Investment Column: Rolls-Royce's shares give cheer in the chill

Travis Perkins; Arena Leisure

Edited,James Moore@JimMooreJourno
Sunday 23 October 2011 07:08

Our view: Buy

Share price: 408p (+32.75p)

Rolls-Royce's view on the economy is not cheery. "The global trading environment remains very difficult and we believe the recovery is likely to be slow," Sir John Rose, the chief executive, said yesterday as the company published its first-half financial results. But the engine-maker still has plenty to be pleased about, and for investors it has attractive prospects.

Rolls-Royce's revenues for the first six months came in up by 17 per cent at £4.9bn, and underlying profits rose 9 per cent to £445m. Even better, the order book is bulging, up £2bn at a record £57.5bn at the end of the first half. And the group's interim payment of 6p per share is a 5 per cent rise from last year.

In part, Rolls-Royce is still feeling the benefits of the boom – engine sales lag aircraft orders, so are still coming through from before recession sent the world's aviation sector into tailspin. The sector is certainly the biggest worry, and the group is predicting a fall-off in profits for the division this year. But the dip in civil aerospace was more than made up for by stellar performances from the group's defence, marine and energy divisions in the first half, and Rolls-Royce yesterday confirmed full-year guidance for broadly flat profits.

Over the longer term, the group's potential is enormous, particularly in nuclear. Rolls-Royce was a big winner from the Government's £152m advanced manufacturing investment, launched this week, and one of the four new manufacturing sites to be built with its £45m slug will focus purely on nuclear.

The group is predicting a global civil market worth £50bn in 15 years' time, and last year set up a 450-strong division to be sure to get a piece of the action. And at a rating of 14.1 times next year's earnings, now is also a time for investors to get a piece of the action. Buy.

Travis Perkins

Our view: Hold

Share price: 795p (+95p)

Travis Perkins, the builders' merchant-to-DIY retail group, has endured a torrid 12 months, buffeted by the tornado ripping through the residential and commercial property markets in the UK. The group said tough conditions in the market had blown its pre-tax profits off course by 27 per cent to £90.4m for the six months to 30 June, but its operating margin of 8.1 per cent was ahead of City expectations. Furthermore, the group's weather vane signalled that conditions in some of its markets are beginning to stabilise and the trough will have soon passed. The star performer was the core DIY chain Wickes, which helped its retail division to grow earnings by 12.5 per cent over the quarter in a tough market.

While first-half trading in Travis Perkins' merchanting division was much worse, with earnings down by 32.7 per cent to £83.9m, the result could have been even more grim without the company's focus on trying to maximise gross margins and cutting costs.

The group has also reduced its net debt to £527m, following its £300m right issue in June, and its price to earnings ratio for 2009/10 of 14 – pre-yesterday's announcement – was lower than rivals Wolseley and St Gobain. The risk for TP's investors is that commercial property market stagnates for longer than expected. Yesterday, the group said there would be no "significant upturn" in construction activity before the end of 2010. While Travis Perkins will be one of the strongest survivors to emerge from the recession, the group will probably not pay a dividend this year and investors may want to consider seeing out potential further turbulence in the commercial property sector. Hold.

Arena Leisure

Our view: Buy

Share price: 26.25p (-0.5p)

When we last looked at Arena, in October, we were sceptical about its prospects. A lacklustre trading update had just been released and the shares were falling. Things have changed for the better since then. A blockbuster TV deal with SIS (which supplies pictures to bookies) has been signed, and the company's estate strategy, designed to deal with a surplus land bank, also seems to be coming good. Evidence of that came with the news that Shepway Council has recommended a development at Folkestone Racecourse that includes at least 400 homes. Developments at Lingfield, where a hotel and country club are planned, are also on schedule and on budget.

It's not all good news. The chill wind of recession is blowing through the racing industry and hitting corporate hospitality hard. Those still going racing are spending less, and at 27 times next year's earnings the shares look pricey. That is not the case: the TV deal and track developments should boost earnings greatly. So buy.

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