GDC listing - Flight to quality for investors?

By FRANK FERNANDEZ

Tuesday 25th April 2000

The listing of GDC Communications on the New Zealand Stock Exchange this week will be watched with close interest after recent turbulence on Wall Street and the Nasdaq, and the failure of new listings National Mail and Beauty Direct to entice sustained support from investors.

GDC is a communications and e-commerce infrastructure company providing telecommunications, data communications and multimedia communications systems, services and solutions to the business and public sectors in New Zealand.

After recent worldwide correction in tech stocks and subsequent 'flight to quality' by investors looking for technology companies with proper businesses and real revenue streams, GDC may well stand to gain from this new-found investor discrimination.

The company's main areas of operation are through

The holding of four Telecom 'Patch contracts' for network provisioning, maintenance and minor access build work. There are 34 Telecom Patch contracts covering all of New Zealand which are serviced by seven contractors including GDC. The GDC Group also builds and maintains networks for other carriers.
The design, building and maintenance of private voice and data communication networks. Among the hundreds of networks it has designed or built are two major New Zealand ISP networks and a 19 site VoFR system throughout New Zealand with its network extending into Europe and the United States.
Being one of the largest sellers of telephone systems and equipment to New Zealand businesses. With many systems incorporating sophisticated software designed and sourced both internally and from external contractors, GDC is also a leading seller of many other brands of hardware and cabling systems.
Providing communications networks and systems to multi-tenant properties under arrangements whereby GDC retains ownership and management of the networks. This service is in the process of being extended to establish GDC as an applications service provider (ASP).

In 1999, the GDC Group generated $33.5 million in revenue and a net profit before tax of $4.5 million. Forecasts for 2000 include revenue of $45 million and a net profit before tax of $6 million as the financial statistics table below indicates.

Summary Financial Statistics
	Audited	Prospective
Year ended 31 December	1999	2000
Revenue	$33,535,000	$45,000,000
Earnings Before Interest & Tax	$4,506,000	$5,900,000
Net Profit Before Tax	$4,500,000	$6,080,000
Net Profit After Tax	$3,217,000	$4,070,000
Earnings per share	10.65c	10.75c
Dividends per share	5.00c	5.25c
Price: EBIT Ratio*	10.1	9.6
Price: Earnings Ratio*	14.1	14.0
Net Tangible Asset Backing Per Share*	$0.12	$0.37

* based on the number of shares (including partly paid shares) on issue at the end of each year and a $1.50 share price.

In its recent pre-listing float, GDC offered (privately) 5,784,000 new ordinary fully-paid shares in the company at $1.50 per share. The float (representing 16% of the company's total shareholding) raised $8.67 million and was oversubscribed by four to one.

With a price to earnings ratio of 14, the GDC shares were offered at a discount of about 20% to market average. In total, GDC now has 36 million fully- paid ordinary shares and 1.86 million partly-paid ordinary shares on issue (The latter are pegged as options for senior management, excluding directors, in return for remaining at GDC for at least three years).

In the past, GDC had considered opportunities to expand which could have been more readily progressed if the company's shares were listed or it had greater access to capital. GDC directors say the primary reason for listing is to provide greater flexibility to pursue and fund expansion activities which may include the active pursuit of opportunities to acquire compatible businesses in New Zealand and Australia.

In the recent equity injection, GDC elected to issue the smallest number of shares to meet NZSE spread requirements while at the same time achieving an active market for its shares. Post-listing will most likely see a relatively scrip-tight situation considering that 84% of the shareholding is held by GDC directors, management and staff.

Taking everything into consideration, GDC does appear to have all the necessary fundamentals to attract investor support. It has been in business for the past 12 years, has sound revenue-earning business streams, pays dividends, is profitable and intends to expand further - all excellent credentials for a bricks-and-mortar telecommunications and e-commerce company.

As to what price it will open up at will be in the hands of investors who hold shares although a canvass around brokers indicate an anticipated opening market value at around the $1.65 mark. GDC's debut will certainly be watched with a lot of interest this week - especially by other companies intending to follow in its footsteps.

Disclosure: Bought into GDC at $1.75 and intend to hold for the medium term.

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