The Investment Column: Success proves costly for ITG
Investors may have warmed to information technology, but they're still a bit scared of the internet. For evidence, look no further than the recent drop in Internet Technology Group's share price. ITG, which crept onto the AIM market in 1996 through a complex reverse takeover, is currently signing up over 5,000 new subscribers a month to its internet dial-up service - each paying pounds 10 a month.
It now has 60,000 paying customers, making it one of the three largest internet service providers in the country. But its share price has halved since April, when it briefly reached 110p.
Considering ITG lost pounds 1.54m before tax last year (the previous year's figures mean little) that may not be a surprise. But, as most investors know, winning new customers costs money. Because it has to spend on advertising and support to attract new internet surfers, not to mention new modems and extra phone lines to connect them, ITG makes almost no money out of new customers in the first year it has them.
After that, however, they become very profitable. At the moment, ITG is signing up more new customers than it has existing ones. Sooner or later, however, that growth is bound to slow and then the profits will be substantial.
SG Securities, ITG's house broker, reckons the company will break even in 1999 and make profits of pounds 4.4m the following year, by which time it should have over 250,000 customers. Its service targeting smaller businesses will swell those numbers even further.
Then there's Globalwave, its 75 per cent stake in a chip which can control computer payments, and could prove a real moneyspinner. ITG shares yesterday rose 1.5p to 54p, valuing the company at just pounds 22.5m. Given the prospects for its internet business, and the added spice of a possible bid from a telecoms operator, the shares look cheap.
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