Investment Column: Telecity's growth is the talk of the town

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The Independent Online


Our view: Buy

Share price: 337.5p (+2.5p)

There is big business in operating data centres, and Telecity Group has performed strongly this year, despite ongoing pressure during the downturn. It was one of the few companies brave enough to list after the onset of the crunch, and the confidence seems to have paid off after a bumpy start. Hitting its nadir at 132.25p in December 2008, the shares have been rising fast.

As the demand for ever quicker broadband increases – with Virgin Media offering 50Mb and companies trialling quadruple that – through the rise of online video and social networking, the company seems to be in the right place at the right time.

Telecity has learnt from a disastrous bursting of the bubble, in which time the share price fell 97 per cent, and has used the latest downturn to build its business. Since we said "buy" in February at 191p, the stock has soared. It also has a string of high-profile clients, including BT, AT&T and Hewlett-Packard.

TelecityGroup yesterday released an update of the four months to the end of October. Trading was in line with expectations as demand for its services continues, and the group said it was considering a move to expand in Europe to meet demand.

Milan Radia, analyst at Jefferies, said it was "no surprise" that the company has delivered strong growth. "Growing demand for real-time content delivery is evident across European consumer and enterprise segments. Telecity's newer sites offer the high power densities that powerful servers crave." Telecity added that the pipeline for orders also remains strong.

Jonathan Imlah, at Altium Securities, backed the group's 85 per cent revenue visibility and earnings growth of over 30 per cent as warranting "a premium rating". The group's price to earnings ratio is 10 times the estimates of full-year 2010. That's not demanding. We reckon the stock can go higher. Buy.

Chloride Group

Our view: Buy

Share price: 162p (+0.5p)

Chloride Group, which provides guaranteed power supplies to the likes of Heathrow Airport's Terminal 5 and Arsenal's Emirates stadium, has not had a bad recession. Its shares are up by 12 per cent this year. And even yesterday's first-half financial results, showing a pre-tax profits slump by 16 per cent to £16.2m on sales broadly flat at £153m, have done little to dampen either the board's confidence or the faith of City commentators.

In fact, the board is so keen to emphasise its conviction that it boosted the interim dividend by 3 per cent to 1.9p and confirmed bullish forecasts for the rest of the year. The Altium Securities analyst Oliver Smyth's analysis is that Chloride's tough short-term trading constitutes a "bumping along the bottom". Although there are not yet any clear signs of a sustainable recovery, yesterday's numbers still beat expectations, thanks to business in emerging markets and healthy services revenues. And Chloride is "fundamentally a share that should be owned for the next cycle". Add to that the house broker Investec's price to earnings ratio estimate of 15.6 times 2010 full-year expectations – as against international peers Emerson, Eaton and Schneider on 18.7 times, 23.2 times and 18.3 times respectively – and Chloride's stock has a compelling case. Don't expect a huge windfall in the short term, but the prospects are good slightly further out. Buy.


Our view: Avoid

Share price: 56p (-5p)

Vantis, the quoted accountant, has become embroiled in one of the more intriguing financial controversies of recent times, which has rather flown under the radar. Upcoming court cases limit what can be reported, but it basically involves the use of rules designed to encourage charitable giving. Their alleged exploitation is going to make a fascinating case (wrongdoing is denied). It's also contributed to some nasty one-offs, which pushed the business into the red for the year ending 30 April. A "debate" with auditors over the accounting treatment of the exceptionals has not helped sentiment, and the results (out yesterday) were delayed. Excluding this, the business saw turnover drop to £90m from £92.1m, and operating profits down at £11m from £14m. Business advisory work has been thin on the ground, but that's been offset by a thriving corporate recovery operation. If you can put aside the company's little local difficulty, is it worth investing in it for this? Corporate recovery is a good business to be in, but we were disturbed at the execs' obfuscation when questioned yesterday. And the market marked the shares down strongly. The recovery operation will do well, but we wouldn't be investing at this time. Avoid.