No Pain No Gain: Tiny telecom player can score despite poor form

The stock market can be a ruthless place. Ask IDN Telecom. I wrote about this little provider of telecom services in February last year when its shares were around 3.25p. They are now near 2.2p. Yet in the meantime profits have advanced strongly and the group has paid its first ever dividend. What's more, trading remains buoyant and profits and dividends are set to increase.

To add insult to injury, the stock market, despite recent volatility, has made heady progress since my IDN comments although the telecoms sector, weighed down by its heavyweights, has not always been fully connected to the exuberance. Even so, it is a particularly harsh judgement when a share loses around one third of its value.

At 2.2 p IDN really looks to be in the bargain basement. Profits should emerge at more than £1.2m in the year ending October (up from £900,000) and last year's maiden dividend of 0.025p a share will be increased.

So what is inhibiting the shares? I think it is the behaviour of some of the company's former directors. Although large sums are not involved, they have unsettled would-be buyers by selling down their shareholdings. A feeling has got around that every time the shares progress towards a more realistic level the price will be hit as they press the sell button.

Former director Michael Wilmott, who is now living in Canada, appears to be the major culprit. At one time he had 56 million shares, around 20 per cent of the capital. He has relentlessly cut back and is now down to 20 million shares. No doubt the stock market is awaiting his final disposal although the company seems to think any further unloading is unlikely. To add to the uncertainty at least one other former director has a 6 per cent-plus stake and is viewed as a weak holder.

There are a number of other influences that could restrain the shares. For one thing IDN operates in a tough, highly competitive environment. It has to be particularly nimble footed. But so far it has proved that despite its small-cap rating - it is capitalised at £8.4m and has a staff of only 40 - it has the ability to prosper. Indeed its very size often gives it the flexibility to provide specially tailored bespoke services to its 1,300 customers - who mainly spend between £10,000 and £750,000 a year.

The company, based at Solihull in the West Midlands, was started 10 years ago and arrived on the stock market in 2000 - just too late to enjoy the madcap dot.com explosion. In its early days it failed to cover itself in glory. Losses mounted. Then Mike Morrison arrived as chief executive. Within a short time profits - albeit a mere £5,000 over six months - replaced losses and it looked as though IDN was on its way.

Since then, trading has continued to improve even if the shares have failed to respond. The lowly rating must mean the group is a tempting take over target and I would not be surprised if corporate action occurred. There is also the possibility that with cash accumulating in its bank account, IDN, where directors and supporters have about 40 per cent of the capital, could be considering acquisitions.

At one time, chairman Barry Roberts and Morrison were so perplexed by the studied indifference of the stock market that they wondered whether to seek refuge in a share consolidation. But they have decided to stay in the penny share category.

Consolidations, when say 20 shares become one, can, of course, be rewarding. Certainly they should reduce costs. But often turning flyweights into heavyweights offers little benefit to shareholders. Indeed on many occasions, when the consolidation is not reflected in the price, shareholders suffer wounding losses.

I have toyed with the idea of enlisting IDN into the No Pain, No Gain portfolio. I almost recruited the shares in February last year but I was unhappy about the possible consolidation. Too often I have been the victim of such cosmetic exercises and I did not want to run the risk of another misadventure. And the share overhang was another inhibiting factor.

Well, the consolidation danger has been removed but the possibility of more share sales putting the lid on the price remains. Still I am encouraged by the group's get-up-and-go approach, its trading prospects and the confidence displayed with its arrival on the dividend list. The portfolio is in need of recruits and this tiny telecom player could emerge as the ideal replacement for takeover victim MacLellan, due to depart soon.

cash@independent.co.uk