Gamble of the week: tech co set to gain from broadband boom

By Paul Hill Mar 06, 2009

Paul Hill

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As most of the West shrinks into recession, one area bucking the trend is the internet. Growth is slowing, but the amount of online traffic is still rising by more than 50% a year. This is being driven by new, data-hungry applications, such as peer-to-peer file sharing and online TV, along with the increasing number of broadband users. With government stimulus packages set to plough investment into the digital age and more families deciding to enjoy a cheap night in, this growth rate could actually accelerate.

BATM Advanced Communications (LSE:BVC)

One stock that has been benefiting from the online boom is Israeli firm BATM. The company specialises in niche broadband routers and switches that help network operators to cut their running costs, increase their bandwidth and deliver innovative new web 2.0 services.

So how is the business faring? At January's trading update, performance was still on track, despite some of its larger rivals – such as Ciena and Cisco – reporting difficulties. Preliminary results for 2008 are out this month, with house broker Shore Capital expecting sales and underlying earnings per share of $132m and 7.7 cents. That means the stock trades on a ludicrously cheap p/e of less than five, and has about $60m (around 11p a share) of cash in the bank. I'd value the firm on a ten-times through-cycle operating profit multiple, discounted back at 12% – generating an intrinsic worth of around 50p per share.

Potential snags are that this is a small firm with heavyweight rivals. It's also sure to be hit near term by customers deferring, or even cancelling, orders. But with blue-chip customers, first-rate proprietary products and the potential to benefit from Nortel's recent demise, I rate the stock a buy. There will be bumps along the way, but with the long-term fundamentals still intact, coupled with its sound balance sheet, investors can afford to be patient.

Recommendation: speculative BUY at 24p (market capitalisation £92m)

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

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