The Investment Column: There's plenty of life left in Old Mutual for those with patience

Kingston Communications; Arena Leisure
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The Independent Online

Our view: Buy

Share price: 166p (-10.25p)

The past 10 months have not been exactly what Old Mutual shareholders might have expected them to be. After finally managing to secure the acquisition of Swedish insurer Skandia at the start of the year - giving the company the additional exposure to the UK which it had been seeking since the beginning of the millennium - investors had been looking forward to seeing the group move into a new phase of growth.

By January, when we last looked at the stock, its shares had risen by a third in a matter of weeks - in spite of the fact that it was putting the finishing touches on the its largest acquisition to date.

Although the euphoria continued for a few more weeks, Old Mutual's shares finally dived with the market in May. However, unlike both the market as a whole and other financial services stocks, they have barely managed to recover since.

Yesterday, as the company announced worse-than- expected third quarter results, the stock fell another 5 per cent, taking it below the levels at which we advised investors to buy in January. Yet while there is a lot of short-term negative news surrounding the company, its fundamentals do not justify the recent pasting which the market has given it. Yesterday's dip in operating profits was accounted for largely by movements in the South African rand - in which the company gene-rates almost half its earnings - and by a series of one-off costs.

Bedding down the Skandia acquisition will take time, but the management team has proved in the past that it knows how to successfully integrate large businesses into the group.

With the company now in effect trading at a discount to the embedded value of its life insurance assets, it looks extremely cheap. It also comes with the added bonus of a healthy dividend. Patience is the order of the day for existing investors, and for those who are not yet on board, yesterday's drop in the stock should be viewed as a good buying opportunity.

Kingston Communications

Our view: Buy

Share price: 69.5p (+2.25p)

Kingston Communications is somewhat of an anomaly in that it is the incumbent operator in Hull, the only region in the UK where BT is not dominant. The Humberside company is thus most famous for its cream-coloured phone boxes.

The small operator faces similar challenges to its larger rival BT as a result of pricing pressure and increased competition. The company has proved fleet of foot in striking up a strategy akin to that of its larger rival. Kingston opted to overhaul its network, target broadband provision and corporate telecoms services as well as digital television services like video-on-demand. Despite shutting its TV division this year its results for the first half show that the investment in its network and a series of small acquisitions has started to pay off.

Over the period, the company's pre-tax profit trebled to £10.3m and its revenue increased. But more impressive was a 67 per cent rise in its interim dividend to 0.65p a share, smashing market forecasts. Kingston expects to invest a further £16m in capital expenditure over the second half and is still on the hunt for acquisitions to bolster its product offering.

Yet Kingston shares have not yet matched its financial progress, perhaps as a result of talks with private equity suitors breaking down earlier in theyear. Based on KBC Peel Hunt forecasts, which factor in actual tax rates, Kingston trades on a meagre rating of 8.6 times forecast earnings compared to 10.4 times for rival Redstone and 12.4 times for BT. With Kingston confident of further progress this looks a decent entry point for investors. Buy.

Arena Leisure

Our view: Buy

Share price: 46.5p (unch)

The market appears to have woken up to Arena Leisure. Yesterday the company announced plans for the second phase of its redevelopment of Doncaster Racecourse, featuring a four-star hotel and apartment complex. They will cost £17.5m, falling to £10.5m when the apartments are sold. The shares finished unchanged at 46.5p but have shot up by nearly a fifth over the past month. They now trade at a fancy multiple of 30.9 times estimated full-year earnings for 2006, although at 3.3 per cent, the forecast yield is respectable. Can the company justify the hype?

There are reasons to believe it can. The rather fuddy duddy racing industry has always viewed Arena with a degree of suspicion, chiefly because it is a solidly commercial organisation. That commercialism, though, is paying the company handsome dividends. Profits are growing fast and the company's new catering division could be shooting at an open goal. There are likely to be opportunities for Arena to leverage its considerable venue management skills by moving into other sports. Who knows, if the bookies tire of owning dog tracks there might be opportunities there as well. There is still plenty of room for more growth. Keep buying.