Spectrum guns for growth and income

Internet kiosks and payphones play Spectrum Interactive boasts good cashflow and strong margins. Its other attractions are a proven ability to grow profitably and the appealing inroads it is making into the exciting and growing public internet access market. Trading on a single-figure p/e ratio for 2007, Spectrum is not expensive and also offers an attractive yield.

The group floated on AIM in April following a £5.5 million fundraising. Its first set of results, for the year to June, saw pre-tax profits come in at £2.5 million on £17 million sales. During the course of the year the company added 1,120 payphones to bring this estate to 8,942. In addition, 473 internet units were added, taking the total here to 1,249.

While the payphone estate is important, the group is slowly morphing into a more rounded digital services operator, using the cash generated from the phone business to finance the other interests. This is because the traditional payphones business is experiencing tough trading and because the wider digital services sector is where the real growth lies.

Last February’s acquisition, UK Explorer, turned Spectrum Interactive into one of the biggest independent European internet terminal operators. Chief executive Mark Lewarne is particularly bullish about the group’s excellent growth prospects here, where the company operates terminals at most of the UK’s airports, as well as two- and three-star hotels (and indeed some youth hostels). This arm moved strongly into profit last year and is serving as a platform to introduce high-margin services like music downloads and games.

Further progress arrived in October when Spectrum acquired ‘almost all’ of the fixed and wireless public internet access assets of Broadreach Networks. This earnings-enhancing deal saw Spectrum buy around 400 fixed and wireless internet units, helping to boost its own public internet terminal business to more than 1,600 internet terminals and 300 WiFi hotspots in the UK alone. The fast-growing internet business now makes up 20 per cent of group turnover, and will help drive margins north, and the Broadreach deal broadened the focus from airports and hotels to the retail sector, with customers including Virgin Megastores and Sainsbury’s. The total estate now comprises over 13,000 payphones and internet terminals across the UK and Germany.

In yet more great news, Spectrum recently snared a deal with T-Mobile for the provision of T-Mobile WiFi services to select Spectrum customers. Lewarne insists this is just the beginning of a tie-up that will quickly boost the number of sites covered and enhance Spectrum’s WiFi business. Furthermore, the company has clinched a deal with Virgin Retail to roll out coin-operated internet terminals to its major UK stores, and is in final talks with Virgin Digital regarding customers being able to integrate interactive access into their digital music download service.

For 2006, Seymour Pierce’s Jim McCafferty is forecasting improved pre-tax profits of £3.3 million – admittedly pegged back from £4 million on difficult payphone trading – on £20.4 million sales, ahead of a jump to £4.1 million on revenues approaching £22 million.

That places the shares, tightly held but issued and priced at 93p, on a forward rating of 9.1 for 2007. Atypically for a recent AIM issue, Spectrum already offers appetizing income attractions, with forecast payouts of 3.7p and 4.1p giving prospective yields of four per cent and 4.4 per cent.