Shares in Eircom are undervalued by over 40 cents, although the stock was likely to take 12 months to rise from its present rate of €4.08 (£3.21) to a reasonable market objective of €4.90 (£3.86), a leading UK analyst said yesterday.

Eircom's price dip since it reached a high of €5.00 (£3.94) on July 22nd was due to "normal, short-term swings and roundabouts", said Merrill Lynch's cohead of European telecoms research, Mr Mark Lambert.

Speaking at a global equity conference in Dublin, organised by Merrill Lynch, Mr Lambert said the share "was squeezed up aggressively in the first wave of IPO euphoria towards €5.00, but then it started looking expensive in terms of its peer group". Asked about the current price of €4.08, Mr Lambert said: "I think it's cheap. I think €4.50 (£3.54) is a fairer price in keeping with our €4.90 objective." Merrill Lynch was involved in the flotation of Eircom, then Telecom Eireann.

While stressing that a price objective of €4.90 needed to be taken in the context of developments in the market in general, Mr Lambert said investors who bought the stock at its launch price of €3.90 (£3.07) were still "looking at a nice profit" to €4.90 if that rise came about in 12 months.

"The IPO was only two months ago. There are no overnight miracles. Local markets love to hate their own tel-co (telecoms company). We have to careful not to get too close to it. We need to stand back and make sure we can see the wood from the trees."

Eircom faced "major challenges and opportunities in a conducive environment", said Mr Lambert. There was further room for growth in the Irish market, particularly in the mobile market. A strong focus on telecoms at Government level and a favourable tax environment would also help fuel growth. While Eircom's flotation and broad liberalisation of the market would lead to further opportunities, Mr Lambert said "competition was unlikely to be anything but severe".

The telcom sector in general remained in very good shape. "There's been a marked shift in perceptions in the investment environment and that has had some impact," said Mr Lambert. "The sector has clearly been rerated." While consolidation in the Irish market was "difficult to assess", market expectations had been raised and growth prospects remain.

Merrill Lynch European Internet analyst, Mr Peter Bradshaw, said many leading stocks in the sector could still be cheap.