The Investment Column: Web-savvy Pipex Communications is making all the right connections

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The Independent Online

Pipex Communications is the country's fifth-largest supplier of broadband internet services and yesterday's annual results proved it is making all the right connections, with sales up from £35.2m in 2003 to £102.3 last year.

Pipex Communications is the country's fifth-largest supplier of broadband internet services and yesterday's annual results proved it is making all the right connections, with sales up from £35.2m in 2003 to £102.3 last year.

But while its 192,000 broadband customers at the end of last year is a big jump from 93,000 the year before, there is more to Pipex than just connecting consumers to the worldwide web.

It has a website and data-hosting business as well that is delivering strong organic growth, boosted by the increasing use of off-site servers for storing documents. It also has a network operation that supplies telecoms services to business customers that is set to turn profitable this year, with £5.6m of new orders booked in the first quarter of the new financial year.

So Pipex is, in reality, a mini-telecoms conglomerate with a £162m market value. It has gone from a loss of £7.2m in 2003 to a pre-tax profits of £6.2m in 2004, with cash on the balance sheet at the end of last year of £11.3m. It has improved its margins as well, with the gross figure up from 43.5 per cent to 47.4 per cent in 2004.

The momentum in broadband connections in the UK, Pipex's core business, is being driven by high-profile campaigns by the likes of BT Group and the Cable & Wireless-owned Bulldog Communications, but smaller operators such as Pipex are cashing-in as well.

About half of UK households have an internet connection but new, high-speed broadband connections are only a small proportion of them. This will grow considerably in the next five to 10 years.

So everything seems set fair, except for the share price that has largely been disappointing since the company floated in 2000, even allowing for the technology bubble bursting.

But like many conglomerates before it - big or small - Pipex may well be suffering from a classic conglomerate discount to its true valuation.

Its rival PlusNet, for instance, has sales of just £54m but specialises in broadband connections. Iomart has sales of £7m but focuses on web-hosting and related areas. Together theyhave a market value of £150m, compared with Pipex's £162m, even though Pipex dwarfs them in terms of sales and profits.

There is strong evidence that Pipex is undervalued. Looking ahead, the company is expecting growth from increasingly popular, bundled services of voice and broadband internet. It also owns a licence for wireless broadband services that it will be testing in the this year, which could be an exciting source of growth for the company. Buy.

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