Investment column: Colt rings up sales success story

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The Independent Online
COLT TELECOM may be loss-making, but its ability continually to deliver impressive customer and sales growth is almost getting boring.

Like Cable & Wireless Communications, it is an example of how telecoms deregulation has created opportunities for nimble up-and-coming players. Despite its phenomenal growth, it still has only 1 per cent of its targeted pounds 40bn European commercial telecoms service markets. Does this mean the shares will continue to soar?

In the short term, sustaining sales growth won't be a problem. Colt is focused entirely on providing telecoms services to corporate clients in Europe and is installing its networks in select cities in the region. Having dug up London - Selfridges is a customer - it's focusing elsewhere. Half of sales now come from outside the UK. Colt is driving revenue growth, acquiring new customers and selling new services to old customers. Revenues are split 70:30 between charges for calls and Internet services and fees for renting its high-bandwidth lines.

It has a presence in 18 cities in 9 countries. Rolling out the network is not cheap. Colt spent pounds 111m in the second quarter alone. Cost of sales and expenses rose 120 per cent to pounds 210m. Colt says losses will widen as it enters new cities. Meanwhile it is linking up its city networks to avoid leasing lines from other telecoms companies.

The problem Colt faces is that its sales growth rate - currently 55 per cent - will one day slow. Dell Computer, another company delivering impressive sales growth, saw its shares punished when its growth rate fell off earlier this year. Colt's account 86 per cent growth rate is surely unsustainable.

Williams de Broe expects Colt to generate sales of pounds 400m this year, and deliver earnings before interest, tax, depreciation and amortisation (EBITDA) of pounds 4m. The real action happens in 2003. Colt should then make a pre-tax profit of pounds 81m, and pounds 414m EBITDA. Valued at 18 times 2003 earnings, Colt is looking fully valued, especially given the uncertainty of how the market will react when the growth rate tails off. The jam is several tomorrows away and impatient investors may wish to take profits.