August 7, 2002 BUSINESS AND INVESTING > THE SPECULATOR
SPECULATOR: PHONE RANGER
I'm well under water with Advantage Telecom, which has fallen way below my entry price. Nevertheless, the junior telco remains a candidate for a solid re-rating if it manages to complete an agreed $77m takeover bid for an unlisted telecommunications company in Britain. AdvanTel (ASX code: ATC) needs to raise a minimum of $9m cash come September to undertake the deal and, understandably in the present confidence-rattled market, there's a deal of scepticism about the proposal. I understand as many as five substantial prospective investors are doing due diligence on the opportunity.
At the same time, we can expect AdvanTel to announce this week further robust monthly growth in its Euro-China telephony traffic and perhaps a soundly based forecast for the months ahead.
As background, AdvanTel listed early this year and we first bought 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 market linking China and Europe.
In the company's first full quarter of operations (the three months to March 31), revenue from telephony traffic totalled $US375,000 ($694,000) under contracts with 16 carriers. In the latest June quarter, revenue soared to $US1.35m, with 17 million minutes of voice time carried under contracts with 28 connected carriers by the end of the quarter.
In early July, when AdvanTel's shares stood at 42¢, the company announced an agreed bid for the privately owned First National Telecommunications (FNT), which accounts for 30% of all the pre-paid telephone cards sold in Britain through a network of 25,000 newsagents and 5000 ATMs. Established five years ago, FNT has had stable revenues for the past three years of about $US100m and last year produced an EBITDA of $US3m.
This looks a great opportunity for AdvanTel. Its target, FNT, sells 30 million minutes of calls a year. Typically, an FNT card holder pays 30 pence/minute to dial through an FNT network point to a carrier charging 20p/min.
With the takeover, all that business will go through AdvanTel, which has both its own carrier licence in Britain plus contracts with other carriers to take its traffic at only 5p/min.
AdvanTel chief executive Mark Stewart predicted a completed takeover would deliver from September 1 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 the next two years. (The terms of the bid when announced were $37.5m cash over two years plus 93 million shares valued at 42¢ over two years, dependent on meeting targets. Those terms could no doubt be amended since AdvanTel's share price has slipped since then to about 25¢.)
When we first reported the deal (Call options, July 16), AdvanTel's shares stood at 37¢, which put them on a prospective P/E of just 4.7 times projected earnings for the first full year of combined trading. If the deal is successfully closed, AdvanTel's shares should be marked for recovery.
AdvanTel has on issue 126 million shares (after broker Terrain Securities placed 27 million at 42¢ to raise $11.2m two months ago.) Market watchers may have noticed that a large shareholder (Futures Telecom Pty Ltd) reported last week that it had cut its holding from 15 million shares to 9 million. I understand the 6 million shares were snapped up by broker E.L. and C. Baillieu at 25¢ each and placed with a Singapore institution.
Meanwhile, we should note that our favourite bio-tech stock Chemeq won approval last month to market its world-patented polymeric antimicrobial as a pig-feed additive in South Africa. It's aimed at eliminating the use of human antibiotics in animal foods, particularly in pigs and poultry.
The company is currently building a $25m commercial plant on an eight-hectare site at East Rockingham, 40 kilometres south of Perth, to begin production for initial sales to Africa and Asia in the first quarter of next year.
Another of our punts, Marlborough Resources, revealed last week that it had doubled production from its Ardlethan mine in the June quarter to 176,000kg of contained tin in concentrate. Under its clever floor price scheme, it was selling its tin at $US4420/tonne, believed to be the highest price being received by any producer in the world. It also looks like getting a copper-gold show off the ground in Queensland. The shares remained unchanged at 6¢.
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