Vodafone still a good call for the long term

LA Fitness looking healthy; Severfield-Rowan to hold dividend
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The Independent Online

Sentiment towards telecoms and technology is still so fragile that a critical broker's circular was able to push shares in Vodafone, the doyen of the mobile sector, to a fresh three-year low yesterday.

The note, by ABN Amro, said the weak economic climate meant Vodafone would struggle to meet sales expectations in markets including the UK, Japan and Germany.

ABN also fears that investors have underestimated the possible impact of customers switching to existing and emerging mobile rivals. It duly cut its valuation for Vodafone shares from 180p to 149p.

Constructing a long-term buy case for Vodafone is not hard. After all, the company is the only UK operator that can claim to have already gained a truly global footprint. It is less easy to see how Vodafone will stay ahead of the march. In the UK, Orange is making rapid progress, largely at Vodafone's expense. Then there is the question of the impact of Hutchison, which is to launch third generation (3G) services in the UK in September.

Vodafone argues that size only counts to the extent that Arpu – average revenues per user – is holding up. But for that very reason the fight for the most lucrative mobile customers, willing to spend more on data services, will only get fiercer. Meanwhile, many are still smarting from the flop of WAP. At a time when text messaging continues to be the so-called killer application, 2.5G technology does not look like a rip-roaring success.

Perhaps the arrival, albeit late, of 3G will be the fillip the industry needs. Whether that prospect can put a rocket under Vodafone's share price in the near-term is another matter. The company's 12-month figures, due out at the end of May, will contain the now familiar slug of asset write-downs. Regulatory investigations into call charges will also continue to weigh on sentiment.

Analysts predict earnings per share of 5.9p this year, putting the shares, down 5.75p at 121p, on a reasonable forward multiple of 20.5p. For investors with an eye on Vodafone's long-term potential, the shares remain good value.

LA Fitness looking healthy

LA fitness sees itself as the gym world's answer to Tesco Metro without the premium pricing. Handy, affordable and dotted across the UK's big cities, it is a budget operator that has gone from strength to strength.

Not so its stock, which has had a hard time convincing investors that the enthusiasm for fitness is more than a fad. Poor trading at its quoted rivals Esporta and Holmes Place, which are pitched at the premium end of the market, have sent LA Fitness's shares tumbling.

Still, pumping interim numbers out yesterday prompted an aerobic 15.5p bound in the share price to 218p. The investment case remains intact, with earnings growth of some 40 per cent expected this year.

The group's 46 value clubs pull in the target mass middle market for under £40 a month. At 70 per cent, membership renewals top the industry. Once inside the clubs, LA Fitness tempts customers to part with extra cash via BUPA-based "wellness" centres and the usual branded sports gear and fitness videos.

LA Fitness has sufficient funding to be operating 72 clubs by the end of 2003. With just 7 per cent of the UK population a gym member, compared with 17 per cent in the US, chief executive Fred Turok envisages an estate of 100-plus clubs by 2005. The management won praise yesterday for its cautious approach to overseas expansion in contrast to some of its competitors. It expects to open four clubs in Spain by mid 2003, down from eight.

Pre-tax profit in the six months to 31 January rose 38 per cent to £3m on sales up 78 per cent to £21m. Dresdner Kleinwort Wasserstein expects full-year, pre-tax profits of £7.6m and earnings per share of 12.6p. The shares – on a forward p/e ratio of 17 – should build on yesterday's rally.

Severfield-Rowan to hold dividend

Glance up at the City skyline and it is hard to miss the steel skeletons of new office developments. But the construction boom has been a mixed blessing for structural steel group Severfield-Rowan, which is supplying girders, steel tubing and more for projects such as Marks & Spencer's new headquarters,and Heathrow Terminal 5.

Contracts in this industry are unpredictable. Severfield-Rowan's pre-tax profits sank 37 per cent last year after a project overran, resulting in a logjam of contracts requiring differ-ent manufacturing processes. Hence pre-tax profits slipped to £6.5m even as turnover climbed by £17m to £146m.

Peter Levine, the company chairman, says the poor show was a one-off, and underscored the point by holding the dividend at 14.0p. Indeed, the order book sits at £77m, even excluding any contribution from Heathrow Terminal 5.

However, Mr Levine also warned that it was hard "to form an opinion" about the second half of the year. The outlook remains uncertain, and competitors are putting downward pressure on prices.

The group's performance is less vulnerable to rising interest rates because exports are only 10 per cent of its output. Cash balances sit at a healthy £13.4m and there are no plans to take on debt.

Its house broker, ABN Amro, forecasts 39.5p of per-share earnings this year, rising to just 40.4p in 2003, which explains why the shares, down 15p at 280p, have a forward price-earnings ratio of just 7. That's cheap enough.

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