The Investment Column: Energis

A LITTLE over a year ago when the market capitalisation of Energis surpassed four-times its network value many analysts became convinced that the alternative telecoms carrier's stock was heading for a fall. Now that telecoms shares have enjoyed a further rise and Energis is trading at 12-times network value, most City players have become enthusiastic bulls.

Yesterday's interim results, which saw sales rise two-thirds to pounds 203m and operating cash flow nearly double to pounds 37.9m, proved just the tonic needed to send Energis stock to yet another all-time high. With the shares up 6 per cent to 2452p, Energis is capitalised at pounds 7.5bn and easily within the top half of the FTSE 100.

For investors who missed the boat two years ago (when Energis floated at just under 300p) it may be tempting to await a share price dip or the future flotation of another alternative carrier. While that might be logical, it runs the risk of losing out on future out-performance and ignores the fact that any new issues will be highly priced and find it expensive to catch up with existing operators.

Three factors underlay the price of Energis: its network proximity to most British business sites via National Grid's network; its head start in marketing and providing services; and its management strategy to target Internet traffic and services. Energis's speed in the latter area sets it apart from virtually every other UK telecoms group. Indeed, advanced and Internet services grew faster than total turnover and accounted for almost 70 per cent of total sales.

While Internet traffic growth is set to continue its expansion, services such as web hosting and e-commerce should expand even faster. That should play to the company's strengths, allowing it to build additional market share and thus boost operating margins. Although the company has paid a high price for moving into the Netherlands, via the pounds 352m acquisition of Enertel, it was faced with little choice after failing to buy Racal Telecom. Though the shares are exceptionally expensive, the strategic positioning is well conceived. Buy on weakness.