Thus and Fibernet are pick among small telcos

Pendragon car sales in top gear; Turbo Genset still has much to prove
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The Independent Online

Is it time to hang up on the alternative telecoms companies, the groups who set up rival networks to British Telecom during the investment boom and whose bombed-out shares have unexpectedly been the stellar performers of the year?

Cable & Wireless is up 180 per cent since January, despite the City having very little idea what to expect when the company manages to extricate itself from its international business. Yesterday, Colt Telecom was up a further 10 per cent and Thus leapt 8 per cent, both to levels not seen for 18 months. Why?

To some extent, there has been what one City observer described yesterday as "dumb buying of beta". Beta is jargon for volatility, and the dumb investors are those who know nothing about the alternative telecoms carriers except that their shares go down more than others when the stock market plunges and up more than the rest when there is a rally. With the wider stock market valuations starting to look stretched, the smart money is on dumb investors closing their bets on the telecoms stocks soon.

It would be brave to recommend anything in this sector to new investors now. The enterprises are valued at an average 7 times earnings before interest, tax and write-downs. That looks expensive, since not all of them will emerge with strong, growing businesses in the short or even medium term, while there is so much spare network capacity in Britain. The question is, where are the chunky profits to made by short sellers?

The puniest companies in this mini-universe include Kingston Communications and Redstone, the latter because, having sold its network to BT, it must await an unlikely upturn in demand. Kingston shares are a sell because of a geographical focus on Hull (where it has a profitable but unexciting monopoly) and a UK-wide unit that looks likely to see sales and margins squeezed in the land grab for small business customers. There are now 90-odd service providers offering alternatives to BT, and switching to them has been made easy. It is the likes of Thus and Fibernet, with hi-tech networks targeted at demanding large businesses, who will win out.

Pendragon car sales in top gear

Cars are racing out of showrooms. The end of "rip-off Britain", together with structural changes in the market, are really paying off for dealers such as Pendragon.

The company, one of the UK's big two (with Reg Vardy), has told the market to upgrade forecasts for the second time this year. Pendragon sells mainly top brands such as Jaguar and Mercedes, but also has Ford and Vauxhall.

There are a number of positive factors for consumers and dealers. Car prices have come down markedly in Britain and with interest rates so low, financing for car purchases is very attractive. Add to that the over-supply of cars, as there is too much manufacturing capacity (meaning great incentives for dealers and consumers) and the upcoming change to "block exemption" rules that will shift power from manufacturers to dealers, and the likes of Pendragon look set for a continuing good time.

Pre-tax profit jumped 53 per cent to £23.7m in the six months to 30 June. Turnover slipped slightly, from £998m to £948m as less profitable business was cut out but margins improved from 2.4 per cent to 3.2 per cent.

The UK, accounting for turnover of £834m, is booming while the less impressive US and Germany are tiny businesses by comparison.

The margins in the £300m-a-year Ford business are getting better but at just 1 per cent, there is plenty of room for improvement just to bring it up to the group average.

It is hard to see much to worry about. There are good growth prospects and there is likely to be consolidation among dealers. Pendragon shares are yielding 3.2 per cent at yesterday closing price of 236p, up 12.5p. After upgrades, the forward multiple is 12, which is not cheap but, given the prospects, the shares are worth considering.

Turbo Genset still has much to prove

It is two years since we last looked at Turbo Genset which, at the time of the Californian energy crisis, was something of a hot property on the stock market. The company was spun out of Imperial College London and has developed generators of a size suitable for powering small office blocks, factories, shopping centres and other public buildings.

When we tipped it at 430p, we thought we were being "green" in the environmental sense. As it turns out, we were being naive. As so often, commercialisation has proved tougher than the group, and its optimistic founder Colin Besant, ever suggested. Fast forward two years to a share price of 42.5p (up 10.5p yesterday) and a set of results showing losses of £3.9m for the first six months of the year. Shipments of the pioneering 400kW generators have been made to Detroit Energy and there are now distribution deals with players in India and the Middle East, although their worth is yet to be proved. There was also the tantalising news that Turbo Genset is "close to an agreement for marketing and systems integration with a large industrial group that would cover the Indian subcontinent".

The environmental and economic arguments in favour of local generators are strong; Turbo Genset itself still has much to prove. Wait.

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