BAA prospects still attractive

Investment Column

Some investors have never got to grips with BAA's split personality, and the market is still unsure whether to rate the airports operator as a transport group, retailer, or even as a utility. It is, of course, all of the above and attractive because of it.

Yesterday's 4p fall in the share price to 483p can be put down to worries about deferred tax charges rather than underlying trading problems. In fact, there was nothing in yesterday's figures to suggest that BAA's two fundamentals - its retail and passenger sides - are faltering at all.

Pre-tax profits rose 13.7 per cent to a record pounds 366m in the year to March. Passenger numbers at BAA's seven airports rose a healthy 7 per cent to 87.7 million, a figure forecast to rise by the same amount this year.

Those captive travellers, generally wealthy, in a good mood and with time on their hands, produced gross revenue from retailing of pounds 513.8m, or a 10 per cent rise in net retail income of pounds 361.9m and a 2.6 per cent rise on a per-passenger basis to pounds 4.14 (pounds 4.04).

The increases look good when it is considered that retailing was hit for much of the year by building work at most of the airports. With such handicaps removed, BAA should be able to achieve 4 per cent growth in spending per head in the current year.

Longer term, however, BAA needs to expand overseas and it was disappointing that nothing new was said about international plans yesterday. Sir John Egan, chief executive, left nobody in any doubt that he would tap shareholders for cash when the right investment turns up, but conditions for such a move could be some way off.

BAA currently runs retailing at Pittsburgh airport in the United States. The operation produces profits of just pounds 1m a year, leading some analysts to question whether the effort is worthwhile, but it does act as a showcase in America. BAA is also close to winning a management contract to run Indianapolis airport.

That would be a big break in a land where airports are tightly controlled, but it is not, of course, the same as owning an airport. For that, BAA's best hope is to aim for the forthcoming privatisation of airports in Australia.

UBS has raised its profit forecast for this year by pounds 10m to pounds 430m. That gives earnings of 31.5p, implying a forward multiple of 15. Given the industry's long-term growth prospects, this is a deserved premium.