Investor's Champion Blog
Provides refreshingly forthright, independent comment on predominantly small cap companies and specialist investment funds. Informed opinion, based on first-hand research, but pulls no punches in exposing management weaknesses.

Adept Telecom-I have had enough of 'strong acquisition pipelines'. How about some good old fashioned organic growth.

Adept Telecom promised so much when they came onto AIM back in February.

However, when I met with management at the time of their results in July I had concerns.

Results at the trime were 'in line with expectations', although ‘managing expectations’ was relatively easy to achieve given the number of revisions to estimates as a result of the 4 acquisitions completed in the year and the ongoing resulting updates. In short, with all the acquisition activity it was hard to gauge anything from the numbers.

The company focused on the efficiency of its back office and lower head count compared with competitors. Given the small size of the company a lot of responsibility rests with Amanda Woodruffe (Operations Director) for efficient integration of acquired businesses and general operations. Amanda has extensive experience running operations of major companies and impressed during the pre-IPO road show. But I was amazed that a person as fundamental to the success of the business as Amanda was not a shareholder, other than through share options, which we are unable to quantify. She still isn't a buyer even at these levels!

The company also stated that ‘organic growth is insufficient to meet their growth aspirations’. With a base of 17,000 business customers and 20,000 residential I couldn't believe that there weren't significant cross selling opportunities-my business would relish 37,000 customers.

Having now made 13 acquisitions I was expecting management to have announced new marketing initiatives relevant to the existing customer base. This would have also mitigated the risk of always having to rely on successful integration of acquired businesses.

They announced that growth would continue to come through acquisitions, some of which are likely to be in the area of Mobile and Broadband. Clearly these are higher growth areas; however, they are also far more competitive.

The flotation in February was well timed from the market’s perspective and the shares went to a rapid premium. Contrary to the house broker’s research which indicated a share price target of 203p I thought the shares look over priced-it turned out to a good call.

I had concerns over a number of issues as follows:

- Intention to move into broadband through acquisition.
- Likelihood of further acquisitions in the short term and quality of customers being acquired.
- Inability to generate organic growth from what amounts to a good sized customer base.
- Dependence on single member of the team who is not a significant shareholder.

Management should have really spent some time concentrating on what it’s got rather than look for further targets. Empire building always seems to take over.

I'm not an expert but the key growth areas at the moment in the telco market appear to be broadband, VOIP and mobile. Adept has little or non exposure to these highly competitive areas which are currently dominated by larger players. They are able to pick up businesses cheaply essentially because none of the main players are really interested in the sort of low growth customers that they have acquired. There is much to be said for this strategy of buying cheap, however, in our view they have to start announcing some new marketing initiatives.

I can assure you it's not just hindsight investing and I would be happy send anyone my report from 10th July.


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