TeamTalk sounds strong

Mobile radio company TeamTalk has developed quite a track record of beating its own forecasts since it listed in May 2004.

Just three weeks after its shares began trading, the company told the market it expected to exceed its prospectus forecast of a $2.09 million profit for the year ended June 30 by more than $400,000. When it reported in late August 2004, it bettered the revised forecast, coming in with a $2.62 million net result.

At that time, it was expecting the 2005 result to be "in line" with the 2004 result, up from the $2.43 million prospectus forecast.

When it announced its first-half results in February this year, it said it had continued to track ahead of the prospectus projections.

That was confirmed last month when it reported a $3.03 million net profit, 25 per cent ahead of the prospectus forecast.

At the sales level, the company bettered the prospectus forecast by 1.8 per cent to $20 million, which was 0.4 per cent ahead of the previous year's sales.

The big reason for the difference between the sales increase and the bottom-line result was the company's prodigious ability to generate cash, which it used to repay debt at faster than forecast, thus greatly reducing its interest bill.

Operating cashflow of $7.8 million was 2.6 times reported net profit and nearly $1 million ahead of the $6.96 million prospectus forecast.

The company has also over-delivered on dividends. Last year, it opted to pay a 9c a share final dividend compared with the promised 7.5c, bringing the year's total payout to 16.5c.

It also promised that it would pay the same amount in dividends in 2005 compared with the 15c prospectus forecast. In the event, it paid out 18c a share in 2005.

So it's somewhat surprising that the shares have been languishing this year. They've dropped from $2.79 in February to about $2.10 in April and have since recovered to $2.46.

While the Small Companies Index has gained more than 25 per cent over the past year, TeamTalk shares have dropped 5 per cent for no reason I can fathom.

The company did have a bit of bad news when it announced its latest results. It forecast that intense competitive pressures combined with no further contribution from its old lease book, which contributed $200,000 to the 2005 result, would mean its 2006 net result would be about $2.6 million.

As the shares have risen since then, this clearly didn't scare the horses any.

The two analysts who follow the stock believe the company will again better its forecast. Selwyn Blinkhorne, of ABN Amro Craigs, is forecasting a $2.7 million result and Greg Main, of Forsyth Barr, is expecting $2.8 million.

Founder and managing director David Ware says TeamTalk lost a few smaller customers as a result of the "push-to-talk" promotions by the major cellphone operators but its focus has since shifted.

The major area in which the company has disappointed to date is that it hasn't been able to find any suitable acquisitions to help it lift its growth opportunities. Blinkhorne describes the company as "a cash cow with modest growth potential".

Ware says the lack of progress on acquisitions isn't for want of trying.

"We're actively talking to people, seriously talking to people. We've done due diligence on a number of occasions," he says.

On two occasions, negotiations have gone right to the wire, with the vendors backing off at the last minute. Ware said that although the vendors would have been happy to cash up, they weren't quite ready for retirement.

"They still might come off. I haven't stopped talking to people."

It's possible the long-awaited slowdown in the economy may work to TeamTalk's advantage. Ware says a big sticking point on some potential acquisitions has been too fancy a price being demanded.

A slowdown is unlikely to affect TeamTalk much. Ware says some of its smaller customers may feel the pinch but the larger customers, such at Toll Holdings and Fulton Hogan, are likely to pick up any business they might lose.

The company has tried the greenfields approach to broaden its business, starting up a finance arm, EasyPlan, providing finance to those who don't want to buy their equipment, and AlarmLink, a service connecting burglar and other remote alarms to centralised monitoring centres.

Ware says that EasyPlan is tracking to plan, but he's wary of providing finance to just anyone. With handsets costing between $600 and $700 each, down from $1000 to $1200 a couple of years ago, financing fly-by-nighters could add up to significant losses.

AlarmLink is breaking even but hasn't been as successful as he had hoped.

Blinkhorne says one of the concerns about TeamTalk is that "cellular phones could gobble up their market" or that technological advances could make mobile radio technology obsolete.

Still, he says, TeamTalk's network is more robust than the cellular networks and certainly provides far better rural coverage.

During the Manawatu floods, cellphones lost coverage but mobile radios continued to work just fine.

Another advantage is that companies can control usage with mobile radios. "If you give all your staff a cellphone, you don't know what you're in for."

Ware admits that his failure to secure an acquisition leaves him with an embarrassment of cash. Blinkhorne reckons TeamTalk's debt will be minimal by June 2007.
"It makes sense for a company like TeamTalk to have some sort of debt on its balance sheet," Ware says.

The company is unlikely to increase its dividends much more because it will run out of imputation credits, but there are mechanisms to return capital to shareholders, he says.

In the meantime, I can think of a whole lot worse investments. If the company only maintains dividends at the present level, that's an 11 per cent yield at the present share price.

Ware says the share-price gyrations don't bear any relationship to what's actually going on inside the company.

"It's tending towards buying a bond when you buy TeamTalk. We're basically going to be in the same position next year. There's no question we can maintain our dividends at the same level."

Who, what, where

* TeamTalk head office: Level 2, 84 Tory St, Wellington.

* Profile: TeamTalk claims about 70 per cent of the mobile radio market, operating through its two national networks (FleetLink and TeamTalk) with customers including TranzLink, Fonterra, Mainfreight and the emergency services and, for businesses such as taxi companies operating within defined geographic areas, through its LocalNet brand.

* Market capitalisation: $49.2 million.

* Latest results: The company reported a 15.5 per cent rise in net profit to $3 million for the year ended June 30. That was 25 per cent ahead of the prospectus projection.

* Management: Founder and managing director David Ware, finance manager Russell Kelling, commercial manager Kevin Brown and chief technology officer Brian Harding.

* Major shareholder: Active Equities with 50.76 per cent. Ware sold his stake down from 3.57 per cent to 1.32 per cent at the end of August with the board's agreement and with the $990,000 earmarked for family purposes.