From The Globe and Mail:
Investors warm to Canadian firms that connect to the Net
Share prices of Internet Direct,
CyberSurf hit 52-week highs
Wednesday, May 12, 1999
Mark Evans
Technology Reporter
Toronto -- According to a recent survey, half of Canadians have regular access to the Internet.
Until recently, however, few people were willing to invest in the Canadian companies that offer
connections to surf the Internet.
That reticence seems to be disappearing as the shares of Toronto-based ID Internet Direct Ltd.
and Calgary-based Cybersurf Corp. both hit 52-week highs -- of $4.20 and $4.35 respectively --
in the past week amid heavy trading.
John Nemanic, president and chief executive officer with Internet Direct, said Canadian
investors are picking up on the company's growth story but much of the new interest seems to be
coming from south of the border.
"Canadian investors don't like Internet service providers [ISPs] but a lot of Americans do," he
said. "They look at our company, what we have been trading at and the fact we are EBITDA
[earnings before interest, taxes, depreciation and amortization] positive."
Internet Direct has helped raise its profile recently with the acquisition of two small ISPs in
Quebec and British Columbia. That increased its customer base to 150,000, making Internet
Direct the country's fourth-largest ISP.
While Internet Direct makes most of its revenue from monthly fees, Cybersurf is pursuing a
different strategy by offering free access to the Internet. Its business model is based on attracting
on-line advertisers to a large number of customers who agree to provide Cybersurf with personal
information.
Cybersurf said it has signed up 75,000 customers in Edmonton and Calgary for its 3Web
service and it now has set its sites on Toronto.
A good example of the company's unique marketing approach is a deal it signed with the
University of Calgary to offer students free access. The distribution of Cybersurf's CD-ROMs
was sponsored by Molson Breweries unit, which has a strong interest in the student market.
The new appeal of Internet Direct and CyberSurf is an interesting phenomena because investors
have stayed away from the ISP market for two simple reasons: Istar Internet Inc. and HookUp
Communications Corp.
Ottawa-based Istar and Oakville, Ont.-based HookUp were both investor darlings after splashy
initial public offerings in 1995 and 1996 respectively -- a time when the Internet was just
beginning to hit the mainstream.
After their stocks soared on Internet-mania, Istar and HookUp both tumbled out of the spotlight
after posting large losses. Istar was purchased by PsiNet Ltd. in 1997 while parts of HookUp
were bought by NetCom Canada Inc. that year.
"In Internet years, that's ancient history," said Paul Stapleton, a senior vice-president with
Rampart Associates LLC in Denver.
Nevertheless, Canadian investors have been leery about the ISP market for many reasons other
than Istar or HookUp.
The market is growing but competition is fierce and lower prices have caused margins to shrink.
At the same time, the market is starting to consolidate and telephone carriers such as Bell
Canada and AT&T Canada Corp. are getting more aggressive on pricing as they strive to be all
things to all consumers.
Mr. Stapleton said there are two different angles that make Internet Direct an attractive
investment: The possibility it could become a takeover target for a large telephone carrier
looking to increase its exposure to the ISP market, and the fact it is a profitable, fast-growing
business.
"They are an excellent business growing as they are," he said. "If you want to play in the
Canadian ISP market, they are a company you want to look hard at. To buy your way in [to the
market], this is the door you want to knock on."
From a valuation perspective, Mr. Stapleton said Internet Direct trades at a discount to U.S.
rivals such as Internet America Inc., MindSpring Enterprises Inc. and EarthLink Network Inc.
That gap could shrink if Internet Direct moves to the Toronto Stock Exchange or the Nasdaq
Stock Market.
Cybersurf has appeared on the radar screen of more investors after signing advertising
agreements with Molson and Proctor & Gamble Inc. last month.
The biggest challenge facing Cybersurf is the slow growth of the on-line advertising business in
Canada. While the market is expected to nearly double to $37-million this year from $20-million
in 1998, it pales to the United States where on-line advertising climbed to $1.92-billion (U.S.)
last year. |
