News blog
AdEPT Telecom
- BY: Andrew Hore |
- POSTED: 06/07/2010 |
Voice and data telecoms services provider AdEPT Telecom is focusing on generating profits in order to reduce its debt so that it will be more attractive to investors.
Underlying pre-tax profits improved from £2.04m to £2.2m even though revenues were 10% lower at £25.7m in the year to March 2010. A reduction in overheads helped offset the lower revenues. Margins are expected to continue to improve but revenues are also set to fall again this year.
AdEPT was formed in May 2003 and it has grown its EBITDA every year since then but it will be difficult to do that this year.
The cash generated from last year’s profits has helped reduce net debt by £1.6m to £9.2m. This debt was built up during the period after AdEPT’s flotation in February 2006 when the company made five acquisitions. Net debt peaked at £11.3m in March 2008. AdEPT has not made any acquisitions for two years so all surplus cash has gone to reducing debt and that is set to continue.
A decline in call volumes led to a reduction in revenues from fixed line telecoms from £27.6m to £24m in the year to March 2010. Mobile revenues grew by 86% to £320,000 thanks to the increased use of smartphones and data revenues were 73% ahead at £1.1m.
AdEPT is not a mobile service provider and this is always going to be a relatively small part of the business. Data, though, should provide more opportunities for growth. AdEPT is one of 20 companies that are approved to sell data products to universities and colleges connected to the Ja.net network. This will boost the credibility of the business with other customers as well.
Corporate failures are always a risk but the bad debts related to failures last year were little more than £90,000.
AdEPT is increasingly focusing on larger clients who can generate more in revenues and the 200 largest customers are spending more than £1,000 a month.
AdEPT currently generates more than 50% of its revenues from customers paying fixed monthly fees dependent on the number of products that they use. This reduces the dependence on overall activity levels. AdEPT generated 86% of last year’s revenues from customers signed up to more than one of its products.
Although house broker Astaire forecasts a slight dip in profit to £2.1m this year, the debt will continue to reduce. Astaire forecasts net debt of £7.5m at the end of March 2011, falling to £5.6m at the end of March 2012. A reduction in the interest charge will help profits to rise in the coming years.
The debt facilities last until the end of 2011. The main facility has an interest rate of 3.5 percentage points over LIBOR, while the smaller facility has an interest rate of 5.5 percentage points over LIBOR plus payment in kind interest at 2% a year.
Acquisitions are still off the agenda. The shares are trading on less than three times prospective earnings so issuing shares to pay for acquisitions is not realistic. Management wants to continue to reduce debt in order to attract investors and raise the multiple and, anyway, they believe that the prices of telecoms businesses are too dear at the moment.
Debt reduction is likely to continue for another 12 to 18 months at least. Longer-term, though, this remains a fragmented sector with hundreds of companies involved and AdEPT should be well-placed to take advantage of consolidation opportunities.
Any shareholder who owns at least 1,000 AdEPT shares can receive free residential phone line rental worth £120 a year. This requires an investment of £215 plus dealing costs at the current share price of 21.5p, up 1.5p on the day.
AdEPT is valued at £4.53m – less than one-half of the level of its net debt.
Download the June edition of AIM Journal at http://www.hubinvest.com/AIMPDFJune2010_9.pdf .
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