Bottom Line: Vodafone still on line

IF all goes to plan and Vodafone wins four licences to operate in Holland, Belgium, Spain and Ireland while buying into existing cellular businesses in another four countries, the company will have invested pounds 340m in overseas projects by this time next year.

By then it will have an international exposure as large as it has in the UK, as measured by the arcane cellular arithmetic of populations weighted by relative GDP. It answers any worries about the ultimate saturation of the UK mobile phone market or acute price competition although there is little sign of either at the moment.

But some in the stock market are edgy about it. Start-up costs overseas, set to rise from pounds 45m to pounds 80m this year, are depressing profits, lifting the tax charge and putting a severe brake on earnings growth in the short-term.

Vodafone overseas will obviously never emulate its UK success. Australia, for example, where Vodafone is number three, is disappointingly slow to get into profit.

But Vodafone is confident it can earn 20 per cent on its money. This implies an ultimate profits stream of pounds 70m from overseas, which values the investments at pounds 900m to pounds 1bn, using Vodafone's current p/e multiple, against a market capitalisation of pounds 5bn.

Underlying UK growth was still impressive. Stripping out start-up costs, one-off disposal profits and acquisitions, operating profits rose 18 per cent on almost steady margins despite a 5 per cent drop in revenue per customer.

But there are worries about how long Vodafone can sustain operating margins of 48 per cent without attracting regulatory wrath. Mercury's One-2-One is not posing much of a challenge although Vodafone is taking Orange seriously.

Although it sees no reason to cut tariffs this year, Vodafone will have to spend heavily on incentives to point new customers towards its digital phones to ease capacity on the analogue system.

Because of the overseas start-up costs, profit forecasts for 1994/5 have been cut, with Credit Lyonnais Laing on pounds 380m and virtually unchanged earnings of 24.5p.

This looks odd against a prospective p/e of 21 at 514p. But until the current surge in the UK mobile phone market slows, competition bites into tariffs and overseas expansion fails, the rating may have the benefit of the doubt.