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AdEPT Telecom – Interim Results in line with Expectations, Reiterate ‘Buy’ at 22p – Target Price 60p

AdEPT Telecom, a leading independent provider of fixed line and mobile voice and data telecommunications services to small and medium sized UK-based businesses, announced on 16th November results for the 6-months ended 30th September 2010 which were in line with expectations.

Revenues overall fell by 7.1% to £12.09 million, in part due to a challenging economic environment reflected in reduced variable call volumes, although exposure is reduced as call revenues represent a smaller proportion of total revenue. The gross margin contracted by 1.1% points to 35.9% largely due to the more challenging economic and trading conditions. However, in line with AdEPT’s strong commitment to strong cost control and focus on winning and retaining larger customers administrative expenses fell by an impressive 17.7% to £3.598 million.  The continued focus on cross-selling has yielded gains, with the proportion of customers taking three or more products increasing from 20.1% to 27.2%. Operating efficiencies have enabled operating profit to jump by 67.6% to £0.741 million and for the operating margin to widen from 3.4% to 6.1%. Net finance expenses fell by 9.9% to £0.598 million due to the further reduction in group debt of £1.05 million to £8.16 million and as a result AdEPT reported a pre-tax profit of £0.143 million compared with a loss of £0.222 million a year earlier.

Table: Interim Results

Source: Company

Notes: 1 Adjusted earnings per share, after adding back amortisation and non-recurring costs.

During October 2010, AdEPT renewed its credit facility with Barclays Bank, albeit at a level £1.125 million lower than before at £11.125 million. Nevertheless, the terms are generally more favourable and provide AdEPT with greater operational flexibility together with less onerous banking covenants and lower interest rates, which should reduce the overall annual interest charge by £0.115 million. As at 31st October 2010 approximately £2 million was undrawn and given the group’s commitment to cash maximisation and debt reduction AdEPT has ample funding capacity to comfortably drive its organic growth strategy.

The momentum already established has continued into the second half and the group’s performance will increasingly reflect the growth in the stickier and higher margin Premier Customer division (large, multi-site customers) especially as its service offering is further broadened. During the last six months this division secured five notable 24-36 months contracts with a total combined value comfortably in excess of £1.9 million. In addition, since its authorisation last March, AdEPT has begun to win contracts under the JaNET (Joint Academic Network) framework. Consequently, we remain comfortable with our existing forecasts while the key to the investment case remains the company’s consistent and proven ability to generate strong cash flows and de-leverage the group at about £2 million per annum.

Therefore, assuming that the very conservative and current EV/EBITDA multiple of 3.9 (Daisy is acquiring SpiriTel on a multiple closer to 5.6 times) is unchanged within two years the equity would be valued at £7.22 million, equivalent to share price of 34.3p. However, the UK telecom market is consolidating and this should result in a re-rating, probably closer to the Daisy/SpiriTel EV/EBITDA multiple of 5.9 times, which suggests a share price of 60.1p, therefore, with the shares trading at 22p, our stance remains buy.

Forecast Table