Investment Column: Hate it or hate it, BT's shares are cheap

The Restaurant Group; Tottenham Hotspur
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The Independent Online

Our view: Buy

Share price: 169.1p (+9.7p)

BT may be capable of truly hideous customer service (it seems almost everyone you meet has a horror story) but financially things are looking chipper. Yesterday the company issued its second-quarter results and upgraded guidance for the rest of the year.

Revenues fell 3 per cent to £4.98bn, but adjusted pre-tax profits were up by 13 per cent at £496m. This was rather better than the City had expected. How has it pulled that off? Largely through cost-cutting, axing jobs and reducing the use of third parties and contractors. And the company is still adding broadband customers and subscribers to its television service at a fast rate. Whether the service will suffer after those job cuts and make them less sticky is an open question.

The company also raised line rentals and upped the cost of daytime calls in September, though it maintains that it is still cheaper than its main rival, Virgin. Earnings are expected to come in around £5.8bn (before various deductions) rather than the previous guidance of £5.6bn.

BT is targeting a return to revenue growth in 2012 with help from initiatives such rolling out its high-speed, fibre-optic based broadband, BT Infinity, and expanding the television operation. The move to the Consumer Prices Index from the Retail Prices Index for its pension has wiped £2.9bn from the deficit, which should also cheer investors.

So should the valuation: Barclays Capital puts this on 7.7 times 2011 forecast earnings while the prospective dividend yield is a healthy 4.9 per cent, compared with 10.4 times and 6.8 per cent for the sector.

So BT looks cheap. It's a hard company to love and comes with any number of health warnings (the pension issue is always a concern), but even after their good run and a hit to revenue from government cuts, we think there's more to come. So buy.

The Restaurant Group

Our view: Hold

Share price: 279.1p (-8.1p)

The Restaurant Group (TRG), which operates the Frankie & Benny's, Garfunkel's and Chiquito eatery chains, yesterday delivered a tasty set of results for the 45 weeks to 7 November, touting its "resilient" performance despite a "tough economic backdrop".

While TRG dished up a 0.25 per cent rise in like-for-like sales in restaurants over the period, that growth has heated up to about 1.1 per cent over the past 10 weeks. This means that management remains confident of meeting full-year expectations of pre-tax profits of £55m. To stimulate further the taste buds of investors, TRG described as "excellent" the overall performance of the 18 new restaurants it has opened so far this year. They are set to "deliver strong returns". Yummy.

Next year, TRG will open as many as 27 more restaurants. Such promises may arouse the interest of private equity groups, which have shown an increased appetite for restaurants recently. That said, we have a couple of concerns. Although the shares slipped back yesterday, they have surged by 27 per cent since August. As a result, they trade on 13.2-times 2011 forecast earnings, which we think is fair enough on valuation grounds.

That said, our main concern remains the unmistakable fact that UK consumers will have less money to spend next year on dining out. So we'd just sit tight for now. Hold.

Tottenham Hotspur

Our view: Speculative buy

Share price: 69.5p (unchanged)

First on to the market, and (more or less) the last listed football club left, Tottenham yesterday unveiled results for the year ending 30 June. Surprise, surprise, they lost money. Despite record revenues of £120m, the pre-tax loss was £6.5m (profit of £33.4m in 2009). The club made a healthy operating profit (£22.7m against £18.4m last time) but it was, of course, wiped out by "investment" in the squad.

At a time when the "Manchester City effect" is sending players' wages to even crazier levels, it has to be a sell, right? People don't invest in football clubs; they spend on them. The game is set up to suck money from investors (and fans). However, these results do not include the windfall the club will get from this year's Champions League. Wunderkind Gareth Bale will fetch silly money in a year or two (maybe sooner), and a new stadium (sensibly financed) combined with financial discipline (worry if the 50 per cent of turnover spent on wages creeps up) mean there might be something in this club from an investment standpoint. But only with money you can afford to lose.

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