The Investment Column: Bid rumours lift ITV, but its shares are still cheap and its strategy sound

Peter Hambro has golden prospects but is in need of a pause for breath - Vanco's progress proves value of its virtual model
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The Independent Online

On a ghastly day for the markets, ITV shares were among just three risers in the FTSE 100 yesterday. Investors are increasingly convinced that regulatory changes and a new clarity of strategic vision will see this company through the turbulent times that lie ahead for television. That, and there is yet more talk of a takeover bid.

We are adding ITV to The Independent's portfolio of tips for 2005, which is in need of a new member after Morse passed through our stop-loss limit last week. Although ITV shares have already risen 18 per cent since the start of the year, we believe that the company's financial results will continue to pleasantly surprise.

Why? At first glance, the negatives are more obvious. The television audience is fragmenting as the take-up of Freeview helps to create multi-channel households among those that Sky and cable have failed to reach. But ITV's chief executive, Charles Allen, has launched ITV2 and ITV3 and plans a fourth channel to ensure that it keeps the group's audience share up, even if ITV1 is doomed to decline in an age of channel hopping. He also has evidence that ITV's audience share stabilises at about 20 per cent in multi-channel houses - lower than the high twenties it is used to, but far from disastrous.

Advertising revenues will fall in tandem with audiences as the shift to multi-channel households gathers steam, but there is an offsetting gain for ITV. Its formula for payments to the Government for its analogue broadcasting licences means that it pays gradually less as customers switch to digital.

Further out, ITV's public service broadcasting obligations are likely to be watered down, freeing up airtime for more lucrative programming.

Meanwhile, the combination of Granada and Carlton to form a single(ish) ITV last year will yield significant cost savings and help to generate substantial profits growth, even if the outlook for revenues is more mundane. At the current price, ITV shares trade on 16 times 2005's likely earnings, with that multiple falling to 15 times for 2006.

That is not an excessive valuation, given that its strong cash flows could make ITV attractive to a private-equity bidder (and a consortium led by Greg Dyke, the former director-general of the BBC, was being mentioned in City drinking dens yesterday). The business could also make a strategic acquisition for a US media giant in due course. We expect the shares to perform well for the rest of the year.

Peter Hambro has golden prospects but is in need of a pause for breath

Peter Hambro Mining has big ambitions to mine a million ounces of gold annually by 2009 from its projects in the far east of Russia. This year, it is predicting production of 271,000 ounces. The company believes it is sitting on 78 million ounces, although so far it can prove, to Western standards, only 7.4 million.

Between the idea and the reality, between the self-promotion and the act of getting the gold out of the ground, much can intervene to disappoint the company and its investors.

To date, as Peter Hambro itself pointed out yesterday, it has met each of its one-year production forecasts. In 2004, gold production rose 40 per cent to 209,000 ounces. But other figures in the results were less than satisfactory. Production at some of its joint-venture projects was below some analysts' expectations. Pre-feasibility studies on its Pioneer deposit were slower than forecast. And the company has had trouble getting its samples analysed in the laboratory, so the latest results - when reserves can be moved from the unproved to the proven category - are still a month or two away.

In all, a slightly disappointing day, and shareholders may even have been lucky to see the stock down just 17.5p to 585p. We advised buying in at 547.5p this time last year, and the stock peaked at 687.5p last month. That price was certainly well ahead of events, the company's strong track record being used to justify giving more than the usual value to unproven reserves.

With the speculative mining sector in need of a pause for breath after a strong run and a flood of flotations, Peter Hambro looks more of a hold for now.

Vanco's progress proves value of its virtual model

Vanco is a telecoms group that unlike many of its peers has never had difficulty proving there is profitable growth in the industry if you know where to look.

It occupies the peculiar sounding space of "virtual network operator". While telecoms companies such as BT Group and Cable & Wireless are stuckdoing business in countries where they own physical network infrastructures, Vanco can go where it pleases. It leases capacity on other people's networks, selling it on to business customers.

It provides a range of services to business users, mainly solutions for their increasingly complex telecoms needs, and then plugs these companies, with its solutions, into the network capacity it hires.

It can choose to use any network in any country on behalf of clients, and has none of the capital expenditure burdens of incumbent, "asset-heavy" telecoms providers. There is nothing to stop large telecoms companies from offering the same service solutions as Vanco, but customers seem to value Vanco's independence. Companies as large and diverse as British Airways, Ford and Avis already rely on Vanco. It can get the best deal for business users by shopping around for spare network capacity, and the bigger it gets, the more purchasing power it has.

Yesterday's annual results showed its reputation is rapidly spreading. Sales were up 35.4 per cent to £104m and earnings per share more than doubled. In December we said buy at 277.5p. The shares are now 300.5p and still worth buying given the continuing evidence of success.

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