Blue Chip: Take a chance on Energis

SHARES in Energis, the recently floated telephone trunk network operator, were off to a weak start in their new life when they opened at 290p - only midway between the 250p and 325p they were offered to investors.

So it is gratifying for those who had faith in the company to see that the shares have defied initial scepticism, and have climbed to 356.5p, off a low of 254p.

It also defies what should by now have become the conventional wisdom about companies floated without a profits track record: things can only get worse.

Ample evidence exists to support this belief: Ionica is among the worst offenders, with its wireless telephone system up against the might of BT. Since its flotation at 390p, the shares have slumped to 92.5p.

And the premise of valuing a company on the so-called discounted cash- flow model, where there isn't a track record, has also come to grief with the likes of Eurotunnel.

Could Energis - predicted to turn a profit in 2001 - be an exception to this trend? One crumb of comfort is that while it remains loss making, it has been operational since September 1994 - long enough for management to have gained real experience of their market, and to have built up a truly advanced network. Most of this hangs from the pylons of National Grid, the owner of 77 per cent of the company.

So Energis is well placed against rival start-ups. Its reward has been to record annual sales of pounds 97m in the year to the end of March 1997 - more than double the pounds 42.7m in sales it made in the previous year. The boom is partly because Energis has a well-developed network, but the corporate sector - its target market - is also crying out for alternatives to BT and Mercury. Products, too, are proliferating: virtual private networks, frame relay, internet and intranets are some of the buzz words in use. Corporate telephony should be a pounds 7.5bn market and is set to explode over the next few years.

Plenty of things can go wrong for Energis. It is exposed to a volatile market, where new technology comes on in leaps and bounds. With its network up and running, improvements from here on - other than through acquisition - are likely to be incremental. And BT and Cable & Wireless should provide tough opposition. Even so, Energis could be a contender. With that in mind, the shares are a speculative, even risky buy at the current level. But the rewards could be appreciably greater than putting your money in BT or Cable & Wireless.