Orange looks squeezed

AIB losing its Celtic charm; Miss a turn at Games Workshop
Click to follow
The Independent Online

Solomon Trujillo, the newly installed chief executive of Orange, managed a rousing repeat of the old slogan at the end of his introduction to the mobile group's interim figures yesterday: "The future's bright, the future's Orange." It is hard to agree.

Orange has lost a lot of its original edge, in terms of both marketing and corporate strategy. It is difficult to see its "squirt in a suit" campaign matching old successes, particularly when it is running up against a resurgent Vodafone.

A strategy presentation last month was strong on promises for profitability growth, but little else. Orange is a maturing company ready to throw off substantial cash flows, but there was no clarity on what the money will be used for, whether it be dividends or aggressive expansion.

It has nascent presences in overseas territories and some, including Romania of all places, have been growing much more quickly than expected. But its biggest markets are France and the UK, where customer growth must be almost nil going forward, and where the future will be bright only if Orange can win customers from rivals and make them pay more for new services such as picture messaging. Vodafone Live! is already streets ahead on the multi-media front. And with 3, BT and Tesco among the new competitors on the scene, call prices are sure to be driven down, not up.

There are quite a lot of short-term plaudits to be won through cost-cutting, though, and this was the highlight of a surprisingly benign set of interim results yesterday. Earnings before interest, tax and write-downs (Ebitda) was up 43 per cent to €3.3bn (£2.3bn).

This defensive trajectory may satisfy existing shareholders - including the highly indebted France Telecom, which owns 87 per cent - for a while, but it is possible that in the run up to Christmas the competitive weakness of Orange will be exposed. If that happens, the current rating of the shares (with an enterprise value to Ebitda ratio of more than 7.5), will be proved way too optimistic. Sell.

AIB losing its Celtic charm

Allied Irish Banks, Ireland's biggest bank by market capitalisation, has had to wave a wistful goodbye to the days when it was one of the Emerald Isle's premium growth stocks.

The reasons for AIB's slowdown are manifold. The fall in eurozone and UK interest rates has put pressure on the margins across the banking sector. In addition, the Irish economy has slowed and AIB has also had to cope with the strengthening euro, which has reduced the value of its overseas earnings by about 4 per cent in the past six months.

Against this difficult backdrop, AIB managed a 16 per cent jump in profits in its Irish business, which still accounts for 50 per cent of the group. Its British arm, where it has concentrated on the small business banking market, saw profits grow 18 per cent in the six months to 30 June. Loan sales increased 20 per cent despite the fact that the overall market has showed signs of slowing in recent months. Its shares dipped 21 cents to €21.46 (£15.17).

AIB has been partly held back by a lack of confidence among investors following revelations of $700m (£430m) of "rogue trader" losses at Allfirst. However, AIB wrote off the sums involved in 2001 and earlier this year sold Allfirst to New York-based M&T. The Irish bank gained a 22.5 per cent stake in M&T, thus retaining an exposure to the gigantic US banking market.

AIB's shares trade at a little less than 10 times future earnings, which is cheaper than the banking UK average but still not cheap enough. Its prospects for growth are unexciting compared with rivals, and its exposure to currency fluctuations makes its shares risky. Avoid.

Miss a turn at Games Workshop

Bonus points to Games Workshop, the fantasy games retailer, which yesterday posted another magical set of financial results.

Its games, which include Warhammer and The Lord of the Rings, involve painting miniatures and war gaming with them in terrain built to landscape an imaginary universe. With fantasy books and films seemingly everywhere, the pastime has enjoyed something of a renaissance and Games Workshop's respected management has been expanding to capitalise. It has 116 stores in the UK and now 81 in continental Europe, and in the year ended 30 June pre-tax profit was up 29 per cent to £17.5m.

That beat expectations and the shares jumped 5p to 658.5p, a five-year high. The company warned that a promotional supplement had driven The Lord of the Rings sales to levels that might not be achievable again this year, but there are other compensating developments. These include the growth of a collectible card game business based in Seattle, of which Games Workshop has acquired 85 per cent, and a new online version of Warhammer allowing multiple players to take part.

The shares trade on 18 times earnings, which looks too high to chase. But hold.