The Investment Column: British Airways flies high on plans for Heathrow's T5

DIC Entertainment; Smiths News

Our view: Buy

Share price: 574p (+25.5p)

British Airways shares have soared 415 per cent over the past four years. In fact, in the past year alone they have risen 77 per cent. From a distance, it seems pointless investors buying into the airline, surely all the gains have already been had? Not true, says Merrill Lynch which yesterday moved its clients into the stock.

Key to the US broker's bullish stance on BA is the opening of London Heathrow's Terminal 5 in March of next year. By then, about 90 per cent of BA's operations will have been transferred from three terminals into the new T5. Merrill is convinced this move will lead to significant revenue and cost-savings opportunities for the airline.

First, the revenue opportunities. By working from three Heathrow terminals, BA finds itself at a competitive disadvantage to other carriers. This is because of the significant time its passengers need to make connecting flights. For example, BA recommends that customers need at least 75 minutes transfer time between Terminal 1 and Terminals 2, 3 and 4.

With the move to T5, passengers will be able to reduce the times need to make connecting flights significantly, allowing BA to close the gap between itself and competitors such as Air France and KLM, at Paris's Charles De Gaulle Airport, and Lufthansa, at Frankfurt. Merrill estimates that passengers with connecting flights account for about 35 per cent of BA's total traffic.

Now for the cost side of the equation. Although, the US broker admits that BA will face one-off expenditures because of the move, it also points out that it will be able to save a lot. Potential savings include the elimination duplicate activities, such as having to bus passengers between terminals and being able to reduce check-in staff numbers.

Overall, Merrill believes the new Terminal could boost BA's earnings by 27 per cent in 2009. Meanwhile, the airline should also receive a boost in the coming quarters from a lower fuel price and could also become involved in the consolidation of the airline industry. In recent months, there has been a takeover bid for Delta Air Lines from US Airways, and Australia's Qantas has received an approach from a consortium of private-equity companies. A takeover offer for BA should definitely not be ruled out.

DIC Entertainment

Our view: Hold

Share price: 158.5p (-34p).

DIC Entertainment, the children's character group, issued its second profits warning in three months yesterday sending its shares down to historic lows. To blame were weak audience figures for new shows on the CBS channel it runs.

DIC manages the US broadcaster's three-hour Saturday morning kids' slot in return for a share of the advertising revenues. Unfortunately, because of the poor viewing figures, the company has not been able to sell much advertising meaning there has been very little money for CBS to share with DIC.

Two profits warnings in such a short period of time is certainly very unnerving for investors. But it is worth noting that DIC does have a solid asset base, which should support its valuation. The group high-profile children's characters including Inspector Gadget and the Care Bears and a library of 3,200 half hours of children's TV animation. It just needs to figure out a better way to capitalise on them.

For those new to DIC, now is no time to be buying into the group. For existing shareholders, it is probably best they stick with the stock, although the road to recovery looks set to be a long one.

Smiths News

Our view: Hold

Share price: 147.25p (2.5p)

The theory behind the demerger of the Smiths News magazine and newspaper distribution business from WH Smith was that it would be able to work with publishing companies that would not have dealt with an operation attached to a book seller like WH Smith.

There has already been evidence that this strategy is working. In the autumn, it signed a contract with Waterstone's for handling the retailer's unsold books. Smiths News gets a fee for doing this and also makes money by selling these books on as opposed to pulping them.

This business has the potential to grow nicely in the years to come, but for now is small compared to the core of Smiths News which sees it distribute newspapers all over the UK.

Here, things are not so rosy. In fact, market conditions are very tough and are likely to remain so given the ongoing decline in newspaper circulation.

The past six months has seen profits warnings from both of the group's main rivals - Dawson and John Menzies. Against this background, the trading statement Smiths News put out at its first shareholder meeting yesterday, revealing a 6 per cent rise in sales for the first five months of its financial year, is rather good.

At 11 times forward earnings, and with a yield of about 4 per cent, its stock is worth holding.