One of the hottest topics over the past few years has been cloud computing (internet-based computing in which shared resources are provided to computers and other devices on demand), and the need to deliver super-fast software over the internet from secure off-site servers. One beneficiary of these trends has been Telecity, which operates 24 server ‘farms’ across Europe. It rents out space to groups such as Ernst & Young and the BBC. Sales have mushroomed due to the popularity of online video and other bandwidth-heavy applications and to finance houses relocating their “flash-trading” activities closer to the main exchanges.
Telecity’s 2010 first-half results were impressive. Like-for-like revenues climbed 14.7% to £93.7m, producing a 29% leap in adjusted earnings before interest, tax depreciation and amortisation (EBITDA) to £37.9m, driven up by better occupancy rates and hardening prices. Capacity has been increased in Stockholm and Manchester via the £21.1m acquisition of IFL in August. The City forecasts 2010 and 2011 sales of £197m and £231m respectively, delivering underlying earnings per share (EPS) of 19.3p and 22.6p. However, shareholders should tread with caution.
Telecity (LSE: TCY), rated a BUY by Charles Stanley
Firstly, the hosting industry is infamously cyclical. During boom times both utilisation rates and selling prices soar. These ‘super-profits’ draw in new entrants, who in turn build extra capacity to meet the rampant demand. Google and Amazon are already building gigantic server farms globally. Secondly, the stock trades on a lofty rating of more than 27 times 2010 earnings – that looks far too expensive. I would value the group on, at best, a ten-times EBITDA multiple. After deducting net debt of £65m, that generates about 390p per share. Lastly, private-equity outfit Oak Hill recently sold 12 million shares. So despite rumours of a bid from American rival Equinix, it’s time to take profits.
Recommendation: SELL at 506p
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