Investment Column: In a bad world, arms maker BAE is a buy
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Your support makes all the difference.BAE
Our view: Strong buy
Share price: 341.3p (-0.3p)
Yesterday's confirmation that BAE Systems has failed to win the follow-on contract for the US Medium Tactical Vehicles (MTV) programme sounds like bad news, particularly as it will leave a £592m impairment in its annual accounts, to be published on Thursday.
It might also sound like bad news that the world's second-biggest defence company has just been fined £285m to settle a six-year bribery and corruption inquiry covering, among others, its activities in Tanzania, the Czech Republic and Saudi Arabia.
But the MTV contract was already long-known to have gone elsewhere, while the write-down pushed BAE's shares a mere 0.3p lower yesterday. And the corruption fine is the best possible outcome to the fraud probe this side of an unexpected exoneration. The Serious Fraud Office (SFO) inquiry meant years of uncertainty – at best about the size of any potential fine; at worst as to the implications of any criminal conviction for existing and future business, particularly in the US.
The admission of guilt may not feel good and the fine may sting (though there are predictions of a £261m pensions windfall in the US that will take much of the pain away). Either way, the settlement draws a line in the sand. The market signalled its relief with a 5 per cent jump in the share price on the day the fine was announced, taking BAE's stock to 348p.
The loss of the MTV deal is costly for BAE, even when the group is expected to post profits up 16 per cent at £2.2bn. Also on the downside are Britain's woeful public finances and the looming Strategic Defence Review, which make for tough times ahead.
However, the real prize is the growing US defence market, where BAE already makes more than half of its revenues. Taken together with the end of the SFO uncertainty, and trading at less than 8.5 times forecast full-year earnings, BAE is a strong buy.
Fidessa
Our view: Hold
Share price: 1330p (+30p)
Judging by the billions of pounds that are likely to be trousered by bankers in the coming weeks as the bonus season gets underway, the financial services industry must be back in some sort of shape, even if it is all thanks to Johnny Taxpayer. Nonetheless, a healthier financial sector is good news for ancillary businesses that hawk their wares to the banks, including Fidessa.
The company, which supplies markets with trading platforms, data and "decision support", said yesterday that increased competition between exchanges had boosted demand for its software. Its full-year results also detailed a better-than-expected £36.2m profit.
What will have grabbed the attention of investors, however, was its special dividend of 40p per share (yes, a special dividend, remember them?), which sent the stock into positive territory. Investors have made barrow-loads of money out of Fidessa in the past 12 months, with the stock putting on nearly 110 per cent.
But while we would cheer the gains, it may also be time to lose a little enthusiasm. Largely as a result of the shares' strong performance, Fidessa is beginning to look expensive. Analysts at RBS say that the shares trade on a 2010 enterprise value to Nopat [net operating profit after tax] of 19.1 times, which represents a material premium to the sector, which stands on 14.5 times. They say the company's margins are being understated and there is some truth in that view.
While we respect Fidessa, it offers only an anaemic dividend yield of 2.3 per cent. We would wait for a little profit-taking to bring the shares down to a more sensible level before we would add to our interest in what is an otherwise excellent company, so hold.
Playtech
Our view: Buy
Share price: 478.25p (+7.5p)
We are celebrating a success with Playtech, which we tipped as a buy at the start of September when its share price was 347.75p. The company, which sells software to the gaming industry, is worth a fresh look, having bought Virtue Fusion for up to €41.5m (£36m) yesterday. This is important because the deal makes Playtech a market leader in bingo. Regulators tend to see bingo as a softer game format than casinos or poker, and this means that having a compelling bingo product is a vital string to the bow of anyone trying to crack liberalising but regulated markets such as Italy or Spain.
The acquisition should also enable Playtech to start cross-selling between its poker/casino and bingo clients, making this deal look even more attractive. Even after the shares' strong recent rise, they are still more than fairly priced at 12 times 2010 forecast earnings. They could easily be due for a re-rating if the company can exploit the potential of the deal, so keep buying.
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