The Investment Column: Great Portland's West End focus is just the ticket

Colt Telecom; Dairy Crest
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The Independent Online

Our view: Hold

Current price: 680p

The property sector has been under a cloud since the beginning of the year. Investors have been jittery as interest rates have risen and a perception has taken hold that the sector is over-valued. Then Great Portland Estates comes along and beats market expectations, reporting an 8 per cent rise in adjusted net asset value per share to 642p in the three months to the end of June.

The rental value of its portfolio - 84 per cent in the West End - has soared by an annualised 24 per cent. It is also worth noting that the company has done best with properties where it has been spending money to improve the premises.

Can this continue? Well, the rate of growth is probably unsustainable, but the company believes the West End has very advantageous characteristics. Demand is rising steadily, and while this may slow if the economy turns down, it is not being matched by supply. It is devilishly hard to get planning permission for new developments in the West End, so it takes a long time for new space to come on stream, if at all. What is more, the current rental values of Great Portland's portfolio are lagging behind market rates. That will change, while the company has been reducing its exposure to the more volatile City of London.

The shares are not cheap. Great Portland, a Real Estate Investment Trust exempt from capital gains tax as long as it pays 90 per cent of its profits in dividends, closed at 680p yesterday, putting it on a 3 per cent discount to the estimated 2008 net asset value. The stock is therefore pricier than the sector, where discounts tend to be rather bigger, with a forecast yield (1.8 per cent) that is nothing to write home about. Still, the shares' high valuation looks to be deserved and these shares are well worth holding.

Colt Telecom

Our view: Sell

Current price: 158.5p

It's the pot of gold syndrome at Colt Telecom. A major breakthrough for the business always seems just around the next corner.

Having spent £3bn over 10 years to 2005 building its own telecoms networks around Europe, Colt's problem in recent years has been over-capacity in the voice-based services market. Just as it achieved sufficient scale to compete, the price of those services collapsed.

For the past couple of years, the company has therefore been focused on data services, where margins are higher, but this has required a whole new tranche of investment.

Still, the company is in much better shape than it once was. It said yesterday that despite a sharp fall in earnings from voice-based services over the second quarter of the year, its profits were up to €8.9m from a loss of €9m in the same period of 2006.

That improvement - and this is the fourth quarter running in which Colt has been profitable - is largely thanks to the fact that the company now gets 50 per cent of revenues from data.

Given Colt's troubled history, chief executive Rakesh Bhasin is right to be pleased about his company's progress. He said yesterday that the company would continue to make progress in the UK and France.

Equally, however, Colt warned that Germany was proving more challenging, which is unfortunate given that this is the company's biggest business. Colt also expects earnings before interest, tax, depreciation and amortisation (Ebitda) for 2007 to be "broadly in line with that of 2006".

As analysts at Bridgewell pointed out, this suggests that an improvement in profits in the second half of the current year is unlikely. The broker's Dan Gardiner said: "We believe the current valuation implies a significant turnaround in Colt's fortunes which, given the market conditions, seems unlikely in our view."

Given Colt's own cautious update yesterday, it is difficult to disagree. Sell

Dairy Crest

Our view: Buy

Current price: 722p

The milkman has joined the digital age. Dairy Crest is trialling an internet ordering service which allows households to place orders hours before the milkman heads off on a round. The pilot is currently running in Surbiton, but Dairy Crest hopes to extend it out to its network of 170 depots.

Yesterday the company delivered a positive update to the City, reporting strong trading during the first three months of the year. Expectations for the full year remain unchanged.

Good performances were produced by key brands including Cathedral City, Petits Filous and Utterly Butterly. The company added that the St Hubert business it acquired from Uniq in January is making good progress and has increased its market share in France.

The company also announced the appointment of three new non-executive directors, bringing fresh ides to the team.

Shares took a hit in May after the company ordered a product recall for Clover Spread due to "product quality issues". However, sales of Clover are back on track, and the majority of costs associated with the recall have been covered by the company's insurance.

Its shares jumped around 3 per cent on the back of the cheerful update, taking the company to a valuation of 13 times this year's forecast earnings - a 16 per cent discount to other quoted food companies.

Dairy Crest also boasts significant premiums to the sector on dividend yield. With a family of strong brands and the dairy business coming into the modern world, it's a buy.

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