Alternative Networks shines after update

Shares of UK business communications service provider Alternative Networks soared after it said it will continue to increase it dividend payments and trading for the year remains on track despite industry headwinds.

In an update ahead of its full year results, the group said positive trading momentum had continued after strong gains in market share at its mobile group. The subscriber base was up 13% to over 77,000 at September 30th 2012.

"The market remains very competitive, but our own strong performance reflects the successful adoption of the enhanced Portal services by our customers in 2012," the group explained.

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Fixed line network services trading has been stable and broadly in line with expectations. Advanced Solutions started the year well, but economic uncertainty impacted new business investment decision making and as a result total revenues for the full year are expected to be approximately 5% lower than in 2011.

Alternative Networks said it increased net cash balances by £7.4m in the second half to £20.5m and strengthened gross margins across the group.

A final dividend of no less than 7p and full year dividend of no less than 11p has been recommended, up from 10p in 2011.

"Going forward, the board intends to increase the dividend by not less than 10% each year in 2013 and 2014," it said.

Broker finnCap said the trading update reveals all the usual pressures the telco sector is experiencing: regulatory influences on mobile, flat-lining fixed line revenue and longer sales cycles for projects and larger opportunities.

"AN [Alternative Networks] operates in a similar environment but with a successful customer portal which reduces churn and admin costs; and with a material cash balance which exceeds the company's needs and therefore is available for distribution to shareholders," notes finnCap's Andrew Darley.

"We favour yield as the route to benefit from holding telcos: AN's cash and cash generation gives management the confidence to guide to +10% dividend growth in 2012, 2013 and 2014, and the opportunity for a special dividend or buybacks in the interim," Darley added.

The broker has reiterated its "buy" recommendation and 280p target.

Meanwhile, Westhouse Securities suggests the trading update indicates that recent share price weakness is unjustified.

"Having downgraded the stock from Buy to Neutral in June, the share price has declined by c. 23 %. Revisiting sector valuations, the removal of the valuation premium to its peer group prompts us to move our recommendation from Neutral to Strong Buy," revealed Westhouse analyst Kevin Fogarty.