The Investment Column: Risk it, sign up to Virgin Mobile

Torex Retail could yet yield handsome rewards - It's time to give up the Imperial Tobacco habit
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The Independent Online

Virgin Mobile began its formal life in the FTSE All Share index yesterday, making it a must-have for index tracking funds, but its early performance on the market has been rocky.

Virgin Mobile began its formal life in the FTSE All Share index yesterday, making it a must-have for index tracking funds, but its early performance on the market has been rocky.

As it only floated in the summer it seems harsh to pass judgement so soon but potential investors would be wise to take note of the volatility the shares have shown so far. The sharp ups and downs are probably a sign of things to come.

Just to recap, it floated on July 26 at 200p. The shares fell to 182.5p in August, soared back up to 217.5p and have now fallen back to 206p, pretty much where they started.

The float was characterised by the institutions hammering the company down on price as they argued the risks associated with Sir Richard Branson's brainchild were substantial.

First, the company has entered what is one of the world's most competitive mobile phone markets. It faces some hugely powerful rivals such as Vodafone and the new entrants Hutchison Whampoa whose "3" brand is buying market share at a voracious pace. Virgin is not encumbered with costly network investments. It piggybacks on the network of T-Mobile and uses its own brand and marketing power to persuade generally younger customers to sign up. Trouble is, shareholders are in the dark about the terms of the T-Mobile agreement, a black mark at the IPO.

At 206p, the risks associated with Virgin are probably factored in. Goldman Sachs has set a 250p target and is confident the company will add substantially to its 4.2m customer base. It is certainly priced at a discount. A forward price-earnings ratio of 11.7 times for the year to March 2005 and 9.1 times for the year to March 2006 is in the bottom quartile of its sector.

It is also planning a hefty dividend payment equal to about 40 per cent of net income which means the shares are expected to yield 4 per cent or more.

So at these levels it has short-term growth prospects and a decent yield but shareholders should expect plenty of volatility. Buy - but be ready to take profits when they arise.

Torex Retail could yet yield handsome rewards

Torex Retail was hived off from its parent company Torex when that merged earlier this year with iSoft. And the change from unloved subsidiary to public company has breathed new life into the software company.

Torex ran the business for cash to fund investments in hospital software. But Torex Retail's management always knew there was scope to win a big new market for its software, which links store tills with head office to give retailers vital information on customers' shopping habits.

Results yesterday showed only the stirrings of success for the new strategy, which really kicks in next year. Of particular interest is a new, more efficient software product, which has now got the marketing push it deserves.

The company is keeping up old clients, winning new ones, and is generating plenty of cash to fund acquisitions that will boost its market share further and create opportunities in Europe. There is only a miserly dividend at this stage, but the long-term rewards will be handsome. Buy.

It's time to give up the Imperial Tobacco habit

Investing in a company that makes a product that kills its customers shouldn't make much sense. But Imperial Tobacco, which makes Regal, John Player, Superkings, Lambert & Butler and Embassy cigarettes, has at least done little harm to its shareholders, as millions of nicotine addicts continue to choose its brands for their fix above others.

In the UK and Western Europe, smoking is in decline, thanks to public health campaigns and tax increases. In these mature markets, Imperial has to compete on price and yesterday said it had maintained its market lead in the UK with a 44.6 per cent share. But the prospect of a smoking ban in the UK now appears to be lighting up, and while Imperial may believe this will have little impact on the number of smokers in Britain, volumes will almost certainly be hit.

Germany has already been more difficult for Imperial. It does 20 per cent of its business there but the market is down 12 per cent since a duty increase in March and there is a further tax increase in December.

Eastern Europe, Russia and Asia present the biggest opportunities to Western cigarette companies, as state monopolies are broken up. But less than 20 per cent of Imperial's business is so far outside western Europe. Unless Imperial can make a sudden big push in to these areas, it will remain a steady earning, cash-generative dividend play. Yet the 4 per cent yield looks on the wheezy side compared with rivals. With the gathering threats in the UK we are changing our stance on Imperial, which was a "hold" back in April. Now, avoid.

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