Investment View: You should go for a firm that has its head in the cloud

This company is a crucial cog in the digital economy’s wheels and benefits from the growth of outsourcing too

TELECITY

Our view: BUY

Price: 846.5p (-7.5p) 

Telecity shares have been as hot as Scotch Bonnet chilli peppers for so long it comes as quite a surprise to see them consorting with polar bears.

I suppose it’s fair to say that the interim results reported by the data warehousing outfit (it provides secure servers and the like), at the end of July, didn’t exactly thrill.

But its well-heeled directors will hardly have been calling their private bankers with instructions to buy up property in the South of France in  anticipation of some extended holidays.

Au contraire. The headlines tell their own story: revenues increased by 16 per cent, earnings before one-offs and financing costs by 18 per cent.

Debt is on the rise, but is still at the lower end of the company’s target, and the borrowing is being used to invest in new capacity, and there is a ready market for what Telecity is selling. Shareholders also saw a 40 per cent rise in the interim dividend.

So what’s the issue? Well, the UK division was notably slow, and the results were shy of some analysts’ expectations. 

It is likely that the shares had reached a natural ceiling prior to the release of the numbers and that a lot of people felt the time was right to cash in, including at least one big institution. The results being slightly disappointing by Telecity’s standards could have served as the catalyst for this.

Given the way that the shares have performed, cashing in was quite understandable. Even after their recent weakness, the stock is still four times the level it was bouncing around at four and a half years ago.

But with the shares at a more modest level than their all-time high (over a tenner), is it time to dip your toes back in these waters? I think so.

The term “data warehousing” might not get the blood pumping but Telecity is a crucial cog in the digital economy’s wheels, and also benefits from the popularity of outsourcing, the growth of cloud computing, and the rise in internet-based transactions generally.

In this country it has facilities in London and Manchester but it is also active across Europe ranging as far as Turkey. You could argue that it is the gateway to the internet in this part of the world and bid rumours periodically do the rounds of the City’s dealing rooms, although there hasn’t been anything of real  substance for a while.

However, even with an uncertain economic outlook plaguing large swathes of this part of the world, it looks poised to do well on a medium- to long-term horizon.

What may have fuelled the weakness at the interim stage was that sales growth in the UK was torpid at best. This suffered largely as a result of  the company having a lack of capacity.

 That has been addressed and Telecity says it has seen improvements since then.

So we might expect to see a better story at the full-year stage. If Telecity can exceed analaysts’ expectations, and some of them have clipped their forecasts a bit, that would be the catalyst for the shares to bounce back very strongly.

Some have expressed concerns about rivals opening up new capacity of their own, resulting in pressure on prices and margins, but this doesn’t yet appear to have been a problem for the company.

It is something worth keeping a careful eye on, but Telecity does have a strong position in the market and should be able to cope.

The shares now trade on a multiple of 22.7 times this year’s forecast earnings, falling to 19 times next year, with the prospective yield set to rise from 1.1 per cent to 1.4 per cent. That doesn’t look at all stretched to my mind.

The multiple might be high compared to UK companies generally, but with Telecity’s growth potential it could be argued that it is actually starting to look quite modest.

I think there is a strong case for getting back aboard this train. Even if the shares take a while to find momentum, there is no reason to think they will suffer from any protracted weakness.

Most of the analysts who follow the stock remain confident, and to my mind the long-term prospects of this industry are very good. Buy.

PROMOTED VIDEO
News
ebookA unique anthology of reporting and analysis of a crucial period of history
News
Richard Norris in GQ
mediaGQ features photo shoot with man who underwent full face transplant
News
Gardai wait for the naked man, who had gone for a skinny dip in Belfast Lough
newsTwo skinny dippers threatened with inclusion on sex offenders’ register as naturists criminalised
News
Your picture is everything in the shallow world of online dating
i100
News
The Swiss Re tower or 'Gherkin' was at one time the UK’s most expensive office when German bank IVG and private equity firm Evans Randall bought it
news
Life and Style
Attractive women on the Internet: not a myth
techOkCupid boasts about Facebook-style experiments on users
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Project Manager (HR)- Bristol - Upto £400 p/day

£350 - £400 per annum + competitive: Orgtel: Project Manager (specializing in ...

Graduate / Trainee Recruitment Consultant - IT

£25000 per annum + OTE £40,000: SThree: Orgtel are seeking Graduate Trainee Re...

HR Business Partner - Banking Finance - Brentwood - £45K

£45000 per annum + Benefits: Ashdown Group: ** HR Business Partner - Senior H...

PA / Team Secretary - Wimbledon

£28000 - £32000 per annum + Benefits: Ashdown Group: PA / Team Secretary - Mat...

Day In a Page

The children were playing in the street with toy guns. The air strikes were tragically real

The air strikes were tragically real

The children were playing in the street with toy guns
Boozy, ignorant, intolerant, but very polite – The British, as others see us

Britain as others see us

Boozy, ignorant, intolerant, but very polite
Countries that don’t survey their tigers risk losing them altogether

Countries that don’t survey their tigers risk losing them

Jonathon Porritt sounds the alarm
How did our legends really begin?

How did our legends really begin?

Applying the theory of evolution to the world's many mythologies
Watch out: Lambrusco is back on the menu

Lambrusco is back on the menu

Naff Seventies corner-shop staple is this year's Aperol Spritz
A new Russian revolution: Cracks start to appear in Putin’s Kremlin power bloc

A new Russian revolution

Cracks start to appear in Putin’s Kremlin power bloc
Eugene de Kock: Apartheid’s sadistic killer that his country cannot forgive

Apartheid’s sadistic killer that his country cannot forgive

The debate rages in South Africa over whether Eugene de Kock should ever be released from jail
Standing my ground: If sitting is bad for your health, what happens when you stay on your feet for a whole month?

Standing my ground

If sitting is bad for your health, what happens when you stay on your feet for a whole month?
Commonwealth Games 2014: Dai Greene prays for chance to rebuild after injury agony

Greene prays for chance to rebuild after injury agony

Welsh hurdler was World, European and Commonwealth champion, but then the injuries crept in
Israel-Gaza conflict: Secret report helps Israelis to hide facts

Patrick Cockburn: Secret report helps Israel to hide facts

The slickness of Israel's spokesmen is rooted in directions set down by pollster Frank Luntz
The man who dared to go on holiday

The man who dared to go on holiday

New York's mayor has taken a vacation - in a nation that has still to enforce paid leave, it caused quite a stir, reports Rupert Cornwell
Best comedians: How the professionals go about their funny business, from Sarah Millican to Marcus Brigstocke

Best comedians: How the professionals go about their funny business

For all those wanting to know how stand-ups keep standing, here are some of the best moments
The Guest List 2014: Forget the Man Booker longlist, Literary Editor Katy Guest offers her alternative picks

The Guest List 2014

Forget the Man Booker longlist, Literary Editor Katy Guest offers her alternative picks
Jokes on Hollywood: 'With comedy film audiences shrinking, it’s time to move on'

Jokes on Hollywood

With comedy film audiences shrinking, it’s time to move on