The Investment Column : Regulatory cloud lifted from BAA

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The Independent Online
Sir John Egan, chief executive of BAA, was in upbeat mood at yesterday's presentation of interim results for Britain's dominant airports operator. With a relatively benign regulatory framework in place on airport landing charges, a big cloud has been removed from the group's horizon.

Sir John was also sounding confident about another issue that could act as a brake on the shares' progress - a Labour windfall tax on the privatised utilities. Sir John said he had received no word that BAA would be included in such a tax and analysts agree that with such a heavy capital expenditure programme, BAA is likely to escape.

That leaves only one potential problem - the possible end of duty-free shopping in Europe by 1999. Even here BAA is bullish, for if the concession is abolished BAA will be allowed to recoup some of the lost revenue by raising airport landing charges.

But far from backing away from duty-free, BAA is expanding its interests. It is expanding its international business outside of Europe and over the weekend announced the formation of a new company, World Duty Free, to develop its duty-free operations around the world. BAA says the worldwide duty-free market is worth pounds 21bn and has been growing at double-digit rates for the past few years. With a 5 per cent share of the market so far, BAA hopes to build that share with or without the European business.

The company also announced plans over the weekend to take over a number of UK contracts with Nuance, the former Allders International business acquired by SwissAir earlier this year.

All this accompanied decent figures for the six months to 30 September which contained few surprises. Pre-tax profits edged up by 3.4 per cent to pounds 304m. This reflected an adjustment of pounds 11m of airport charges which have been "re-phased" to the second half. On a like-for-like basis profits were 10.5 per cent ahead.

Passenger numbers at BAA's seven airports were up by 4.9 per cent to 8.7 million in October, although short-haul traffic in the summer was hit by a cut in capacity by the tour operators. Stanstead performed strongly and made its debut first-half profit.

Much of BAA's promise lies in its retail operations which account for 44 per cent of revenue. Retail income per passenger rose by 7.2 per cent to pounds 4.20, with perfume sales particularly strong.

BAA is also starting to show its abilities lie beyond just being a landlord. It is developing new formats of its own, such as Whiskies of the World. Forthcoming openings include Studio 55, aimed at high-spending Japanese passengers. With analysts forecasting full-year profits of pounds 455m, the shares, down 6p at 496p yesterday, trade on a forward rating of 15. Good value.

Sidlaw heads

out of the woods

New management at Sidlaw is at last showing signs of leading the group out of the woods it got into when it paid over the odds for Courtaulds' flexible packaging operations in 1993. That pounds 78m deal transformed Sidlaw from a minor Scottish mini-conglomerate into one of Europe's largest packaging companies and led management to make the fatal error of pursuing volume at a time when margins were being squeezed at both ends.

The old strategy contributed to losses which have deepened from pounds 112,000 to pounds 7.27m in the year to September. But since the October arrival of packaging man John Durston as chief executive, there are grounds for believing the worst may be over. Most immediately, the exceptional items which have scarred recent figures, rising from pounds 7.38m to pounds 8.23m in the latest period, should not recur and should lead to future benefits. Of the total last year, pounds 5.34m related to the net costs of the sale or closure of underperforming parts of the packaging division.

But more important to the group's revival is the path being laid down by Mr Durston, whose room for manoeuvre has been vastly increased by September's pounds 56m sale of the ASCo oil services business. At a stroke, that deal erases Sidlaw's former high gearing and throws up a pounds 16.5m profit, allowing him to pursue his stated strategy of seeking higher margin business.

He sees scope for expansion in growing areas with high barriers to entry like individual chocolate biscuit wrappers.

Growth rates of 2.5-4 per cent may not sound much, but they are better than the flat or declining sales typical in traditional mainstays.

He has set himself the demanding target of raising margins to around 8 per cent over the next two to three years from the low of 1.7 per cent hit in the second half of last year. But, boosted by hopes that in early 1997 he can push through the first price rises for four years, the omens for Sidlaw are better than they have been for a long time. Minimal profits of pounds 2.5m for the full year would put the shares, unchanged at 106p, on a stratospheric multiple of 35. Reasonable value for those brave enough to back the man even so.


being squeezed

Interim results from Uxbridge-based Prowting illustrate well the problems facing smaller housebuilders. In a rapidly consolidating sector, where greater size gives increasing economies of scale, only just being among the top two dozen of housebuilders is not an ideal position to be in.

Not even its location in southern England, where the housing market is relatively buoyant, has helped Prowting's cause. While the larger players such as Bellway and Westbury are reporting good profit and margin improvements, Prowting is going in the opposite direction.

In the six months to August, the pre-tax number almost halved from pounds 4.1m to pounds 2.2m on sales 17 per cent higher at pounds 59.2m. The maintained 1.9p dividend was uncovered by earnings per share of 1.6p (3.3p).

Prowting blamed an "extremely competitive" new homes market, where price increases have failed to match those secured in the second-hand market. Buyers still seem to have the upper hand and are driving a hard bargain, especially for new houses. As a result, margins remain under pressure, collapsing to 5.7 per cent from 11.3 per cent a year ago, even though the cost of part-exchange and other incentive schemes fell and the average selling price rose to almost pounds 90,000 from pounds 77,000, as more large houses in more expensive areas were built.

Prowting expects to complete 1,350 transactions this year, up from 1,217, but with the approach of a general election likely to lead to a house- buying hiatus and land prices registering annual increases of up to 50 per cent the outlook is less than promising.

House broker Panmure Gordon is sticking with its full year pre-tax forecast of pounds 7.7m (pounds 6m), implying a forward p/e ratio of 18 with the shares at 114p, down 1.5p.

That rating leaves little room for error. Unnattractive.