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The UK’s little-known communications gems
The UK telecoms and internet infrastructure industry is dominated by a handful of giants. Look a bit deeper and you’ll find some lesser-known but very interesting players.
Most people associate this sector with the large companies such as BT (BT.A) and Vodafone (VOD). They tend to be natural homes for income seekers thanks to good dividend yields backed by enormous cash flows, even in the face of equally vast debts.
Further down the market cap spectrum is a handful of fascinating smaller companies bubbling under the surface. These businesses are barely known outside of a relative handful of fund managers, private investors and their own customers. Here you will find a network of very interesting investment opportunities.
Not every small telco is a disaster
The vast and rapid change in the telecoms environment has resulted in a fair few investment disasters. That might explain why many investors haven’t bothered to seek opportunities among junior companies.
The market is very good at remembering companies that disappoint. For example, think of cash-strapped consumer satellite operator Avanti Communications (AVN:AIM). Others might be familiar with payments network platform Monitise (MONI:AIM) or emerging markets app store failure Mobile Streams (MOS:AIM). They’ve all had interesting stories to tell; sadly they’ve ultimately proved disastrous investments.
So why should I bother looking for opportunities, you might ask? Well, the answer is simple. You can’t tar the entire sector with the same brush. Read on to discover our top hidden gems on the UK stock market.
Why we like Gamma
The first on our list is Gamma Communications (GAMA:AIM). Regular Shares readers might recall Gamma’s inclusion in our top stock picks for 2015 where were said two years ago to buy at 231.5p.
The shares now change hands for 481p, having traded as high as 528p in September last year. We still believe this is under the radar of most investors, despite the aforementioned share price gain.
Gamma is a technology-based supplier of communications solutions in the UK. Its cloud and call control products allow businesses to manage increasingly complex voice, data and mobility requirements.
It also provides best-in-class broadband, ethernet, mobile and data services.
Out-competing both large and small rivals for years, Gamma is a rare telecoms technology group as it is growing much faster than its peer group.
Earnings for both 2015 and 2016 beat forecasts. We will get confirmation of the exact figures for 2016 when it reports in late March 2017. Analysts expect pre-tax profit will move from £21.4m in 2015 to £24.5m in 2016; before moving ahead to £26.1m in 2017.
On the cusp of an earnings breakthrough
Fibre networks designer and builder CityFibre (CITY:AIM) is another little-known operator in the UK telco industry, but we do not expect it to remain ignored for long.
CityFibre has used a combination of debt and equity funding to fuel its growth ambitions of a 100-city wide national UK network.
On 17 January CityFibre announced a contract award for the roll out of a public services network in Stirling, the fourth CityFibre gigabit city in Scotland and 41st nationally.
The seven year contract has been agreed with the local council who will act as an anchor tenant, putting up the cost of the network build and guaranteeing a minimum usage level.
Once up and running, CityFibre’s model is to sell capacity access to local businesses and, eventually, residents.
Breaking into profit could act as the share price catalyst long desired by investors.
The company is approaching an earnings breakthrough three years after joining AIM on 17 January 2014.
Analysts expect the 2016 financial results will show a maiden positive EBITDA (earnings before interest, tax, depreciation and amortisation) figure for the 2016 financial results, when they are published around April time. It is forecast to report a maiden pre-tax profit figure in 2018.
There are other interesting options for income seekers. KCOM (KCOM) and Manx Telecom (MANX:AIM) both act as incumbent operators in their respective local markets; KCOM in East Yorkshire and Humberside, Manx on the tax haven Isle of Man.
What the pair also share are ambitions to bolster their mature, low growth local markets operations with enterprise data, cloud and mobile services.
This is important for shareholders of the pair since both businesses pay out almost all earnings as dividends based on 5% to 5.5% income yields.
Both have their challenges. Failure to deliver growth from newer services could seriously limit each company’s capacity to continue to increase dividends. This would be disastrous and would most likely trigger an investor exodus.
There are no risk-free opportunities in the telcoms space, as per the whole of the stock market. But there remains far more opportunities than many investors might imagine.