Maintel primed for recovery

Indeed, house broker FinnCap expects earnings to increase by 22 per cent in 2018 thanks to a slight uptick in revenue and major margin recovery. This makes the shares' valuation of nine times expected 2017 earnings look very mean, giving the company a forward price/earnings-to-growth (PEG) ratio of just 0.4 times. The expected turnaround in three, previously disappointing parts of the business, gives us optimism that Maintel is on the cusp of a recovery.

The first cause of recent disappointment has been problems at one of the major telecoms vendors, Avaya, that uses Maintel's services. For much of last year, Avaya was in US bankruptcy protection, which stopped customers from taking up new contracts. Avaya resolved these issues in November paving the way for a pick-up in business conducted via Maintel. The pipeline of previously postponed Avaya contracts is very encouraging.

Then there's Azzurri, the telecoms services business acquired in May 2016. Two of Azzurri’s big, high-margin contracts have unwound more rapidly than expected, meaning 2017 results have been disappointing. But those contracts will have been exited in full by the middle of 2018 and sales should then start to grow again. Azzurri adds scale and new products to Maintel’s portfolio, as well as a healthy proportion of recurring revenue.  

Finally, Intrinsic Technology – which was acquired in August 2017 – has been constrained by low-margin contracts. But Maintel’s management plans to close these out to help lift margins. Integration of Intrinsic and its suite of new vendors is progressing smoothly, which will help extract more costs in 2018.

Maintel’s cash performance is also expected to improve materially now that most of the heavy lifting associated with its two acquisitions and development of a new portfolio of cloud services is complete. Historically, the group has had good cash generation, with operating cash flows of £10.6m in the 2016 financial year and underlying cash conversion of 104 per cent of adjusted cash profits. A return to these impressive heights should help bring the net debt position down and add further support to the dividend, which currently yields 5.2 per cent. Management is also sticking by a pledge to increase the payout by 10 per cent this year, despite the difficulties.