Make Balfour Beatty into a buy

Take profits on Amlin while going is good; Centaur worth a look now that it's trading

The private finance initiative has established itself firmly as the Government's favoured way of setting up major building projects such as new schools, hospitals and roads. It tempts private consortia into stumping up the initial investment in return for long-term contracts to run the resultant facility.

The private finance initiative has established itself firmly as the Government's favoured way of setting up major building projects such as new schools, hospitals and roads. It tempts private consortia into stumping up the initial investment in return for long-term contracts to run the resultant facility.

Balfour Beatty has established itself as the gold standard partner for the Government. Partly that is because of its sheer scale. With interests that span project design, construction, maintenance and facilities management, Balfour can plan, build and maintain many PFI assets on its own, as it does the Edinburgh Royal Infirmary, for example. But it is also because the group doesn't slip up often.

Not often. Investors need to remember that public sector work is high profile, politically charged and reputations can be lost in an instant. This company has recovered its poise since the fatal Hatfield rail crash happened on its track maintenance watch, but it and some former employees have been charged with manslaughter. It denies the charge, and its culpability - and reputation - will be tested in court next year.

Balfour appears a big enough company to withstand shocks. Network Rail's decision to take routine track maintenance in-house, for instance, barely dents the revenue line and there will be opportunities to re-use its expertise abroad instead.

PFI revenues are highly predictable, giving confidence in the future. In addition, there is potential for the assets themselves. Unlike rivals, Balfour plans to hang on to the £180m of PFI and similar investments on its books, rather than try to sell them immediately. But as a market for these assets develops, the City is likely to factor in their value to Balfour.

Margins across the group are better than many rivals, but they could be improved, particularly in the engineering division and in the newly-acquired American construction business Mansell. With £124m of cash in the bank, there ought also to be overseas acquisitions to bolt on this year.

On a price-earnings multiple of 10.5, with a dividend yield of 3 per cent, this is a buy for the long-term.

Take profits on Amlin while going is good

The past few years have been short on natural disasters, long on fears about madman-made atrocities. Insurance has been in demand, while insurance pay-outs have been falling. No wonder Amlin, one of the leading insurers operating in the Lloyd's of London market, put in such a stonking financial performance in 2003. Profits more than doubled to £120.3m.

Can it last? The effect of soaring premiums will continue to show in profits for a couple of years to come, yes. But, while the company talked about "discipline" in its results, meaning the industry is not yet settling for lower premiums in many of the insurance lines it offers, some rates are off their peak.

Amlin is undoubtedly an efficient outfit, focusing on increasing margins rather than chasing new business. But is everyone this sensible? The increase in underwriting capacity since the 11 September attacks means the stock market will soon start anticipating a downturn, even though Amlin can trumpet good returns on capital for another two years.

Amlin is also way behind the curve in creating a non-Lloyd's operation. A dividend hike yesterday takes the likely 2004 yield to 4 per cent, but this is a top-of-the-cycle payout rather than a forever-sustainable one, and the shares, at 163.5p, are expensive on other measures.

Take profits.

Centaur worth a look now that it's trading

After much controversy, Centaur shares started trading yesterday. The company publishes business and trade magazines, with titles including Design Week, Money Marketing and The Lawyer.

The reason the float proved controversial was that an auction of the business by its private owners was won by Numis, the stockbroker. To the surprise of many, the Numis bid, at £145m, was much higher than offers from at least three trade buyers - Incisive Media, Emap and United Business Media. Not only was it odd that a financial buyer, with no synergy benefits, could beat industry players but Numis was broker to Incisive, which was furious at what it saw as a betrayal.

Numis planned an "accelerated IPO" - buying Centaur on behalf of a consortium of investors to whom it would pass on the shares at an immediate stock market flotation. Not only did the broker manage to pull off the company's float at a value of £148m, but the shares closed up 2.5 per cent at 102.5p.

Successful business-to-business publishing depends on having really good brands in the sectors that you address, preferably the leading magazine in a "space". Here Centaur scores very well.

Investors who backed the IPO are banking on a pretty strong advertising recovery. There is gathering evidence that this is under way and further proof should be provided today with results from Incisive. Centaur's margins are significantly lower than those of many peers, so there is also significant scope for cost-cutting from what is regarded as a rather bloated cost structure.

Centaur shares are valued on about 20 times forecast 2004 earnings, which is a slight premium to rivals. Given the consolidation potential in the sector, that is still attractive. Buy.