Last week the government released its long-awaited report on how to fast-track the country into the digital age. One proposal is that by 2012 all households should have broadband access. But what does this mean for investors? For starters, it should jump-start a major upgrade in telecoms infrastructure, which will boost equipment suppliers such as Alcatel-Lucent.
Iomart (Aim: IOM)
But it should also allow more of us to enjoy Web 2.0 and ‘cloud computing’ services – such as data-hungry video-on-demand (VOD) and software-as-a-service (SAAS) applications. As more people download films, they will also want to archive them securely. This should boost the expanding data-storage sector. One beneficiary of this should be Iomart, a UK hosting specialist with four data-centres located in the City of London, Glasgow, Nottingham, and Leicester. These serve prestigious customers such as Stagecoach, the London Stock Exchange, Stanley Gibbons and BSkyB. Over the last six months, the group says that it has added 30 new customers (taking its total to 90) and improved utilisation rates to 22%. Due to the firm’s high ratio of fixed to variable costs, this asset-utilisation measure is important. It largely explains why Iomart is only just moving into profits on estimated turnover of £15m for the year ending March 2009.
With net cash of £10.9m (or 11p/share), the board has plenty of time to load up the data-centres, and is implementing a two-pronged strategy of internally generated and acquisition-led growth. Assuming suitable targets are found, I could easily see the group achieving earnings before interest, tax, depreciation and amortisation (EBITDA) of £6m by 2011. As such I would value the company using a ten times price/earnings multiple, discounted back at 12%. This produces an intrinsic worth of about 42p per share.
As ever with stocks listed on the Aim market, there are risks. Iomart is still relatively small compared to its larger competitors, so could struggle to reach critical mass. The firm could be hit by downward price pressure as customers tighten their belts, new technologies are developed and more capacity becomes available. In particular, the London market could feel the pressure of budget cuts resulting from the banking crisis.
That said, with the industry currently looking sound, and Iomart set to pay its first dividend this year, the stock looks good value. Indeed at these depressed levels, I could even see it being mopped up by a trade buyer above 50p per share.
Recommendation: speculative BUY at 26.5p (market capitalisation £25.7m)
• Paul Hill also writes a weekly share-tipping newsletter, Precision Guided Investments.