THE INVESTMENT COLUMN

Soaring BA is still good value

Is British Airways a growth stock or a cyclical recovery play? More to the point from an investor's perspective, should the company be valued on a discount because it is currently riding high on buoyant economic growth in most markets of the world (and set for a fall), or on a premium because it is one of the likely beneficiaries of perhaps two decades of strong growth in air passenger traffic?

There's no answer of course, and the view you take on that question will determine whether you agree with the handful of City brokers recommending selling the stock, the similar number of buyers or those who haven't a clue. The range of views currently being espoused, despite broad agreement on prospective profits growth, makes for a healthy market even if it is guaranteed to confuse.

Interim figures yesterday from the world's favourite airline continued the good news of three months ago with second-quarter figures the best- ever 12-week result. Interim pre-tax profits of pounds 430m (pounds 349m) were up an impressive 23 per cent. Earnings rose by a similar proportion to 33.8p (27.2p), allowing a 10 per cent hike in the half-time dividend to 3.85p (3.5p).

For the first time since the late 1980s the balance between capacity and demand appears to be moving towards a sustainable equilibrium. The aircraft which spent the early 1990s mothballed in the desert are now carrying record numbers of passengers, with load factors (bums on seats) of almost 77 per cent, helping turnover through the pounds 4bn mark for the first time in a six-month period and generating cash flow of more than one and half times operating profit.

Importantly, first-class and business passengers, who generate the fattest margins, are on the increase.

It is not all complimentary champagne, however, with uncertainty hanging over BA's stake in USAir and losses from the European alliances still mounting up, if at a slower rate. Robert Ayling, the bright young heir apparent, admits that the company has a long way to go before it can claim to have shaken off its old state-run, bureaucratic shackles. Selling costs and pay are rising at a fair lick.

But those are small quibbles in the context of strong growth in passenger numbers, which some forecasters estimate at more than 6 per cent a year for the next 20 years. Compounded up, that represents a massive increase in the size of BA's target market, a growth that few if any relatively mature industries could dream of matching.

Pre-tax profits of perhaps pounds 580m for the year to March put the shares on a prospective price/earnings ratio of about 11. That is not asking a lot, and the shares, which at 468p have all but quadrupled since flotation in 1987, still look good value.

Oily strategy pays off for ABF

Food manufacturers have had a grim time of late, hit by a rise in raw material costs and the increasing power of the supermarkets, which has made price increases a forlorn hope.

This could have been the story at Associated British Foods had Garry Weston not wisely continued to reduce the group's reliance on the grocery giants. Fifteen years ago, 60 per cent of ABF's business was with the big grocers. Now it is 20 per cent and falling.

Although ABF is still Britain's biggest baker, it has moved more into food ingredients such as edible oils and fats as well as sugar - keeping it at a safer remove from the supermarkets. In July it paid around pounds 100m for Kraft Foods' US edible oils interests. Last year it bought the US operations of Karlshamns, the Swedish foods group. More deals in this sector are expected and, with a pounds 600m cash pile, the company has plenty of firepower.

The strategy appears to be paying off, with pre-tax profits for the year to September up by 16 per cent to pounds 375m. The figures were boosted by a pounds 48m increase in investment income and British Sugar turned in its customary solid performance, with profits up by 10 per cent to pounds 184m.

But ABF has also turned the corner in some of its problem businesses. Allied Bakeries lifted profits after five years of decline. A 3 per cent price increase in January has stuck, just as well given that packaging prices rose by 25 per cent over the year.

The power of the supermarket is nowhere better illustrated than in ABF's ice cream business. In spite of a 17 per cent increase in sales - thanks to the summer heatwave - the division didn't make a cent.

Retailing profits increased by 8 per cent to pounds 55m. However the group's Northern Ireland supermarket chains, Stewarts and Crazy Prices, may come under pressure from Tesco and Sainsbury, which are moving into the region.

Unlike many of its peers, ABF shares have enjoyed a good run this year, rising by more than 20 per cent. Yesterday they closed 13p higher at 701p. Merrill Lynch forecasts profits of pounds 400m for the current year, which puts them on a forward rating of 12. Unlikely to excite but a steady performer to tuck away.

Profits blow

at Hickson

No summer would be complete without a disaster at Hickson International. The plant explosions which hit the West Yorkshire chemicals group in successive years in the early 1990s were replaced last time by the loss of the contract with Unilever to supply the catalyst at the centre of the "soap wars".

A little later in the season this year, Hickson has hit the market with news of production and marketing problems - expected to wipe out second- half profits for 1995 - the departure of chief executive Dennis Kerrison and the axing of this year's final dividend.

The news was all the more disappointing after the relative confidence expressed at the interim results in August. It now looks as though the pounds 6.1m half-year profits - themselves little more than half the 1994 figure - will equal the trading outcome for the year, with exceptional charges plunging the pre-tax figure to a loss of around pounds 17m.

The group's problems clearly defeated Mr Kerrison, but it remains to be seen whether the latest moves will be radical enough to correct them. One of the central issues is the 80-year old Castleford site, which is potentially the group's biggest profit generator but is running at 60 per cent capacity after being plagued by plant failures all year. Yesterday's appointment of a full-time manager for the operation should help, but necessary investment may be constrained by current gearing of around 60 per cent.

Meanwhile, the legacy of the detergent catalyst debacle continues. PharmaChem in Ireland is still struggling to find a replacement for the Unilever order, which represented a third of group profits. The decision to exit from some underperforming operations, kicked off by the $33.5m sale of Hickson Kerley in the US announced yesterday, should help to eliminate losses and cut the interest bill.

Profits of say pounds 12m in 1996 would put the shares onto a prospective multiple in the mid-teens. That represents a premium compared with the market and Hickson's peers, but the shares are probably still just worth holding in case vague bid hopes turn into something more concrete.