Investment Column: Telecity stock will catch up with performance

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The Independent Online

Telecity

Our view: Buy

Share price: 191p (+21p)

"2008 has been an excellent year for Telecity Group," said chairman John Hughes, when announcing the group's full-year results yesterday. The numbers are indeed good, with the FTSE 250 company, which manages data centres, posting a pre-tax profit of £20m, up from a loss of £7.1m in 2007.

Chief executive Mike Tobin says that he struggles to think of any risks for the business, especially since the use of online data, and the need to store that information, is soaring.

With between 80 and 85 per cent of business needed to match analyst expectations already booked for the year, 2009 looks like being another stellar 12 months, argues Mr Tobin.

But whether shareholders will be equally confident remains to be seen. Yes, the company's stock was up 12.4 per cent on the news of the undoubtedly good results yesterday, but Telecity shares are down a disappointing 37 per cent since the first-half results were announced on 30 July last year. The group is not as well known as some, and Telecity has outperformed most, but for a group doing so well, investors deserve a better stock performance.

There is a continuing attractiveness about Telecity shares, however. While most groups are rightly cautious about the coming 12 months, Telecity is upbeat about what the year will bring.

Most of the experts are, too. "Telecity currently trades on an enterprise value/Ebitda of 7.9 times and price earnings ratio of 15 times," says Cazenove. "However, given the growth of demand, in addition to the operational gearing of Telecity's data centres, we believe that a deferred cashflow (DCF)-based valuation is more appropriate. Our DCF of the existing Telecity data centres values the company at 200p per share."

If the group can continue its impressive performance, we think it is only a matter of time until the stock catches up, allowing investors to cash in. Buy.



Avanti

Our view: Buy

Share price: 168.5p (+9.5p)

Five. Four. Three. Two. One. Buy. It is going to be a fascinating year following Avanti Communications, the satellite broadband group that Lord Carter, the Communications minister, likes to mention in relation to getting everyone in the UK logged on to broadband by 2012.

The group, which yesterday issued its interim results saying that an operating loss of £1m has widened on the same period last year, is set to change radically, and hopefully for the better, later this year when it launches its own satellite into space.

Avanti has certainly had its fair share of government support, including a £24m grant for the group. Chief executive David Williams points out that the European Commission is also providing €3bn of support to the industry to get the 30 per cent of Europeans that do not have access to broadband connected.

So can Avanti's share price rise as meteorically as its satellite is scheduled to do? By ignoring today's share price, investors are taking a punt on the fact that the group is expecting to grow hugely in the next few years.

Obviously, there are risks, not least that the satellite will never get off the ground. The group reckons its satellite is capable of adding profits worth 75p to 100p a share, however, and the bird itself is insured for £89m; should it blow up on lift-off, shareholders will get a payout worth 170p a share, which means breaking even on today's price.

While Avanti, with its prime earner not yet in orbit, is certainly a risky punt, we like it. The Government is keen to provide broadband access for all by 2012, and that alone should support the share price. It is an illiquid stock, but we would advise filling your boots if you can. Buy.



Research Now

Our view: Buy

Share price: 272.5p (+12.5p)

Research Now is proof that a good small-cap's shares can perform well in a downturn, and proves further that the excuse used by chief executives that the poor stock performance of their company is down to being ignored by the market, is nonsense.

The online market researcher, whose share price is more than 3 per cent up on this time last year, put out a good set of full-year numbers yesterday, saying pre-tax profits were up from £300,000 to £5.7m. The stock then rose another 4.8 per cent.

With corporate clients keen to be ever more targeted in their marketing, the case for Research Now becomes obvious. Those at Investec reckon the share price is set to rise to 310p in the next year, saying that the group, trading on 8.8 times its 2009 price earnings ratio, deserves to trade at a premium to its peer group.

Research Now's shares performed well in 2008, and there is no reason why 2009 should not be similar. We see no reason not to buy.

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