Pensions cloud over BT
Ad recovery will boost WPP; Take out insurance with Irish Life
Tuesday 29 April 2003
Just over a year after Ben Verwaayen started as chief executive of BT, it seems the honeymoon is well and truly over and calls for action are getting louder.
But BT is caught between a rock and a hard place. Many analysts accuse it of having become a boring utility with few real growth prospects yet urge the company not to do anything too radical, such as a big acquisition, that might make it a riskier investment proposition.
They are right to be concerned about growth. Embarrassingly, Mr Verwaayen has already had to abandon the revenue targets he set for the business only six months after announcing them.
BT's core market is not getting any easier. It is facing increasing competition in the domestic fixed line business from new entrants such as Carphone Warehouse and the supermarkets while consumers are using mobile phones more and more.
Those analysts cautioning against serious corporate action are probably also right. It was a corporate spending spree that was largely responsible for the mess BT found itself in two years ago with close to £30bn of debt. Today, BT's estimated £10.3bn of debt looks relatively minor compared with the debt mountains of France Telecom and Deutsche Telekom. And, if you believe Mr Verwaayen, the company can get decent organic growth from broadband and a host of other offerings such as IT services.
Analysts are forecasting profits, before exceptional items, of about £1.8bn for the year just ended, although the figures are likely to be clouded by a pension fund shortfall.
Based on forecast earnings of 15.9p a share for the current year, the stock is trading on a forward multiple of about 11.6 times – broadly in line with other UK utilities. Until the pension funding issue is out of the way and until there is more evidence of a convincing strategy, that seems fair.
Ad recovery will boost WPP
Sir Martin Sorrell has been the doctor doom of the media industry for a long time now. However, last week, he started to sound upbeat when reporting first-quarter figures for his WPP advertising giant.
The man who came up with the "bath-shaped" advertising recession, said that there was "definitely more stability" in the market. Underlying first-quarter revenue was flat, year on year, making it the first quarter in which like-for-like revenue did not decline since the third quarter of 2001.
The turnaround was led by the US. Sir Martin stuck with his forecast that things won't really pick up until next year, when the US presidential elections and the Olympic games should increase ad spend. For the hard-hit media sector, the recovery cannot come fast enough.
WPP has a great global position and Sir Martin's relationship with existing and potential new clients is impressive. Yesterday he kept up the pace of bolt-on acquisitions, buying a market research agency, Sadek Wynberg Research, for an undisclosed sum.
The stock rose 5 per cent to 450p, well off the 12-month low of 320p seen in March, putting it on a forward multiple of 17. However, the shares will gain further as more evidence of recovery emerges. Buy.
Take out insurance with Irish Life
Given that the entire life insurance industry is out of fashion, Irish Life & Permanent has not done that badly to see its shares fall from 1,081p in June last year to 675.25p yesterday.
Compared with rivals in the UK and on the Continent, Ireland's largest life insurer and mortgage provider has been seen in some corners as a safe haven, thanks to its strong capital base and dividend cover.
Its exemption from the capital concerns which have dogged bigger players has also allowed Irish Life to quietly pile on new business. After the company's purchase of a bank, Irish Permanent, in 2001, mortgages have been particularly strong thanks to the booming housing market.
While a slowdown in house buying is expected, the company said yesterday in a trading update that its levels of mortgage approvals were still ahead of last year. And, thanks to its conservative lending policy, it is not at risk of a surge of bad debts if the economy turns down.
The company is on track to make €326m in pre-tax profit this year and trades at a premium of one of a half times its embedded value – in effect its net assets. That isn't cheap compared with its peers, but it is justified by its prospects for further growth. A long-term buy.
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