Vodafone offers a bumpy ride to wealth

Vodafone; Haslemere; Rage Software
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The Independent Online

There is a debate raging between and within the City's biggest investment banks over the best way to value shares in Vodafone, the world's largest mobile phone operator.

Well there might, since it was only a few months ago that many analysts believed the stock was worth something north of £5. It currently languishes at levels not seen for three years, and yesterday stood at 128p.

And yet Vodafone is a great collection of companies, with a global sweep and relative balance sheet strength that allows it to pursue an integrated global technological platform.

The reasons that investors have fled the stock remain to the fore. Many will get worse before they get better, but they will get better and most now appear to be well understood by the market.

The technological glitches will eventually clear to allow the roll-out of those famously expensive "3G" networks, capable of fast internet access and, hopefully, whizzy video services. Vodafone is still encumbered by several shareholders itching to dump the stock they received in return for asset sales, but the overhang is down to less than 5 per cent of the company, perhaps less as a result of derivatives trading.

Growth is also a worry, since the average spend by Vodafone's customers is declining and a sharp economic slowdown might squeeze that further. But while western Europe and US markets were always going to mature – practically every man and his dad have now got a mobile – Vodafone has a finger in many emerging markets, too, including a strategic stake in China Mobile, which dominates the world's largest mobile market.

Emerging market activity could help offset any regulatory interference the company may attract from Oftel in the UK or the European Union, both of which are looking at charges for using mobiles while "roaming" abroad.

In a slew of "buy" recommendations after Vodafone's controversial takeover of Germany's Mannesmann at the peak of the New Economy boom last year, analysts based their valuations on enterprise value – market value plus debt – and on Ebitda, an earnings figure that doesn't take into account asset write-downs and debt interest. It was a measure that wasn't easily comparable with companies outside the high-growth sectors.

Now, there is a movement to resurrect the traditional price-earnings ratio, the cost of the shares relative to the amount of earnings they will produce in a year. With market forecasts for at least 4.7p of earnings in the year to next March, the stock is on a multiple of 25 at most. And Deutsche Bank is predicting 30 per cent earnings growth in the following year.

That is cheap. Vodafone is a must-have for investors with an eye on the long term and the stomach for a bumpy ride.

Haslemere

Happy the property company that has managed to pre-let a big new development. Happy Haslemere, which has already let 80 per cent of its Pall Mall, London, office project to McKinsey & Co. The management consultancy doesn't actually want all that space any more, now the economic downturn is crimping its business opportunities. But it is stuck with trying to sub-let the space itself – a task which the Netherlands-based Haslemere said yesterday is getting tougher.

Vacancies at Haslemere's £1.5bn UK property portfolio, which includes the Leeds Cross Gates and Edinburgh Princes Mall shopping centres, increased from 2 per cent to 2.7 per cent in the six months to June, largely due to business failures in industrial areas.

Worse, the value of the portfolio has fallen by £20.3m in that time, as independent valuers take a more cautious view of the property market and rental opportunities amid the economic gloom. Net asset value, at £40.01p a share, is just 1.7 per cent up on last year.

The company has a talent for nifty property sales, though, and promises to squirrel more cash away this year for acquisitions when values fall further. Meanwhile, the light Dutch tax treatment means it is throwing off cash, enough to promise a buy-back and a 9.2 per cent yield. That should support the shares, unmoved at 2,887.5p, which are a buy for investors most concerned about income.

Rage Software

Rage Software, a computer games business, has had a tough year. It has failed to meet market expectations, reshuffled its management and switched strategy to publishing games as well as developing them.

As previously warned, the company moved further into the red in the year ended June. The pre-tax loss of £17m compared with a loss for the same period last year of £6.7m, including all restructuring costs and write-offs. Sales were £5.7m, up from £3.3m.

Its decision to change the business model was risky but, if it succeeds, the rewards will be big. Much of the gamble hinges on the quality of its games and how quickly new games consoles such as Microsoft's Xbox and Gamecube take off.

At least Rage has £20m of funding in place and a number of interesting deals, including one with David Beckham to produce football games using the star's image. The company plans to churn out 14 products this year and will launch its first Beckham game for Christmas.

Analysts are forecasting Rage will make pre-tax profits of around £100,000 for the year on sales of around £21m, but these are only tentative guesses. It is too soon for the shares, down 0.75p to 7p yesterday, to make much progress. First the products will have to prove a hit on the high street in a tough trading environment.

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