Investors have been wary of technology shares since the turn of this century. But more than six years on, it may be time to take another look at this most invigorating (and of course risky) of sectors.

Why? Well, according to the experts at PricewaterhouseCoopers a new technology boom is looming that will be centred on the much-heralded ‘digital convergence’.

Digital convergence brings together computer, telephony, recording and broadcast technologies to produce new kinds of products and services. There are a number of technology and media businesses quoted in London that should benefit from this, but such companies will need to ensure they have the necessary technical expertise on board.

Step forward telecoms and IT support firm Glotel. Glotel focuses on supplying clients with engineers and software developers who have skills that can be used for such work as the design of mobile phones, the implementation of networks and the development of databases and internet technologies.

Although much of the business currently comes from contract staffing, Glotel is shifting towards higher-margin activities, such as recruiting personnel for permanent positions.
The business is structured into three operating divisions covering Europe, the Middle East and Africa (EMEA), the US and Asia Pacific.

Recent results revealed that a core portion of Glotel’s business depends on its UK operation which, having grown revenues by five per cent to £46 million during the financial year ending 31 March, accounts for 34.3 per cent of turnover. Here, the market is very competitive but conditions have been improving with skills shortages beginning to emerge and contractor rates increasing.

Revenues made by the EMEA division from non-UK clients during the year amounted to £12 million (2005: £11 million). Steady progress is being made, with engineers being contracted to telecoms projects in several countries. However, with the operating margin for the EMEA division at 2.4 per cent, there is room for improvement.

The most profitable division is the US, with an operating margin of seven per cent. Last year, US revenues increased 12 per cent to £56 million. The US business has three units: telecoms contract staffing; IT contract staffing; and ‘hybrid solutions’, where an element of project management is undertaken by Glotel in return for a higher gross margin.

In the US, Glotal has been ending contracts where gross margins are not satisfactory, while making investments to grow its presence in the permanent recruitment market.
In Asia Pacific, Glotel enjoyed a 41.4 per cent increase in sales to £19.9 million, although the operating margin for the division was just four per cent. The group is benefiting from increased telecommunications projects in the region.

As far as current trading is concerned, activity levels have remained high as the group focuses on its expansion, particularly in the area of permanent recruitment.

Over the past three years, Glotel has grown its revenues at annual rates of between 12.6 per cent and 31.5 per cent. Meanwhile, its pre-tax profit has increased from just £750,000 in 2004 to £4 million in 2006. And Glotel’s profits are backed by strong cashflow.

According to analysts’ forecasts, this trend is set to continue, with Glotel set to deliver an increase in earnings per share of 35.2 per cent this year to 8.6p. For 2008, EPS is expected to come in at 10.1p. Such a growth rate coupled with a price-to-earnings rating of less than ten times suggests the shares, which also pay a small dividend, are well undervalued. Buy.

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