Companies: AN.   

Against the backdrop of a tough business climate, business communications services group Alternative Networks recently dialled up robust first-half figures and announced it was to return up to £4 million of surplus cash to shareholders via a tender offer. Despite its lengthy, profitable track record and resilient, cash-generative business model, shares in the company have been unfairly sold down with the rest of the sector.

Alternative launched in 1994 and raised £3.3 million from the City’s great and good at its AIM IPO in 2005. Pursuing a twin-track strategy of acquisitive and organic growth under CEO and co-founder James Murray, the company offers a ‘fully converged’ communications portfolio of fixed-line, mobile, voice, data and systems solutions.

As well as its strong strategic links with industry giants including O2, BT and Cable and Wireless, the company plays a pivotal role in the critical communications of thousands of small and medium-sized companies.

Recent interim results to March – the seventh consecutive set of solid numbers from the company – were very strong. On sales up 32 per cent to £46.1 million, pre-tax profits sparked up 27 per cent to £5 million. And though the top line was boosted by £8.9 million of sales from August’s Echo acquisition, the organic growth rate of nine per cent pleased analysts.

Describing this as an ‘excellent period of trading’, Murray flagged up ‘progress made in the integration of Echo and the successful focus on low churn and larger customer wins across the group’. Alternative has recently been targeting the ‘mid-enterprise’ market – business customers with between 50 and 500 employees who spend more, tend to ‘churn’ less and offer good repeat revenues. He was also keen to point to underlying EBITDA growth of 32 per cent at £5.3 million and steady operating margins of 10.8 per cent (10.9 per cent) in a far from favourable business climate.

Operationally, each of the three main revenue streams demonstrated encouraging growth and margin resilience, namely mobile (where the group acts as a service provider for Vodafone and O2), network services and advanced solutions. Moreover, Murray reported significant increases in Alternative’s mobile subscriber base and fixed line revenues, as well as a 36 per cent rise in the number of lines managed, buoyed by new customer wins.

He was also keen to talk up the scale and cross-selling benefits of the Echo deal. Good progress has already been made in selling Alternative’s products into the client base of Echo, which delivered £1.1 million of EBITDA during this first full six-month contribution, equal to the earnings it achieved in the whole 12 months to March 2007.

Alternative Networks finished the half with £4.9 million net cash, leaving it strongly placed to scout for acquisitions, particularly those ‘operating in the IT, data and mobility’ sectors.

However, as well as enabling the board to treat investors to a 50 per cent rise in the interim dividend to 1.5p, this financial strength has allowed Alternative to return £4 million in surplus cash to shareholders by buying back their shares (at what was eventually a 140p strike price).

Rewarding investors, the buy-back also reduced the number of shares in issue from around 48 million to just below 45 million, in a move enhancing earnings per share going forwards, although one analyst did point out that the buy-back perhaps signalled a lack of appealing acquisition targets for the moment.

Following the interims, house broker Investec upgraded its numbers for the second time in a matter of months. For September 2008, it sees pre-tax profits moving to £10.2 million (2007: £8.2 million), ahead of £11.1 million for 2009. Earnings forecasts of 16.3p and 18p – and envisaged dividend payments of 4.5p and 5.4p – leave the shares trading on low multiples with respectable prospective yields.

Given its resilient model, excellent cash characteristics and growth record, the market has been wrong to hang up on Alternative Networks.

Alternative Networks	AIM	£67.53m	151.50p	1.00p
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