Investment Column: Picture quality finally restored at Virgin

Balfour Beatty; Grainger
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The Independent Online

Our view: Buy

Share price: 1,304p (-46p)

Virgin Media, a company that purely focuses on customers in the UK, is finally becoming visible to the country's investors as well. The group, whose primary listing is on Nasdaq, has appointed Goldman Sachs as its first corporate broker, and revealed that 20 per cent of its shares are now held in London, 10 months after it took a secondary listing here.

The company is almost unrecognisable from the one formed from the merger of NTL and Telewest, and looks good for growth thanks to the fact its cable network offers the fastest internet speeds currently on the market. As well as attracting new customers, the holy grail for Virgin and its rivals Sky and BT is to encourage those customers to take more services and pay more for those services. Virgin, which can offer its clients the "quad play" of internet, landline telephone, mobile phone and TV, has increased customer numbers and Arpu – the amount they spend – for the past four quarters.

Don't be alarmed by the negative numbers in the profit line. It is slowly writing down the £13bn that were invested digging up roads and laying cables in the Eighties, so depreciation and amortisation lops off £300m every quarter. What's important is free cash flow has been growing. It was £276m in 2008, and the broker Execution estimates it will grow to £559m by 2012.

Virgin still labours under its debts, yet this is no longer the investment risk it once was because none fall due in the next five years. The business is also highly operationally geared, with a rise in top line revenues of 7 per cent increasing free cash flow by a chunky 37 per cent. The company was confident enough to launch a surprise £700m capital return to its shareholders last month, which prompted a series of analyst upgrades.

In the current market for broadband and pay TV, the sure financial footing gives us confidence to recommend a buy.

Balfour Beatty

Our view: Buy

Share price: 259.5p (-3.4p)

Balfour Beatty seems too good to be true. In a construction and contractor sector best described as struggling, thanks to the Government's determination to introduce swingeing cuts, Balfour is going great guns.

Its first half results showed a 32 per cent pre-tax profit rise, thanks largely to its buyout last year of US peer Parsons Brinckerhoff. Chief executive Ian Tyler says that even stripping out the effect of Parsons, the group grew underlying earnings per share by a not unimpressive 2 per cent.

So what of the cuts? Mr Tyler says he is confident in Balfour's position as a global infrastructure player. There is plenty of work in emerging markets. The group relies on UK capital spending for only 20 per cent of its income, and that figure is declining. And at least power projects in this country are likely to be spared the worst of the cuts.

Investors might expect Balfour to be pricy given its enviable position, but in fact, trading on a 2010 price to earnings ratio of 7.6 times, Balfour Beatty's stock comes in significantly below the 9.1 times sector average. An increase in the dividend, giving a yield of 5 per cent, should encourage any doubters.

We don't like the construction and infrastructure sector, and that's the Government's fault. But we do like Balfour Beatty. Buy.


Our view: Buy

Share price: 112.6p (-1.7p)

Grainger, Britain's biggest residential property company, yesterday trumpeted the resilience of its portfolio, despite it reinforcing recent downbeat industry data that price growth in the housing market has "slowed". While its completed, and pipeline of, sales of £154.8m for the 10 months to 31 July was behind last year's figure of £180m, this is explained by Grainger's stated strategy of selling fewer lower margin units.

Over the 10 months, Grainger sold 593 vacant units for £90.1m at a margin of 42.6 per cent, compared to margins of 35.5 per cent on sales of 625 units for £86m last year.

It achieved these sales at values which were 6.9 per cent ahead of its September 2009 vacant possession values, above the average 3 per cent rise documented in the Halifax and Nationwide surveys.

Back in April, we advised buying Grainger at 135.5p, which does not look too clever now. Still, note that Grainger trades at a 40 per cent discount to its forecast adjusted net asset value for the year to September. Despite an uncertain outlook for the UK housing market – further house price falls are likely given constrained lending from banks and building societies – we think that sort of value is an opportunity not to be missed. Buy.