Why BAA needs to spread its wings

THE INVESTMENT COLUMN
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The Independent Online
BAA's results underlined the need for the UK airports operator to spread its wings to other parts of the world. It is not that the numbers were poor, but they did show the first signs of slowdown and highlighted the dangers of being exposed to the vagaries of one pretty mature market.

Pre-tax profits at half-way, up 10.9 per cent to pounds 294m, were a shade on the low side and boosted by pounds 9m worth of property disposals, as well as a higher rate of interest capitalisation, at pounds 27m, than the market had expected.

The good news - apart from the 10 per cent dividend rise - was that the retail division continues to grow, with revenues up 5.8 per cent to pounds 698m. Innovative marketing and the opening of new shopping outlets meant that income per passenger now averages pounds 4.10, up from pounds 3.96. Perfume sales from BAA's airports account for 20 per cent of the UK market, and a string of beauty centres is planned.

Passenger numbers in the first half rose 5.8 per cent, but the poor charter market for Mediterranean holidays and competition from the Eurostar train service took their toll. April's passenger growth was 11.6 per cent, but has slowed each month, ending with a 3.4 per cent increase in September.

Passenger numbers picked up slightly in October and BAA still believes it is on course for annual growth of 5-6 per cent, which looks achieveable given the 8 or 9 per cent growth its largest customer, British Airways, is producing.

But other domestic pressures remain, such as delays to the possible construction of a new terminal at Heathrow; and the collapse of the Heathrow Express tunnel always raises concerns about additional costs to BAA.

Future growth hinges largely on international expansion, and here progress is slow. BAA has secured management control of Indianapolis airport in the US, but hopes of taking over some of Australia's privatised airports are on hold while the government settles political in-fighting.

Full-year profits of about pounds 430m would give earnings of 31.5p, and a forward multiple of around 15.

The premium reflects BAA's long-term growth prospects, but that leaves it open to further hiccups. High enough.

British Steel

gloom justified

It is tempting to look at British Steel's almost fourfold increase in half-year pre-tax profits, 50 per cent dividend increase, prospective 7.9 per cent yield and forward price/earnings multiple of 4 and draw the conclusion that the market has overdone the gloom in knocking the shares 16 per cent off their recent high in less than two months.

Tempting, that is, until you look closely at the chairman Brian Moffat's statement about second-half trading and realise that, while the European steel market is not headed for free fall, the best that can be expected is a two-year plateau before recession sets in, perhaps in 1998. How often has an over-stocking blip, laughed off by over-confident company bosses, been the precursor of a full-blooded downturn?

Plainly, we are headed for the top of the steel cycle, even if more optimistic analysts believe this time will be a long flat peak followed by a less than usually severe slump thanks to the structural changes that have accompanied the move of much of the European industry from the state to the private sector.

That is the assumption lying behind British Steel's rapid acceleration of its capital expenditure progr- amme, which at pounds 400m this year matches the high rates of the late 1980s. Not everyone is as confident as Mr Moffat that late 1996 will be seen as the optimum time in the cycle for the company's Tuscaloosa plant in the US to come on stream.

It is a peculiarity of stock markets that the time to be most cautious about a share is when the numbers are moving smartly in the right direction, but the sub-text of the chairman's comments is worrying. A yield of almost 8 per cent is no good if the capital value of the shares falls even a small amount. Time to sell.

Sidlaw feeling

the squeeze

This year's profits collapse at Sidlaw appears to vindicate those who questioned management's ability to handle the pounds 79m acquisition of Court- aulds' packaging interests two years ago. That deal doubled the size of the company, turning a small Scottish mini-conglomerate into one of Europe's top five flexible packaging groups.

But since then the industry has been squeezed between soaring raw material costs and price deflation from its mainly food industry customers. The resulting pain apparent in Sidlaw's first-half results has continued into the second.

Pre-tax profits more than halved, from pounds 14.7m to pounds 7.27m in the 12 months to September. After a one-off pounds 5.24m loss on the disposal of the original jute business earlier this year and the pounds 2.14m cost of the rationalisation of the Courtaulds operation, Sidlaw slumped into the red.

Despite its effect on margins, management has persisted with a strategy of increasing market share. At the same time it has had to curtail capital investment promised after last year's pounds 23.7m rights issue to rein in gearing to 62 per cent.

The shares, up 7p to 155p, stand on a prospective multiple of around 17 if profits top pounds 8m this year. Shareholders who heeded cash calls at 275p and 180p since 1993 must hope recent buying from the aggressive investor PDFM might herald better times, or a takeover, or both.

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