The Investment Column: Two million more reasons to buy BSkyB

National Express has travelled far enough for now; Be patient with McCarthy & Stone
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The Independent Online

BSkyB has just met its target of signing up 8 million customers - with the emphasis on the word "just".

With less than a fortnight to go before the end of the year, and with more than one in ten existing customers leaving Sky every year at the moment, it had seemed touch and go.

And the City thinks 8 million was the easy part.

Now Sky has set itself the target of reaching 10 million subscribers by the end of 2010. A task that looked either impossible, or involving impossibly high marketing costs, to the extent that BSkyB shares collapsed by 19 per cent on the day last year that the target was announced.

Why might it seem impossible? Well, first, 44 per cent of UK homes already have pay-TV, and three-quarters of those are already with Sky. It has most to lose from the march of Freeview, where you might only get 57 channels with nothing on, instead of Sky's 100-odd, but which at least is free. It could also be hurt if cable gets its act together after the merger of NTL with Telewest and the mooted rebranding of the whole shooting match as Virgin. And then there is the emerging threat from BT and others who are launching television over broadband services.

Gulp. Sounds frightening. But BSkyB is an audacious company with a sparkling track record and would be worth backing against a cable company with much to sort out from the merger and a wrong-headed move into mobile telephony. The attractions of Freeview will undoubtedly limit the number of non-digital homes that will choose Sky as the Government promotes switching to digital televison, but Sky will always have more unique content for which it can be worth paying. As for broadband TV, BSkyB is in the process of buying Easynet, an internet service provider with a network of wires across the UK and an increasing reach into homes, enabling Sky to start offering TV-and-internet packages and keeping its options open on TV technologies for the future.

That 19 per cent share price fall, and the drift of the shares since, reflected the initial profit hit of the new marketing push and the lower profits from the new 2 million customers who are likely to choose basic packages only. The share price now values BSkyB on 17 times current year earnings, falling to 14 times in 2007. This is fair, rather than cheap, but as well as the jam tomorrow of another big customer push, there is also a modest dividend, yielding about 2 per cent.

With sentiment in the City so depressed towards BSkyB and its strategy, now is a good time to invest. Buy.

National Express has travelled far enough for now

British transport companies don't travel well, at least historically.

Many an overseas adventure has ended in financial failure and retreat, so Phil White, chief executive of National Express, will have to forgive the City for not sharing his enthusiasm for the company's £262m acquistion of the Spanish coach operator Alsa. In a trading update yesterday, National Express desribed itself "excited by our opportunities in this new market ", but the diversity of Alsa's operations adds to the risks, as does its former family-owned status.

The UK group was willing to pay such a high price for Alsa because of the limited scope for expansion in its mature domestic market, where we are into the second decade of transport deregulation and privatisation and where margins are thin. National Express was late getting into the London bus market, where the mayor's anti-car measures have pushed more people onto public transport. And its spruced-up national coach network, for which the company is most famous, will win only a handful of people away from the trains.

The City expects and fears more overseas adventures, but at least the company reiterated yesterday that it "will continue to utilise its cash flow to enhance shareholder returns". Bulls of the stock hope for a special dividend or some other significant return of capital. Most analysts think the scope for a big financial restructuring is limited.

The shares fell 22p to 870p yesterday because it highlighted rising fuel costs and the continuing negotiations over the company's Silverlink and Central Trains franchises. With a dividend yield little more than the market average, the shares are too high.

Be patient with McCarthy & Stone

McCarthy & Stone, the builder of retirement homes, is finding courting potential customers as slow a process as Joe Macer is finding courting Pauline Fowler in EastEnders. First-time visitors, even second-time visitor numbers, are holding up well, but there is "a reluctance to commit" , Keith Lovelock, the chairman, told the annual shareholder meeting yesterday.

The long-term demographics are in McCarthy & Stone's favour, of course. An ageing population means many people wanting to move to a more manageable house or flat, but without giving up their independence. This year, though, potential buyers are reluctant to sell their homes, given we are no longer enjoying the go-go housing market of previous years. Mr Lovelock predicted 2006 will be another testing year and there will be fewer homes completed this financial year than last as a result.

Building site wage costs and fuel bills are rising, and McCarthy & Stone is having to use land it bought more expensively in recent years, so its margins will be a lot lower, too. But most of this has been flagged and the company's shares have lagged other less specialist housebuilders this year.

We said take profits in March and the stock is now 50p lower at 622p. For those with the patience of Joe Macer, a solid hold.

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