Buy BT rights but with caution

British Telecom; Sportingbet; Mulberry
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British Telecom's £5.9bn rights issue, combined with asset sale proceeds, means that the telecoms giant will emerge with net debt of about £17bn ­ a hefty but manageable amount. Now BT must decide how to satisfy investment demand for the creation of a utility stock as well as one or more growth stocks.

Utilities are meant to be low risk, with visible cash flows providing dividend income. Growth stocks, in contrast, aim to provide capital gains, but are more volatile. For nearly a decade BT sought to be both utility and growth stock. The cancellation of the final dividend and the emergence of faster-growing, more focused rivals, particularly in the broadband and mobile markets, should have put paid to the notion that BT can face both ways simultaneously.

But has it? Though Sir Christopher Bland has made a fast start as BT chairman, the group is still unconvincing as either an engine of growth or a reliable generator of dividend income. As a growth stock, BT has some interesting, if underperforming, businesses, such as Wireless and Ignite, its internet protocol network. There is also long-term growth potential in Openworld, BT's domestic internet arm, and perhaps in Concert, the business joint venture with AT&T. That leaves Wholesale, the fixed line network infrastructure, and Retail, the division providing traditional voice-based consumer services. Turnover growth in both is expected to be flat and each displays low risk, defensive characteristics.

BT needs to reposition itself as a broadband service provider. However, early progress has been woeful and BT's ageing residential network is only partially up to the challenge of delivering ever-increasing bandwidth.

Spinning off Wholesale, and investing in local loop upgrades which would be marketed to branded service providers, would create a utility-type stock that would appeal to BT's traditional investor base.

On value grounds, there is a rationale for existing shareholders to subscribe to BT's rights issue on Friday, since by some measures the company is now modestly undervalued. But that discount reflects longer-term uncertainties over BT's eventual structure and whether it can ever regain competitive advantage.

Sportingbet, the online bookmaker, showed yesterday that it is making progress since graduating to the AIM market from Ofex at the end of January. Like other firms, it is looking to shed the .com suffix at an AGM later this year.

In the year to March, Sportingbet's pre-tax loss fell to £4.2m from a £5m loss last year. Sales were £325m up from £27.4m, though acquisitions accounted for two-thirds of the rise. The company, which has £12m in cash, increased its customer base eight-fold to 90,065.

In the first quarter to date, the company said its financial performance was in line with management's expectations and "materially better" than last year, despite that period being seasonally slow. It is also confident that nothing sinister will emerge from a government review into betting in the UK.

Analysts expect Sportingbet to turn in profits of £2m-£3m this year, putting the stock, down 2.5p at 131p, on a forward price/earnings multiple of nearly 60. While the business looks a good bet, that ratio seems a touch demanding.


Mulberry is back in the black following three loss-making years and confident demand for its luxury clothes and accessories remains very strong.

Profits were a modest £301,000 in the year to March, but that's a £1m improvement on the previous year. A £7.6m investment by Singapore fashion queen Christina Ong and the recruitment of award-winning designer, Scott Henshall, are bearing fruit. Like-for-like sales so far this year are 4 per cent higher with orders for the autumn/winter womenswear collection up 30 per cent.

British design houses are on the ascendant but Mulberry has a long way to go to catch its far richer rivals including GUS's Burberry. Mulberry's new found confidence has led founder Roger Saul to spend £2m on redesigning the flagship store in London's ultra-chic Bond Street, which will reopen in September. But plans to open in New York have been put off until the autumn, a delay that may prove a blessing as it gives Mulberry extra time to assess the potential impact of the US slowdown.

Mrs Ong and Mr Saul control two thirds of the shares, up 1.5p to 41.5p yesterday. On a forward p/e of 16.6 the shares are fairly priced for a small, tightly held company that must still prove it can maintain profits growth in the fickle world of fashion.