July 10, 2002 BUSINESS AND INVESTING > THE SPECULATOR
CALL OPTIONS
We've bought more shares in the junior telco stock, Advantage Telecommunications (AdvanTel), as nervous punters sold it down on news that the company had exceeded its target forecasts and planned to take over a substantial British operator. The negative reaction is perhaps understandable, since all telcos, including local giant Telstra, seem to be on the nose right now. Furthermore, few investors understand much about AdvanTel (ASX code: ATC) since it back-door listed through the shell of WA gold prospector Nugold Hill Mines in January. (NUGDF.PK)
We first bought into AdvanTel in April on the basis that the largely Australian-owned company had established a potentially lucrative niche buying and selling wholesale voicecall time in the telephony market linking China and Europe. At the time of our purchase, the word was out that London-based chief executive Mark Stewart was on his way to Australia via China with news of new deals. The shares briefly surged to 59¢ but later came back to trade between 40¢ and 50¢ on news of a placement of 27 million shares through broker Terrain Securities at 42¢ to raise $11.2m. (That leaves it debt-free with current cash of about $4m.) Last week, Stewart was in Australia again to report pleasing revenue growth and firmer forecasts as the company held a series of broker seminars in Sydney and Melbourne to rally support for another capital raising.
AdvanTel has carrier licences in Britain, China and Taiwan, with leased fibre-optic cable from SingTel linked to London plus state-of-the art Nortel switch and compression gear installed at a cost of $7m in Hong Kong and Shanghai. The company has contracts with 55 major carriers to buy and sell voicecall time in and out of China to the world, mostly to Europe. (A typical contract allows AdvanTel to buy wholesale 2 million to 10 million minutes a month from a major carrier and resell it for margins that range from 25% to 40%.)
In the company's first full quarter of trading (January-March this year), the number of contracted carriers actually connected rose from six in January to 16 in March, with revenues for the quarter totalling $US375m ($676m). The latest June quarter revenue exceeded company forecasts by 35% at $US1.35m, with 28 of the 52 contracted carriers now connected. During the June quarter, 17 million minutes of voicecall time were carried, an increase of 70% over the previous quarter. One new contract with China Mobile alone is expected to add another 10 million minutes a month to traffic when it comes on line. The company is on track to be EBITDA positive in the current quarter.
The big boost should come with last week's announcement of a $77m agreed bid for privately owned First National Telecommunications (FNT), which accounts for 30% of all the pre-paid telephone call cards sold in Britain through a network of 25,000 newsagents and 5000 ATMs. Established five years ago, it has produced stable revenues in each of the past three years of about $US100m and EBITDA last year of $US3m.
FNT sells 30 million minutes of calls a year. Typically, an FNT card holder pays UK30p/minute to dial through an FNT network point to a carrier charging FNT 20p/min. With the takeover, all that business would go through AdvanTel, which pays carriers 5p/min. CEO Stewart predicts the completed takeover will deliver in the year from September 1, 2002, combined revenues exceeding $210m, with a forecast net operating profit after tax of $27m, or 9¢ a share fully diluted for all future share issues to complete the purchase over nearly two years. At 37¢, the shares are on a projected P/E of just 4.7 times the projected earnings for the first full year of combined trading. That compares with P/Es last week for Telstra, SingTel and Telecom NZ of 15.1, 14.4 and 13.1 respectively. AdvanTel fell last week to a low of 36¢.
Of the $77m purchase price, $37.5m will be paid in cash over two years. The rest will be paid in 93 million shares valued at 42¢ over 24 months dependent on meeting targets. The company needs to raise a minimum of $9m by September to complete. Interestingly, the usually informed electronic daily trade newsletter Communications Day claimed last week that backroom Telstra staff have put forward a plan to fund the junior. Meanwhile, Dioro Exploration may become a takeover target, which we'll explore next week.
Sold
30,000 WA Metals @ 5.7¢ (bought @ 6.2¢; 7.03.02)$1670
Bought
5000 Advantage Telecom @ 37¢$1890
20,000 Diora Exploration @ 12¢$2448
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