The four companies in the FTSE 350’s industrial transportation subsector are an incongruous bunch, comprising businesses involved in everything from parcel delivery to nuclear decommissioning and aviation. Equally disparate were the constituents’ share price performances in 2016 – a trend we think will continue this year – as BBA Aviation (BBA) and marine services provider James Fisher (FSJ) steamed ahead of Royal Mail (RMG) and shipbroker Clarkson (CKN).
The latter pair has been treading water in some intensely competitive sectors. Even though the bonus-linked salary structure of many of Clarkson’s employees helps to take some pressure out of the cost base, shipping markets remain dogged with overcapacity. The trading waters are so choppy that the group was forced into a profit warning in July, just three months after analysts roundly upgraded earnings forecasts. Nevertheless, consolidation has left the group the dominant player in global ship broking, and its dollar earnings make it a preferred stock for UK investors.
Overcapacity is also a running theme in the UK parcels market, where Royal Mail is locked in an arms race while presiding over the steady decline of its lower-margin letters business. And while we are told that the company is now “past the peak of investment”, investors’ nerves may have been jangled in November when the success of a cost-saving programme was described as dependent on the organisation’s “absorbable rate of change”.
Change had certainly been in order at BBA Aviation, after the airline services company diluted shareholders in 2015 in order to acquire rival airport services provider Landmark Aviation. The logic for that deal appears to have been vindicated by improving underlying earnings and decent prices for the divisions BBA has been forced to sell. Despite this, sentiment for the largely dollar-earning stock has continually improved in the past year, and while we remain concerned about the group’s high debt ratios, a recently inked deal with Gama Aviation (GMAA) suggests management is charting routes out of the morass.
| Price (p) | Market value (£m) | PE (x) | Yield (%) | 1-year change (%) | Last IC view | |
| BBA Aviation | 285 | 2,939 | 15.5 | 3.1 | 79.4 | Hold, 285p, 3 Jan 2017 |
| Clarkson | 2,230 | 674 | 18.5 | 2.8 | 3.6 | Hold, 2,195p, 16 Aug 2016 |
| Fisher (James) | 1,585 | 795 | 23 | 1.6 | 45.4 | Hold, 1,556p, 1 Sep 2016 |
| Royal Mail | 449 | 4,494 | 21.1 | 5.0 | 4.6 | Hold, 470p, 21 Nov 2016 |
Favourites: While we believe the sector offers little in the way of clear value, this can be a feature of lumpy and sometimes opaque contract negotiations. Momentum can be a useful indicator, and so a repeat of James Fisher’s strong recent track record in contract wins in very niche areas of marine services may be one source of broker upgrades.
Outsiders: For a company with an unrivalled distribution network and implicit state-sponsorship, our rather dim view of Royal Mail’s future might look like an oversight of the group’s defensive qualities. But intense competition in UK parcels means that the group’s opportunities for near-term growth have been limited to foreign acquisitions, a strategy now hampered by a weaker pound. As for the domestic business, Amazon (US:AMZN) looms large.
