 'I don't think a single bodice gets ripped'

Poldark star Heida Reed

'I don't think a single bodice gets ripped'
The difference between America and Israel? There isn’t one

The difference between America and Israel? There isn’t one

Netanyahu knows he can get away with anything in America, says Robert Fisk
Families clubbing together to build their own affordable accommodation

Do It Yourself approach to securing a new house

Community land trusts marking a new trend for taking the initiative away from developers
Head of WWF UK: We didn’t send Cameron to the Arctic to see green ideas freeze

David Nussbaum: We didn’t send Cameron to the Arctic to see green ideas freeze

The head of WWF UK remains sanguine despite the Government’s failure to live up to its pledges on the environment
Author Kazuo Ishiguro on being inspired by shoot-outs and samurai

Author Kazuo Ishiguro on being inspired by shoot-outs and samurai

Set in a mythologised 5th-century Britain, ‘The Buried Giant’ is a strange beast
With money, corruption and drugs, this monk fears Buddhism in Thailand is a ‘poisoned fruit’

Money, corruption and drugs

The monk who fears Buddhism in Thailand is a ‘poisoned fruit’
America's first slavery museum established at Django Unchained plantation - 150 years after slavery outlawed

150 years after it was outlawed...

... America's first slavery museum is established in Louisiana
Kelly Clarkson: How I snubbed Simon Cowell and become a Grammy-winning superstar

Kelly Clarkson: How I snubbed Simon Cowell and become a Grammy-winning superstar

The first 'American Idol' winner on how she manages to remain her own woman – Jane Austen fascination and all
Tony Oursler on exploring our uneasy relationship with technology with his new show

You won't believe your eyes

Tony Oursler's new show explores our uneasy relationship with technology. He's one of a growing number of artists with that preoccupation
Ian Herbert: Peter Moores must go. He should never have been brought back to fail again

Moores must go. He should never have been brought back to fail again

The England coach leaves players to find solutions - which makes you wonder where he adds value, says Ian Herbert
War with Isis: Fears that the looming battle for Mosul will unleash 'a million refugees'

The battle for Mosul will unleash 'a million refugees'

Aid agencies prepare for vast exodus following planned Iraqi offensive against the Isis-held city, reports Patrick Cockburn