Need more data on Telecity

A slightly better-than-expected first half at Telecity suggests the data centre group is back on track after an earnings miss and uninspiring outlook hurt the share price earlier this year. But there was no word of any additional cash return, which has turned off some investors Monday.

Adjusted earnings before interest, tax, depreciation and amortisation rose by nearly 11% to £81.6 million, giving adjusted earnings per share of 19.6p. A 9% increase in the top line to £174 million was just ahead of consensus estimates - revenue excluding acquisitions and currency effects was up 9.5%.

"Demand across the European data centre market is strong and our order wins continue to be encouraging," said chief executive Michael Tobin, reaffirming organic currency neutral revenue growth guidance of 9 - 11% to between £355 million to £362 million.

The company has been more efficient with its capital, too, with return on capital employed up to 15.4%, up 30 basis points. And the interim dividend surged by 30% to 4.5p per share. But at its first-quarter update in April, Telecity had promised an update on its wider capital allocation strategy. Its omission is disappointing, although there's every chance it is only delayed until Eric Hageman, former finance director at Dutch telecoms giant Royal KPN, joins as the new finance director on 1 September.

Churn levels - or lost orders - were, as expected, higher in the first six months of the year, at 11%, largely buoyed by the closure of a small data centre in London, which helped UK churn growth reach 16%. Although first-half churn levels will restrict second-half revenue growth, investors should be relieved that Telecity expects a reduction in the next six months.

"The most important message from the results is the reiteration that UK customer churn will no longer be an issue from second half of 2014, leading to strong gross order win performance finally showing through into financials (UK first-half revenue growth being a tepid 3.3%)," said Investec. "This churn has been a 'suspicious' item for several investors, especially re. wholesale competitions, so removal is highly positive."

And the broker remains optimistic. "The shares have started to recover lately, as the re-acceleration in revenue growth in the first-quarter and now first-half has struck at the heart of the bear case." It says.

At 763p, Telecity shares are only 10-15p above significant technical support and trade on a forward price/earnings ratio of 19, falling to 17 in 2015. That looks fair value, although Mr Hageman's arrival could generate interest.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.