Convergence and quadruple play the holy grail of the IT and telecommun-ications industry involves offering bundled voice, mobile, internet and video solutions over a broadband connection. This isn't science fiction it's already mainstream for many UK businesses, which benefit from lower costs and better-quality services.
AT Communications (ATCG, 45p), tipped by broker Daniel Stewart
Blue-chip customer base and double-digit growth
AT Communications is a leading "one-stop" supplier of bundled communications for small and medium-sized businesses in the UK. It designs, builds and operates the most appropriate, cost-effective IP (internet) networks for corporations, and has 5,000 customers across more than 11,500 sites, including blue chips such as Harley Davidson, Siemens, and Lloyds. These include both public and private-sector organisations.
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In 2005, revenues increased to £15.1m, representing an underlying growth rate of 20% a year. The IP side of the business accounted for 94% of turnover and proforma earnings per share was 4.1p. In light of BT's £10bn investment to upgrade its network, I expect ATC's organic growth of 10%-20% to continue for the foreseeable future.
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New contracts and confident management
This year started in line with expectations and the board has "great confidence" for the year ahead. Indeed, ATC recently won three new Voice-over Internet Protocol (VoIP) contracts worth £1.5m with Guardian Newspapers, L'Oreal and Northgate Information Solutions, which further underpins the 2006 targets. Recurring revenues account for approximately 60% of sales, while customer churn is low at around 10%. The board expects to recommend a maiden dividend this year.
On Tuesday, ATC announced the acquisition of Britannia Telecom Group (BTG) for £5.8m, which is expected to be earnings enhancing in 2006 and beyond. 70% of BTG's sales (£5.5m in 2005) are generated from recurring revenues based on long-term maintenance and fixed-line voice contracts.
Attractive valuation with upside
Following acquisitions, broker Daniel Stewart forecasts turnover of £39.2m and earnings per share of 7.3p for 2006, which puts the shares on a miserly forward p/e of 7.4. Net debt stood at £1.6m in December 2005. Daniel Stewart have a target price of 86p, which seems achievable. ATC was floated on Aim in July 2005.
But what should we watch out for? Well, being a small player in a large pond, competing against the likes of BT, clearly carries risk. Furthermore, continual pricing pressure could also damage margins. However, in my opinion, ATC is a well-managed company, operating in a growth sector and trading at an attractive valuation.
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