The Investment Column: Land Securities has good foundations for continued growth

Inmarsat; Gaming VC
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The Independent Online

Our view: Buy

Share price: 2,176p (+11p)

Land Securities, Europe's largest quoted property firm, has had a good run since we last tipped the stock a year ago. Boosted by recovery in the London office market and continued strength in its core retail division, the company has seen its net asset value per share increase by almost 11 per cent. Its shares have not quite kept pace with those of its peers, but they have none the less risen by almost 50 per cent since last November.

The concern for investors, however, is what might happen next, given the much less stable outlook for the commercial property sector over the coming months.

Retail (shops and warehouses), which accounts for more than half of Land Securities' portfolio, is the biggest worry. With consumer confidence already fragile, and interest rates having been raised again this month, the high street is likely to come under additional strain in the New Year. While Land Securities' chief executive Francis Salway claims that his company's retail portfolio is more resilient than most of its competitors, there is no denying that a sharp decline in retail sales would be likely to see a rapid rise in shops going out of business.

While the office sector looks set to continue to grow in 2007, its rapid progress over the past year has increased concern that another bubble may be developing.

Nevertheless, there remains plenty for Land Securities investors to be upbeat about. The company's property outsourcing business, Trillium, which accounts for 17 per cent of group profits, continues to enjoy rapid growth, and has built up an impressive pipeline of future business.

Meanwhile, the company's proposed conversion into a Real Estate Investment Trust in January will make Land Securities a much more tax efficient vehicle for investors, and will help push up the dividend by some 30 per cent in the second half of its current financial year.

Although 2007 looks unlikely to be as strong as 2006, we believe there is enough of a tailwind to continue to deliver decent returns to shareholders for at least another six months. Buy.

Inmarsat

Our view: Hold

Share price: 400p (+25p)

Anyone who has travelled to Cornwall and tried to make a mobile phone call would know that it can be a frustrating experience due to poor reception or a total loss of signal. Yet what is an annoyance for consumers can be a disaster for businesses that need to transmit important data from places much more remote than Penzance. Inmarsat aims to solve this problem through its network of satellites, which cover 85 per cent of the earth's landmass.

Satellite communication systems have traditionally been considered somewhat of a niche sector compared to the ubiquitous mobile phone networks. However, Inmarsat's third quarter results showed that it could prove a very profitable niche. While revenue in the period grew 8 per cent to $129m (£68m), net profit more than tripled to $11.1m. The company was cautious in its outlook, but analysts saw significant scope for upgrades on the back of its recent progress. Lehman Brothers, which acts as a broker for the company, upped its price target to 460p from 390p, arguing that the company's fledgling BGAN high-speed mobile broadband network had got off to a flying start.

Shares in Inmarsat surged nearly 7 per cent to 400p on the back of the results, valuing the company at over £1.8bn. Such a rich valuation suggests a lot of the company's growth potential is already priced into the shares, so investors should wait to see if it merits such a rating. Hold.

Gaming VC

Our view: Avoid

Share price: 129.5p (+9.5p)

Gaming VC Holdings makes great play of the fact that its online casino does not do any business with Americans. Unfortunately, the majority of its clientele come from Germany, where the authorities are also less than enamoured of foreign gambling web sites.

If that was not an issue then the shares would be much higher than they are. Yesterday's trading statement showed a business in good health, with rising revenues and customer numbers, particularly in poker. And yet at 129.5p, up 9.5p yesterday, the shares trade on a pitiful multiple of under four times forward earnings, far too low for a business like this.

The company can point to the support of the EU, which has been moving against countries that seek to support local gambling monopolies by taking action against rivals. But the wheels in Brussels turn dreadfully slowly. If the German authorities choose to get nasty, there could be tough times ahead for this business.

Those who buy, or hold the shares, are in effect taking a bet that they will not. If the bet wins, they will get paid off handsomely, but there were plenty of people who got badly burnt by betting that the Americans would not act either. These shares are for the brave or foolhardy only. All others should avoid until the regulatory situation becomes clear.

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