EasyJet has flown high enough for now

Christian Salvesen; Havelock Europa looks good value

Since its stock market take-off in November 2000, Stelios Haji-Ioannou's no frills airline easyJet has had a smooth ascent. But the shares may have overshot their appropriate cruising altitude, and the risks of a stomach-churning correction are growing.

The company has been handing out good news as freely as its full-service rivals hand out peanuts. Yesterday's traffic statistics for March completed the picture for the first half of easyJet's financial year, and came in ahead of expectations yet again.

The airline carried 839,472 passengers last month, up 39 per cent on March 2001. The rise outstripped the rate of growth in February, and came with pleasing news on "load factor", the proportion of seats that easyJet filled on the average flight. That was 85.9 per cent, still comfortably ahead of the 80 per cent target the company set itself, if a little lower than in February.

They are truly great figures, and put growth by the national flag carriers to shame. It cannot have escaped anyone's notice that easyJet and its ilk have affected a dramatic change in the airline industry. The willingness of the travelling public to switch to no-frills operators should sustain growth for many years. EasyJet itself plans to quadruple the size of its fleet in six years, piling on additional routes and – as importantly – extra flights on existing routes that will make the airline more attractive to business travellers.

One risk is that it will strain its finances with the addition of new planes; another, that it will opt to diversify the fleet from its current reliance on Boeing and increase maintenance costs as a result.

But the main concern at this stage is over the market's forecasts of future growth. These vary considerably, and small changes in assumptions (such as fuel costs, to take a topical example) can have big effects on predicted earnings growth. The focus today, when easyJet plans to issue a pre-results update on its financial performance, will be on yield. How much have passengers been paying for their tickets? Or, another way, has easyJet been buying the passenger growth it boasted yesterday, cutting ticket prices in a way that depresses the airline's already wafer-thin margins?

It seems likely that easyJet's earnings growth will slow from its recent stellar pace, even without the additional competition that has been slowly feeding into the low-cost market. British Airways has been much derided for its promise to reduce fares on short-haul journeys, but it is at least showing awareness of the need to claw back market share from no-frills rivals. New launches such as BMIbaby, from British Midland, could become common, since barriers to entry are relatively low.

This matters, because easyJet shares trade on a multiple of this year's earnings at least in the high-20s and, on some forecasts, more than 30. That leaves no room for pilot error. Avoid.

Christian Salvesen

It is one of the great "if only"s of recent years. Christian Salvesen's management turned down a 200p-a-share bid for the haulage group back in 2000, just months before the start of an economic slowdown which sent the stock to a low of 77p last November. Shareholders look unlikely to see 200p again for quite a time.

There was another little squeal of pain from the company yesterday. The industrial division has continued to experience weak markets, it said. This reflects the downturn in the UK and mainland Europe in general engineering, and in particular the decline in production in the automotive sector. Profits aren't going to be up to the average of City forecasts.

There is broad agreement that Salvesen is pursuing the right strategy, trying to create a pan-European haulage group, with a pivotal business in Germany giving access to eastern European markets. But the company has messed up two of its three most significant acquisitions. The German business is still in intensive care, having closed four centres last month as the first stage in a two-year recovery plan. In Spain, too, there is some trimming to be done. The company is talking to its advisers about writing down the value of these acquisitions, a move that will hit profits.

There was better news yesterday on the consumer goods and food distribution side of the business. This has remained stable, but it is the lowest margin side of the business.

The shares have recovered from their lows and were 94p yesterday, raised up by the rally in cyclical stocks. It is true that a strong economic upturn will feed through quickly to profits but better times are still just over the horizon and the shares have got ahead of themselves.

The 200p bid was from Custos, a Swedish outfit which still has a 10 per cent stake in the business. It could well come back with another, presumably lower, offer. But with trading still dire, and a miserable track record, Salvesen shares are not tempting. Avoid.

Havelock Europa looks good value

Havelock Europa is a company "rejuvenated", says its chief executive, Hew Balfour. The shopfitter has had a torrid time of the last few years, as planning authorities put the brakes on massive new shopping centre developments and Marks & Spencer, one of its biggest customers, cut spending on capital expenditure as it fretted about its sales went hurriedly south.

New Havelock has been created by observing a couple of Blairite mantras: tough choices and education, education, education. The toughest choice was last year's decision to dramatically scale back its main shopfitting operations and close one of its two factories. And it has moved into the education market with the acquisition of ESA McIntosh, which fits out school laboratories. This is a growth area thanks to Tony Blair's enthusiasm for private finance initiative projects to refurbish schools. McIntosh already appears to have the Scottish PFI market sewn up.

The acquisition took Havelock's debt to eye-popping levels, and the company could find itself strategically constrained as a result. But an early sale of the Nottingham premises, probably for more than book value, should help and, as Mr Balfour has consistently pointed out, the company has its interest payments well covered.

The costs of closing Nottingham pushed Havelock to a £2.6m loss in 2001, but its broker, Teather & Greenwood, expects a £3.5m profit this year thanks to the lower costs in the main shopfitting business, a full-year contribution from McIntosh, and continuing strength in the Point of Sale division, which makes product displays for retailers and individual brands.

Management underlined their confidence in the company's prospects by hiking the final dividend by 20 per cent. At yesterday's price, 43.5p, the stock has a dividend yield of almost 5 per cent. On a price-earnings multiple of less than 5, the market is undervaluing the recovery potential. Buy.