Bottom Line: Vodafone a promising long-term hold

VODAFONE'S previously stratospheric premium rating - its multiple was nearly twice the market average in 1991 - came close to being eliminated earlier this year.

News in May that net new subscribers in its core UK cellular activity were running at record levels put paid to that, as did blue sky hopes of a bid from AT&T, post-BT and MCI. The shares have since outperformed the stock market by 20 per cent, restoring Vodafone to a respectably superior rating.

For a company that has a market capitalisation of pounds 4.6bn, annual turnover of pounds 664m and operating margins of 46 per cent, this rating may well be high enough.

After a 20 per cent rise last year earnings growth could be back to single figures this year. Operating profits will be slowed by an extra pounds 25m of start-up costs on Vodafone's overseas expansion programme. At the same time, as capital spending is stepped up from pounds 139m to pounds 300m, interest receivable of pounds 15m in 1992/3 could come under severe pressure. The tax charge is also set to rise.

The company could easily use its 3.1 times cover to squeeze out another 15 to 20 per cent rise in dividends but, as the yield is already a well-below-average 1.9 per cent, the stock market scarcely expects anything less.

A 14.5p fall in the share price to 451p yesterday does follow a strong run. But in its home market there are also fears that the imminent arrival of Mercury PCN will provoke Vodafone and its smaller rival Cellnet to start lowering prices.

Overseas, where Vodafone is well on the way to having a larger potential exposure than in the UK, the company rightly argues that investments such as the newly announced pounds 5m move into South Africa will pay off when, by 1995, there are no more licences to give out. But will they be anything like as profitable as the UK?

Meanwhile the recent re-rating has gone far enough. A good long- term hold, though.