Shares in the Sheffield, UK-based ISP have fallen by over 25% following the news. However, PlusNet’s financial broker believes the stock is an excellent buying opportunity and the ISP is now considerably undervalued.
We believe that the 25% fall in PlusNet’s shares since Friday April 7 creates an excellent buying opportunity, it said. In our view, the threat posed to PlusNet by CPW’s [Carphone Warehouse’s] entry into the market with a free broadband service has been exaggerated. PlusNet’s reseller strategy should enable it to remain competitive on prices by capitalizing on lower network costs and without the need to invest in LLU. Additionally its niche strategy, centered on attracting experienced broadband users by referral, should help insulate it from the land-grab for new customers.
With the shares now trading at 13.7x 2006 earnings and the company likely to achieve over 50% earnings growth in 2007, we believe PlusNet is considerably undervalued, it added. The broker was also skeptical about Carphone’s ability to roll-out all of its exchanges and to deliver a quality broadband experience at this price to a demanding market.
In March, PlusNet revealed that it had signed an agreement with Tiscali UK, whereby Tiscali will supply PlusNet with wholesale broadband services using its local loop unbundling infrastructure. This means that PlusNet should be able to offer broadband speeds of up to 8MBps in the 600 or so exchanges that should be unbundled Tiscali by the end of this year. Where Tiscali is investing in ADSL2+ technology, PlusNet should be able to offer speeds up to 24MBps.
PlusNet already has a client base of 176,000 broadband customers, and recently said it was going to charge 50p ($0.87) a minute for a consultancy helpline to explain technical issues. These technical issues do not include general questions such as why isn’t my broadband working?, which will still be dealt with PlusNet’s existing telephone helpline. The consultancy helpline will instead concentrate on questions such as how do I use CGI scripts on my web site?.
