Comms Dealer January 2012

BUSINESS MATTERS

Comms sector in review A

slew of results in the last month highlighted the attractive, defensive, cash generative nature

Philip Carse

Philip Carse, Telecoms Analyst at IS Research, reports on the recent performance of leading companies in the comms space.

Comms Index (14th December closing prices) Adept Telecom

Alternative Networks BT Group

C&W Worldwide COLT Telecom Daisy Group

Maintel Holdings Pinnacle Telecom TalkTalk Telecom

of telecoms resellers, as well as fast growth in hosting and data centre markets. Multi-utility reseller Telecom Plus, which trades as Utility Warehouse, grew half year revenues and EBITDA by 10% and 32% respectively to £161.7m and £11.2m, all through organic growth, while the usual summer positive working capital led to free cash flow of £28.7m. Last October’s acquisition of Scalable Communications enabled Alternative Networks to report full year revenue and EBITDA growth of 22% and 27%, to £117.3m and £15.4m, with organic growth of 1-4%, and the company raised its dividend by 64%.

Daisy’s first M&A-free half showed a much clearer picture of the business, with revenues and EBITDA of £176m and £26.6m respectively, and 1-2% organic growth. Increased EBITDA margins are expected in the second half as the company secures more efficiencies from the March/April Outsourcery mobile and Telinet/Ipitomi acquisitions.

Meanwhile, Adept Telecom did its usual trick of growing EBITDA (by 0.8% to £1.9m for the first half) on falling revenues (down 8.2% to £11.1m), while free cash flow of £0.9m enabled another meaningful

Hosting and Fixed Line peer group share price performance Share price

MKt cap £m 36.0

282.5 187.0 16.7 86.6

100.5

Iomart 119.0 Kcom

67.8

266.0 0.3

135.0

Telecity 628.5 Telecom Plus Virgin Media Average

771.0 1390.0 FTSE All Share 2754.8 7.6 136.2

14538.3 450.6 771.7 268.3 124.7 350.3 28.4 6.0

1234.0 1250.0 539.1

4014.1

reduction in net debt to £6.5m. In hosting and data centre services, iomart enjoyed strong first half revenue growth of 35.6% to £15.4m and EBITDA growth of 85% to £5m reflecting operating leverage. We estimate that just over half the growth was driven by acquisitions, including Titan and Switch Media, and the company also announced another two small deals (see below).

Kcom reported first half revenue and EBITDA growth of 1.6% and 4.5% to £198m and £40.7m respectively, partly helped by a one-off £7m network build contract, and continued debt reduction (by £6.9m to £75.1m).

Strategic buys Following the preponderance of private equity driven deals in the last couple of months (Onyx, Adapt, Lumison), it was the turn of strategic buyers, with iomart completing two small deals – EQSN and Global Gold – for a total of £3m in initial cash consideration and up to £3.7m in total. The headline multiple paid for EQSN was 9x historic EBITDA, but iomart expects the final valuation to be closer to 4-5x EBITDA once synergies are taken into account. EQSN adds 40- 50 large customers and managed hosting revenues of £1.7m while Global Gold brings in 2,000 lower spending hosting customers.

Share price 1 month 5.1% 8.7% -2.6%

-41.7% -14.4% 1.5% 9.5% -5.2% 9.7%

-23.7% 7.2% 2.5% 7.5% -8.7% -3.2% -3.1%

Share price 3 months 5.9% 1.4%

10.4% -43.2% -14.7% -9.5% 17.2% -4.7% 23.5% -12.1% 11.0% 16.3% 13.7% -11.7% 0.3% 1.7%

Share price 1 year 54.8% 49.6% 7.5%

-73.4% -33.6% 0.0%

32.4% 31.3% 19.6% -23.7% -14.2% 23.8% 81.6% -17.9% 9.8% -9.7%

Kcom’s Accelerate Channel Partner Programme now available 34 COMMS DEALER JANUARY 2012

Overall, the hosting and fixed line sector tracked the FTSE in share price terms over the last month, with an average 3.2% decline. However, much of this was due to CWW (-42%), COLT (-14%) and Virgin (-9%). In comparison, the solid results highlighted above helped the share prices of iomart (+10%), Alternative (+8%), Telecom Plus (+8%) and Adept (+5%).

Daisy ended up +2%, while Kcom was down 5%. The last month’s share price performances largely mirrored the last year, with network owning CWW, COLT, TalkTalk and Virgin Media shares down by more than the FTSE’s 10% fall over the same period, while the share price gainers have largely been the resellers (especially Telecom Plus, Alternative, Adept and Maintel) and the data centre/hosting providers (iomart and Telecity).

Megabuyte’s monthly Hosting and Fixed Line reports are sponsored by Knight Corporate Finance.

Round up

Alternative Networks details excellent FY11 Alternative Networks had an excellent FY11 to September, with 22% revenue and 27% EBITDA growth, aided by the Scalable acquisition and a strong performance from the existing business. The full dividend has been raised 64% on an underlying basis to an above-expectations 10p.

Exponential-e ups the ante with debt-funded network expansion Network connectivity specialist Exponential-e is on track for 30% revenue growth in the year to January 2012 and, according to Founder and CEO Lee Wade, 40% sales book growth suggests that the following year is looking equally as promising. IS Research publishes www. megabuyte.com, a company analysis and intelligence service covering over 200 public and private UK technology companies. philip.carse@is-research.co.uk

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