Investor - An insider's guide to the market: Eircom in its current guise returned to the Irish stock market in March 2004 at a share price of €1.55.

Stripped of any exposure to the rapidly growing mobile market, the predominantly fixed-line Eircom business did not seem to be a particularly attractive investment prospect.

The investment banks marketing the initial public offering (IPO) recognised this and it was decided to offer the carrot of a very high dividend yield in order to attract buyers.

In early 2005, the shares enjoyed a strong run on the back of optimism regarding the rollout of broadband and speculation that the company would soon re-enter the mobile market in the State. During February/March the share price traded above €2 and briefly touched a high of €2.20. Since then the shares have retreated steadily and are now holding just above €1.70.

This quite sharp retreat in the share price seems to be due to a stall in the speed at which Eircom's broadband product is being taken up. The firm's target of 500,000 broadband connections by December 2007 is very challenging. This target can probably be met but only if the price of Eircom's offering is reduced. High promotional spend and more competitive pricing means that it will take longer than previously thought to achieve profitability in broadband.

Lack of progress in achieving re-entry to the mobile market has been another short-term negative for the share price. Eircom's management has stated unequivocally that it is actively considering mobile re-entry options. There would seem to be only two options: re-entry through the purchase of "airtime" from O2 or Vodafone - the so-called MVNO route where Eircom effectively acts as a reseller of mobile airtime; or purchase Meteor, the third and smallest mobile operator.

The purchase of Meteor is probably the preferred long-term option but it would require much more upfront investment. Media reports have suggested a valuation for Meteor of more than €300 million. Eircom is very highly leveraged and may have difficulty raising the necessary funds to purchase Meteor and its only alternative may be to seek to raise further equity from existing shareholders.

The MVNO route would require minimal upfront investment but long-term profit margins would be lower.

Another reason to re-enter the mobile market is the potential from fixed-to-mobile convergence, where the same handset acts as a mobile phone outside the home or office but becomes a fixed-line phone within the home/office. In the UK, BT offers such a product where it has an extensive MVNO agreement with Vodafone.

It is clear that Eircom is having to work very hard to just stand still. In 2003, it generated revenues of €1,682 million, which declined to €1,628 million in 2004 and are forecast to decline to €1,603 million in 2005. Operating profits have improved due to the successful implementation of a cost-reduction programme.

There is still scope to improve profitability through greater efficiencies but the medium-term imperative of succeeding in broadband and mobile is clear. Until there is greater visibility in broadband revenues and the mooted mobile re-entry, the share price is likely to remain volatile. However, Investor is of the view that the current share price fully discounts these admittedly major issues.

At the current price, the shares offer a dividend yield of 6.4 per cent, which is way above the 3.7 per cent average of its European peer group. Its price/earnings ratio and its EV/EBITDA ratio (enterprise value/earnings before interest, tax, depreciation and amortisation) indicate that the shares are cheap relative to other incumbent telecoms.

For Investor, the only real investment attraction of Eircom is the high dividend yield but this looks increasingly attractive in the current low interest rate environment.

Eircom faces many challenges and sustained appreciation in the shares will require sustained progress in broadband rollout and mobile re-entry. Meanwhile, in Investor's view, the dividend yield is sufficiently high to adequately reward patient investors.