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The cable guys

By Jenny Ruth

Friday 3rd February 2006

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 Jenny Ruth
Cabletalk Group listed in November 2000 under the old New Capital Markets system after raising $600,000 from a public share issue. It graduated to the main board in August 2001, after buying four telecommunications network service companies for $4.48 million in cash and the issue of 21.7 million shares at a nominal 50 cents each. A 9:1 rights issue, also at 50 cents, raised a further $5.4 million.

The numbers: Chairman Ross Keenan told the 2001 annual shareholders' meeting: "It's probably the easiest one [year] we'll ever have." However, the company then failed to meet its prospectus forecasts, largely because merging the companies which created it took longer than expected and costs blew out by $4.3 million in the year ended March 2002. The following year, the company wrote off all the goodwill associated with its formation. While that resulted in an $11.74 million bottom-line loss, it left it well positioned to cope with its next major blow: it lost its maintenance contracts with Telecom after multinational tenderers undercut it. Those contracts, worth $37.2 million in revenue in the year ended March 2004, accounted for more than 70% of Cabletalk's revenue. That ended a 14-year relationship with Telecom and Cabletalk's shares dipped as low as 16 cents in April 2004. Cabletalk had already recognised its dependence on Tele-com and had been actively seeking other contracts. The same month it announced the loss of the Telecom contracts it announced a five-year contract with TelstraClear, worth $20-$30 million in annual revenue.

Management: Managing director Peter Wilson was brought in in April 2000 by founders Ross and Carol Watton, who still own 16.84% of the company. Staff numbers have risen from about 50 to 250 and the Wattons remain active in the company - Ross managing the tele-communications part of the business and sitting on the board, essentially the TelstraClear contract, while Carol manages customer services. The fourth key -executive is company secretary and financial controller Michael -Carter who has been with the company three years. Cabletalk is expanding its management team, and Carter will move to the commercial manager role.

Current strategy: Although the company was able to gain what appears to be more lucrative work from TelstraClear, that still accounts for more than 70% of the company's revenue and it remains vulnerable. In response, in the year ended March 2003 the company established its Talking Solutions divisions, which supply PABX and other tele-communications equipment, and an IT services division catering for SMEs - initially named Gotit, and later CodeBlue. Cabletalk sold down its stake in CodeBlue to 37.5% in October 2004. Wilson says Cabletalk didn't have the resources to develop CodeBlue and that the new shareholders, who have contributed additional capital and are now running that business, are more committed and gaining traction. Cabletalk has also been looking for acquisitions of complementary businesses. In June last year it announced it was buying Fortlock Security, one of the largest privately owned electronic security and surveillance systems companies. Fortlock had a profitable history and immediately started contributing to Cabletalk's earnings. The company is looking for similar -acquisitions and its strong balance sheet shows it has plenty of capacity to do so. At March 31, it had shareholders' funds of $7.07 million against $11.82 million in total assets and $4.82 million cash in the bank.

Recent track record: Cabletalk reported a 19.8% rise in net profit for the year ended March 31 even though revenue fell 24.7% to $41.15 million. The result was even better than the bottom line suggests since it included a $1.14 million tax expense and the previous year's result included a $202,000 tax credit. Also positive - the company declared its maiden dividend of 3 cents a share. In early November, the company reported that despite a 25.2% drop in first-half revenue to $19.7 million, net profit rose 4.2% to $1.22 million. Even more impressive was that its EBITDA jumped 164%, indicating that the new business is vastly more profitable than the lost Telecom contracts, which were reflected in the previous first-half results.

Analysts' recommendations: ABN Amro Craigs' Mark Lister is the only analyst covering Cabletalk. His last valuation report on the stock in July valued the shares at 73 cents - they were trading at 62 cents in mid December.

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