Gamble of the week: defensive telecoms stock

By Paul Hill May 01, 2009

Paul Hill

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Alternative Networks (AN) is a UK business-to-business telecoms provider. The firm purchases wholesale capacity from fixed-line and mobile operators, and then resells this bandwidth under long-term agreements to around 5,000 companies – such as Channel 4, BAT, Office Depot and Swinton Insurance. It also installs and maintains IP-based communication systems.

Alternative Networks (AIM:AN)

Due to its broad contracted base, expertise and strong recurring revenues (85% of sales), Alternative Networks is defensive by nature. Yet in these testing times, even recession-resilient organisations cannot entirely escape the slump.

Last Friday, Alternative Networks warned that first-half profits would fall short of targets, pushing the shares 10% down in the day. The culprit wasn't a loss of business. Rather, the problem is that the company's existing clients are now simply using their phones less, reducing foreign travel and cutting back on staff – altogether conspiring to decrease turnover to 5%-8% below expectations.

Alternative Networks share price

But it's not all doom and gloom. Cash generation remained strong, with net funds rising to £5.5m at the end of March, up from £3.2m in September. This was made all the more impressive by the fact that £2m was paid out in dividends and share buybacks during the period. Overheads are being trimmed and the firm is still winning new accounts, such as with Macmillan Trust and Weightmans Solicitors.

Indeed, during the first half its customer base actually grew in volume terms by roughly 4%-6%, indicating that it was gaining market share. Even after factoring in the softer outlook, I estimate that the company will deliver 2009 turnover and underlying earnings per share of £90m and 14p respectively, rising to £94m and 15.0p in 2010.

As such the stock trades on attractive p/e ratios of 7.5 and 7.0 and pays a secure 4.3% dividend yield, which looks far too cheap. Alternative Networks is a solid buy for income and value investors, with a strong balance sheet and reliable cash flows.

Recommendation: BUY at 107p (market cap £48m)

• Paul Hill also writes a weekly share-tipping newsletter, Precision Guided Investments

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