The Investment Column: Strong C&W faces a dollar-driven headwind

Ennstone; EBT Mobile China
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The Independent Online

Our view: Take profits

Share price: 164p (+2.5p)

Cable & Wireless shares have risen by nearly 30 per cent since we tipped them at the end of the summer. Yesterday, they gained ground because the telecoms group was heard to have made a bullish presentation to one of the City's leading sector analysts.

C&W was not the only fixed-line operator to stage a solid performance yesterday. BT shares hit a fresh five-and-a-half-year high. It seems that the telecom sector is once again in vogue after years in the doldrums when it was de-rated to such an extent that it began to look like a good-value investment.

However, given its present valuation, C&W does not fit the "value investment" tag. The stock's strong gains over the past four months have left it trading at a massive 36 times forward earnings and yielding around 3 per cent. This is a significant premium to its European rivals.

Key for the stock in the near term will be the performance of the group's UK business. This is in the process of being overhauled by John Pluthero, the division's sixth head in 10 years. He has focused the unit on its 3,000 most attractive customers and has sold off the loss making Bulldog broadband operation.

As for the group's international operations, which stretch from Macau in the Far East to Montserrat in the Caribbean, the aim is to raise the profit margin to between 35 and 37 per cent by 2009. But there are headwinds gathering - namely the continued weakness of the US dollar. Around 80 per cent of the international division's revenues are dollar denominated. With this in mind, and C&W's high valuation, now is probably a good time for investors to take some profits.


Our view: Buy

Share price: 48.5p (unch)

The Midlands-based aggregates group Ennstone yesterday continued its US expansion with the purchase of Handyman Concrete for £4.6m. Handyman is a manufacturer of "small load" ready mixed concrete for contractors and the generate public and is based in Northern Virginia, with a particular focus on Washington DC.

The business will operate as part of Ennstone Inc (the group's existing US operation) and makes great strategic sense. Ennstone has been building up its American operations for some years and given the strength of the pound against the dollar now is a perfect time for such a deal.

From an investment point of view, Ennstone's impressive asset backing is probably its most exciting feature. It has reserves of gravel and limestone that will last it until 2026 in the UK and 2033 in the US. In addition, the group has substantial reserves for which it is yet to be granted development permission from the relevant authorities.

Ennstone has wisely built up a dedicated team of professionals to handle this procedure. Once the company gets the green light from planning authorities the value of its reserves rises dramatically.

And it is Ennstone's reserves that make it an attractive acquisition target for one of the sector's bigger players.

The industry has been fast consolidating of late - both Aggregate Industries and RMC have been taken over in the past two years - and it can be only a matter of time before a predator comes knocking on Ennstone's door.

Although the stock looks fully priced at its present rating of 17 times forward earnings, investors would do well to note that it trades well below the levels at which Aggregate Industries and RMC were bought at.

EBT Mobile China

Our view: Buy

Share price: 26p (+1p)

EBT Mobile China, a Chinese version of Carphone Warehouse, yesterday raised £7.7m from a placing of new shares at 22p. The cash will be used to strengthen the retailer's position in the local market.

How you may ask? Well, it plans to extend its relationship with the country's biggest operator, China Mobile, commence a national expansion in partnership with a leading international retailer and set up and run kiosks selling mobile phones in malls and hypermarkets for a major handset maker in the east of China.

Currently, EBT has 190 outlets in 18 cities. Analysts expect this figure to rise to around 250 by the end of the year. Its aim is to become the leading end-to-end provider of mobile products and services in China and yesterday's fund-raising will certainly help it with this target. The London listing EBT has enjoyed since September 2005 gives it not only access to capital, but also a tradeable currency with which it can make acquisitions.

Unsurprisingly, China's mobile retail sector is highly fragmented. There are over 3,000 retailers in Shanghai alone so there is plenty of scope for deals.

There is probably no more exciting a place in the world to be selling mobile phones than China.

Its economy is booming while less than a third of its population have a mobile phone. However, investors should not expect an instant return from EBT. This is a stock to tuck away for the long-term.