There's a cheap telecoms star out there that the market hasn't picked up on yet, despite several Fools having spotted it.
My attention has turned back to the telecoms sector of late, as I've been wondering how the smaller fish are managing in today's turbulent pond. It's definitely looking like a sector of contrasts.
A rising star
One telecoms company I'm definitely taking a linking to is Telecom Plus (LSE: TEP). The company first came to my attention in March, when I was impressed by how well it had handled the cut and thrust of telecoms competition in a market in which the big guns tend to hold the advantages. Telecom Plus has, generally, been growing revenues and paying dividends for a few years now, and back in March the forecasts for 2009 and 2010 were looking good.
Its latest results came in pretty much bang on estimates, with earnings per share up once again, to 24p, and a resulting increase in the dividend to 17.5p. Estimates for next year have since been scaled back slightly, with a small drop in earnings to 22p now expected (but another dividend rise, to 22p pencilled in). If that is achieved, I think it will be a very good result in the current climate. Estimates for 2011 suggest a nice rise in both earnings and dividends again, to 31p and 24p respectively, but with today's uncertainty I'd wait until at least this year's first-half results before I'd really start thinking that far ahead.
Growth and dividend
As Bruce Jackson pointed out recently, the current P/E of nearly 12 goes very much against the grain of the ultra-low P/Es that people seem to think are justified in today's hard times. If the company was purely in a "blue sky" phase or was in debt then I might agree with such caution, but it has no debt and is bringing in lots of cash. It is offering a dividend yield of 8% (and, I think, is very likely to meet its dividend targets for the next two years). It still has some significant growth potential too -- only a couple of weeks ago, we listed Telecom Plus as a multi-bagger candidate.
As I said in March, I like the Telecom Plus customer-led marketing model. While it isn't the kind of approach that leads to rapid short-term expansion, and perhaps wouldn't be sustainable in a much larger company, I don't think either of those are problems. Steady growth is more important than over-extended rapid growth, and the current strategy is cheap (it doesn't require massive spend to get the word out, when customers are doing it themselves). I think the company still has plenty of organic growth potential in it before it needs to think about a change of marketing strategy, and I suspect it might end up being bought out at a handsome price before that becomes a problem.
A contrast
As a contrast, consider similarly-sized, Hull-based, telecoms player KCOM Group (LSE: KCOM), which started out as Kingston Communications (which it now owns).
Originally owned by Hull City Council, by providing Hull with its basic telecoms services it gave the city a rare distinction (not to mention its cream-coloured telephone boxes) the only one in the UK not served by BT Group (LSE: BT-A). KCOM has since expanded, partly through acquisitions, and now operates a number of telecom services.
With a market capitalisation of £147m, KCOM is only a little smaller than Telecom Plus (at £193m), and its turnover is more than double. But even with that large difference in turnover, the two companies have been recording similar levels of pre-tax profits in recent years. And for 2009, KCOM's preliminary results show a loss of around £100m, and though a return to profitability is expected next year and the year after, it does look pretty flat. If current forecasts turn out to be accurate (and updates are expected soon, in the back of recent results, so we should probably expect some change), P/E for 2010 would be about 7.7.
Couple that with KCOM's net borrowings of £170m (more than the market cap of the company), and you can perhaps see why I think Telecom Plus's prospective P/E of nearer 12 looks less demanding, and why I wouldn't be recommending KCOM to any widows and orphans out there.
But the star? Where else are you going to get a steady growth share, already paying 8% in dividends, with no debt, good control of costs, and top-notch management? Yep, I like Telecom Plus (I don't own any shares, but that may well change before too long).
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