The Investment Column: Hang up on Colt Telecom as competition intensifies

Character Group; Cambrian Mining
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The Independent Online

Our view: Sell

Share price: 72p (-1.25p)

In its 10 years as a listed company, Colt Telecom has spent £3bn on rolling out a 20,000-kilometre pan-European network that includes 32 cities in 13 countries. Has it all been worth it? The answer is not really.

As yesterday's first-quarter results from Colt showed, the company is still not profitable. The figures, which came in below analyst forecasts, saw it register a pre-tax loss of £7m. Admittedly this is a lot better than the £28m loss it suffered for the same period in 2005 but it shows that Colt is still some way from being profitable. The City expects the group to break into the black some time in 2007 although no one is predicting a dividend for any time soon.

A decade since its dual listing in London and New York, the major problem facing Colt is the ferociously competitive marketplace it finds itself in. These conditions are unlikely to improve. In fact, they will probably become more challenging. Among the most worrying trends in yesterday's figures was the fall in revenues Colt experienced during the first quarter compared with the fourth quarter of last year.

To combat these difficult conditions, management plans to focus on high-margin activities such as internet telephony. But despite such efforts it will still be a very long time before it gets back the £3bn it has spent on building its network.

Selling the business would probably be the best way for investors to get some of their money back. However, it is unlikely that any buyer would pay more than £1.5bn for the whole company - that would be a 35 per cent premium to yesterday's closing price. And, of course, there is absolutely no guarantee that anyone would actually bid for the group.

All this leaves Colt as an unappealing investment. At 72p - its stock trades at a 20 per cent premium to the wider sector - it should be sold.

Character Group

Our view: Buy

Share price: 66.5p (-4p)

January's decision to ditch the digital photography arm of the business looks to have been a shrewd move by Character Group, allowing the company to concentrate on its core games and toys licensing division.

Although the proceeds, £10.3m, were disappointing, the sale helped the group return to operating profitability to the tune of £3.7m.

It registered a loss of £1m in the corresponding period of 2004. Turnover rose by nearly 50 per cent to £40.7m, stripping out revenues from the digital arm, thanks to a year which saw the group gain the No 1 and No 2 products in the UK toy market. They are the Dalek from Dr Who and Roboraptor, an electronic dinosaur model.

Looking ahead to the second half of 2006, the company has licensing agreements in place for games linked to two potentially blockbuster films: Superman Returns and Pirates of the Caribbean 2.

The group is also poised to launch Roboreptile, a successor to the Roboraptor, along with more Sudoku games endorsed by Carol Vorderman and exclusive products featuring Peppa Pig, a very popular children's pre-school character.

Character shares trade on an undemanding earnings multiple with the potential for a substantial re-rating should Superman and Pirates do well in cinemas. A 50 per cent rise in the first-half dividend should be followed by the same in the second half, giving the shares a prospective 4.5 per cent yield, impressive for a small company.

Given the ongoing consolidation in the children's entertainment industry, there is always a chance that a suitor will swallow the newly refocused Character Group. But even without a bid its shares are worth buying.

Cambrian Mining

Our view: Buy

Share price: 160.5p (+0.25p)

Cambrian Miningunveiled plans yesterday to buy the 30 per cent of the Sydney-quoted AGD Mining it does not own. AGD has base and precious metals interests including an operational gold mine.

The all-share deal turns Cambrian from being a pure mining investment company to a having direct operational control over various projects.

Since coming to the Alternative Investment Market in London in 2002, Cambrian has raised about £35m. Thanks to clever investments, its management has turned this into a company worth £125m at yesterday's close. Among its most successful was backing Asia Energy, the Bangladeshi coal group.

Adding up the value of the group's various shareholdings - the majority of which are listed - gives it a net asset value of £178m or 228p per share. Buy.

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