The Investment Column: Growing mmO<SUB>2</SUB> looks long-term bet

Solid National Grid is worth holding on to
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After the crash, bang, wallop profit forecast downgrades meted out to Virgin Mobile earlier this week, it was back to the relative calm of mmO 2 yesterday.

After the crash, bang, wallop profit forecast downgrades meted out to Virgin Mobile earlier this week, it was back to the relative calm of mmO 2 yesterday.

The one-time BT Cellnet business has led a charmed life since it demerged from its mother ship in 2002 and its chief executive, Peter Erskine, has delivered impressive progress.

Yesterday the company unveiled its trading update for the last six months before interim results on 17 November. It said accelerating first-half growth meant the company was able to increase its full-year expectations for revenue growth from a range of 7-10 per cent to 9-12 per cent.

Its core O 2 business in the UK is proving one of the best brand creations of the past few years. And the revenue growth predicted yesterday comes despite the well-flagged impact of lower termination rates coming in during the second half. These are the charges levied by mobile phone operators for switching calls on to their network from fixed landlines. Ofcom, the regulator, has forced through 30 per cent reductions in these charges, which took effect at the start of September. These fees have been significant revenue earners and knocking them down 30 per cent is painful for all.

Its German and Irish operations chug along sweetly enough, while capital expenditure on its new third generation network is well under control. The interims will reveal a squeeze on margins caused by the faster than expected customer growth and the inclusion for the first time of overheads from O 2 Online and the group's research and development function.

However, the company said margins would still strengthen in the second half, with a "stable" full-year margin expected on a like-for-like basis.

So is it worth buying the shares? On a price-earnings ratio for the year to March 2005 of 16.5 times, it is the highest rated of the quoted mobile operators, but that reflects the quality of its management, its strong network and its consistent trading performance. We have advised readers looking to spice up their portfolio to punt on the more volatile Virgin Mobile; mmO 2 is more suitable for widows and orphans.

Buy for the long term.

Solid National Grid is worth holding on to

As befits a company owning the backbone of the UK electricity and gas networks, National Grid Transco is a solid, upstanding company, with solid dividend prospects and an upstanding management.

That management, headed by Roger Urwin, the chief executive, has proved itself an extraordinary deal-doing machine over the past decade. It has created and spun out the telecoms network Energis. It has expanded National Grid's electricity interests in the US. It has spliced the company together with Transco and, most recently, has spent £1.1bn on Crown Castle's network of 3,500 mobile phone masts and television broadcast towers (to add to its own 1,400).

There have beUen hiccups (don't mention Latin American telecoms) and it is proving tough to get a big new cost-cutting programme past the unions in New York state. But generally, the company has made decent returns from its investments and ought to keep doing so as it invests recent disposal proceeds in additional electricity distributors in the US.

Further moves in the US are necessary if the company is to generate returns in excess of those allowed in its more highly regulated UK businesses. The main risk is that opportunities to consolidate the US power industry will be few.

For investors, there is a £2bn return of cash to anticipate (NGT recently outstripped everyone's best expectations with the proceeds of the sale of four local gas pipeline networks) and the promise of an annual 7 per cent rise in the dividend until 2008. Its shares fell 0.75p to 466.25p yesterday, when the company set out the short-term financial implications of rising capital expenditure and a falling dollar. At that price, they will yield 4.5 per cent this year, rising close to 6 per cent by 2008. It is not the most generous payout among the utilities, and the edge has been taken off a little by the rise in the share price since we said buy at 404p last November. However, hold.