The Investment Column; Increase in traffic lifts BAA

Half-year figures from BAA, the airports operator, were hit by a welter of one-off distortions that made the interim profits look a lot worse than they really were. Stripping out the impact of the windfall tax, and ignoring decisions to rephase airport charges from the first to second half years and to stop capitalising interest on the Heathrow Rail link, pre-tax profits would have been almost 10 per cent better.

Reported profits of pounds 310m were actually only 2 per cent higher, lower than analysts' forecasts, and the reason for yesterday's 16p fall in BAA's share price to 518p. Declared earnings per share of 13.2p were well down on last year's 21.5p, but once again stripping out the unusual elements implied a much healthier 12 per cent rise, underpinning the 9 per cent dividend increase to 4.9p.

The underlying picture at BAA continues to be sound. The company is driven by traffic numbers, which remain on a relentless upward track. Passenger numbers at Heathrow increased by 4.5 per cent in the half year while at Gatwick, increasingly a hub of equal importance, numbers rose by 12 per cent.

Traffic is expected to grow by 7 per cent for the year, although the full benefit of that growth will be restricted by a strict new regulatory regime which limits traffic charge increases to RPI - 3 per cent. In effect that income must remain static while other costs, such as the price of staff which increased by 12 per cent in the period, push higher.

The other profits driver is the amount BAA can persuade its captive shopping audience to spend in its retail outlets. Underlying income from that source grew by 8.3 per cent during the period, with the growth coming from outside the duty and tax-free sectors where the strength of sterling limited the increase. In order to keep pushing this higher, and benefiting from tax-free sales after they are phased out in Europe, BAA recently acquired Duty Free International for pounds 423m. Although the deal increased the risk profile of what is to all intents and purposes a utility-type stock, Sir John Egan, chief executive, believes it will be earnings enhancing within three years.

BAA has suffered on two fronts recently, combining the disadvantages of being a pretty dull, low-growth company with the added disincentive of an uncertain regulatory environment. It is little wonder that the shares have done little over the past four years.

On the basis of full-year forecasts of around pounds 480m and pounds 520m for next year, the shares trade on a prospective p/e ratio of 14. They have fallen a long way since the summer, but compared with single-digit growth over the next couple of years, that is about fair.