View from City Road: Cellnet hides a less secure core

ALTHOUGH it is hard to feel much sympathy for someone who invests pounds 4m for a 40 per cent stake in a business which eight years later is worth perhaps pounds 2bn, the relationship between the Securicor twins and their gilt-edged associate, Cellnet, has a certain irony.

Since Securicor and Security Services transferred to the telecommunications sector of the stock market, analysts and investors have shown only limited interest in their core business of security guarding, parcel distribution or the potential of prison management.

Yet this is what the management of Security Services, the holding company for Securicor's main operating activities, headed by Roger Wiggs, chief executive, actually does. It has no management role in Cellnet but instead must sit back and admire its stupendously successful investment while awaiting the arrival of a Cellnet dividend cheque over which it has no influence.

The stock market's love affair with mobile telephony means that the gross value of the Securicor twins' holdings in Cellnet, based on the pounds 2bn valuation, is about 15 per cent more than their market capitalisations before taking account of a hefty tax bill on a sale or demerger.

The dominance of Cellnet has helped to disguise a pedestrian performance in the core managed businesses during the recession. First-half figures from Securicor and Security Services indicate that cost-cutting and better marketing, particularly in parcels, are bringing an improvement. But they still made combined pre-interest profits of only pounds 4m to pounds 5m on sales of pounds 280m.

Cellnet itself shrugged off some nightmarish bad-debt experiences and, with the tardily introduced call-back messaging system, has increased usage. Securicor's share of profits rose to pounds 22.8m compared with pounds 19.8m in the second half of last year.

Nearly doubled pre-tax profits of pounds 26.6m to 31 March at Securicor were enough ahead of expectations, thanks mainly to parcels, to leave the 'A' shares 12p higher at 568p with Security Services 8p up at 424p. On pounds 55m pre-tax for the year, Securicor shares are on a stratospheric p/e of 24 and a minuscule yield.

But Cellnet's profits could well be hit by cut-price low-user packages this year and a cheap digital offering next. Unless BT, the 60 per cent owner, buys out the twins in frustration, the shares are amply valued.

(Photograph omitted)