Daisy is a virtual telecoms provider for small- and medium-sized businesses (SMEs) based in Britain. The group was founded in 2001 by CEO Matthew Riley – it listed on Aim at 80p in July 2009. Its goal is to consolidate the fragmented £5.5bn UK market by offering a cradle-to-grave telecoms service for SMEs. The sales target is £500m by 2013.
This won’t be easy. But so far the execution has been flawless. Nine companies have been taken over and successfully integrated to date. That has triggered annual synergies of £18m and created a one-stop shop that commands a 4% share of the sector (behind dominant leader BT, on 51%).
The new group rents wholesale capacity from fixed-line operators such as BT and mobile groups such as Vodafone. It resells this bandwidth under long-term agreements to approximately 70,000 customers, such as Holidaybreak, British Museum, Manchester airport and Ticketline. Daisy also installs and maintains internet protocol-based communication systems, along with offering hosting and cloud services from its two data centres.
Gamble of the week: Daisy Group (Aim: DAY)
Thanks to its broad contracted base (no customer accounts for more than 10% of sales), deep vertical expertise and solid recurring revenues, the firm is a classic defensive. The task now is to grow organically, cross-sell products to existing clients, improve margins and complete more earnings-enhancing acquisitions. Investors can take heart from the fact that HSBC, Lloyds and Yorkshire Bank agreed to lend Daisy up to £75m in June. That debt facility is recognition that the buy and build strategy is sound.
House broker Liberum Capital is forecasting revenues and EBITDA for the year to March 2011 of £265m and £40m respectively, along with closing net cash of £16.7m. Assuming this is achieved – last week the board confirmed that it was on track – I would value the stock on an eight times EBITDA multiple. After adding back the cash and discounting at 12%, that delivers a fair value of approximately 120p per share.
That said, nothing is risk-free. C&W has warned that sales to the public sector have slowed to a snail’s pace ahead of the strategic spending review on 20 October. And BT could retaliate if it feels it is under threat. Meanwhile, future acquisitions could hit integration issues, especially if the UK falls back into recession. However, Daisy offers essential services at competitive prices and should be well placed to weather the tough times ahead.
Recommendation: speculative BUY at 95p (market cap £251m)
• Paul Hill also writes a weekly share-tipping newsletter, Precision Guided Investments