Tunnel is a black spot for BAA

BAA confirmed the perversity of markets yesterday, rising 13p to 482p on worse-than-expected September traffic figures and a profits downgrade from UBS, the broker. As usual it has made sense to sell on the expectation of bad news and buy once it is confirmed.

Actually, the 3.4 per cent rise in passenger numbers in September compared with the same month last year disguised strong growth from most of the routes using BAA's seven airports. The fly in the ointment was European flights, which grew by only 1.2 per cent, clobbered by the popularity of the Channel Tunnel's rail routes to Paris and Brussels.

As a result, UBS cut its pre-tax forecast for the year to March by pounds 20m to pounds 410m. It wiped a similar amount off the following year's forecast, now pencilled in at pounds 460m.

The shares bounced partly out of relief that the traffic numbers and downgrade were no worse. Over the past three months, the shares have underperformed the rest of the market by 7 per cent. Over the past month they have slipped almost a tenth from 532p, lagging the market by a similar margin.

Long-term, the outlook is still bright for the airport operator cum retailer. It enjoys highly reliable income from both its main activities, volumes are likely to remain buoyant as the airlines fight tooth and nail for market share, slashing prices in the process, and BAA's market remains attractively wealthy and captive.

A large slug of the company's income comes from duty-free retailing, where it enjoys gross margins of perhaps 70 per cent. It is little wonder that the shares have been such strong performers over a longer time frame.

On a prospective price/earnings ratio of 14 to March 1997, the shares stand at a small premium to the rest of the market but are much less highly rated than usual. After their recent weakness they remain attractive.