SINGAPORE (Dow Jones)–Investors who are looking to dial into the potentially explosive growth of Voice over Internet Protocol services, and have the appetite for a higher-risk investment, should keep an eye on Global Voice Ltd. (H23.SG), analysts say.

The Singapore-based company, which provides communications and technology services over a secure fiber-optic network in 14 European cities, is trading 28% below analysts’ average price target of S$0.26and could be due for a positive re-rating. The stock closed at S$0.185 Thursday.

SIAS Research has just upgraded its recommendation to Buy from Hold and its target price to S$0.25 from S$0.20 after GV agreed to buy half of Viatel Holding (Bermuda) Ltd.’s (VH.YY) inter-city fiber network for just EUR42 million. The network was built between 1999 and 2001, during the Internet boom, at a cost of EUR1.2 billion.

Viatel Group is a telecommunications group which operates a pan-European telecommunications network, offering data communication services such as VOIP, managed connectivity, managed hosting and managed internet security.

Like GV, Viatel acquired its network at fire-sale prices when the company that built it filed for bankruptcy.

GV will pay EUR25 million cash and grant Viatel five pairs of its metropolitan fiber, valued at EUR17 million, in seven cities in a deal that creates one of Europe’s largest fiber-optic networks.

Viatel will transfer its infrastructure clients and business to GV.

GV will also receive existing annual revenue from the network of up to EUR2.6 million, which makes the acquisition earnings-positive from 2006.

The company will only start to bear operating costs from 2008, capped at EUR7 million a year, and believes it will be able to reduce those costs.

Kelive analyst Rohan Suppiah said the acquisition is “almost a perfect strategic fit” as it connects all of GV’s 14 metropolitan area networks except Dublin.

Suppiah expects “a significant acceleration in earnings” as a direct result of the acquisition and from greater business opportunities in areas such as network services, business continuity services and infrastructure Provision.

Research firm IDC is predicting significant growth in demand for such services over the next few years.

Asset Sale Play

For worldwide corporate data storage, IDC is forecasting that budgets could grow to US$27.7 billion in 2009, an increase of US$5.1 billion from 2004, with the European market worth US$10 billion by 2009.

As for Western European consumer VOIP services, IDC estimates the market will grow at a compounded rate of 107% to US$8.0 billion by 2010.

But even if GV’s new business doesn’t take off, the stock is attractive as an asset inflation play as well as a potential asset sale play due to its undervalued assets, say analysts.

After paying just EUR120 million for its existing networks – due to overcapacity depressing prices – that cost EUR650 million to build in 2002 and 2003, GV appears to have scored another bargain, said CIMB-GK analyst Kenneth Ng.

As the new assets are potentially worth EUR600 million, GV is sitting on assets worth EUR1.25 billion, versus its book value of EUR170 million, he said.

Selling assets is not a part of GV’s current strategy of increasing the utilization of the company’s network, chief executive Noel Meaney told Dow Jones Newswires.

But GV is open to the idea should any part of its network become surplus to requirements, he said.

Using comparable peers as a benchmark, Suppiah estimates GV’s net asset value could be as high as S$0.48 a share compared with his original valuation of S$0.37 a share.

Suppiah, who currently has a Buy on the stock, is keeping his target price at S$0.27 as theViatel deal will only be completed in March, 2006.

He believes there is potential for the target to be raised if the full operational advantages of the acquisition are realized.

The key risk for investors remains execution of the business strategy given the management’s relatively short track record. The company was formed in 2002.

“It’s difficult to predict whether GV is able to increase or sustain its profitability in the future due to a lack of track record,” said SIAS Research’s Howard Lim.

The company is expected to post a small loss for 2005 but be profitable again in 2006.

Not Without Risks

Another near-term risk is the financing of the EUR25 million cash it plans to pay to Viatel.

Meaney said GV has “a range of options” including a debt or equity issue but analysts say both would hurt earnings.

If GV raises debt, its balance sheet will swing from net cash of about EUR5 million to a 12% net gearing, according to Ng.

For equity, the deal will be 11% dilutive if the new shares are issued at the current price.

Ng has suspended his recommendation of Outperform with a target price of S$0.28 on the stock as CIMB-GK has become GV’s financial adviser.

Some investors also remain wary of the stock because of “legacy baggage” left over from GV’s reverse takeover of Horizon Education & Technologies in 2004 despite the adoption of the Global Voice name and the jettison of almost all of Horizon’s previous businesses, said Lim.

“Some investors are still of the perception that the management is the same,” he said.

GV agrees that it needs to be more visible and plans to give more regular updates from this month on.

The company may also upgrade its listing to the Singapore Exchange’s main board from the Sesdaq market for small companies now that a one-year moratorium imposed by Horizon as part of the reverse takeover has expired.

Another issue hurting the stock was the recent spate of share sales from key institutional investors like Fidelity Management & Research.

FMR declined to comment but the move may reflect a change in FMR’s asset allocation strategy as it has also been active in paring its stakes in other technology companies.

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