Interactive Investor

Stockwatch: perfect timing for speculative broadband investment?

The company has a limited track record, but looks operationally strong.

1st April 2021 15:16

Edmond Jackson from interactive investor

The company has a limited track record, but looks operationally strong. 

Two years ago, I examined AIM-listed broadband solutions company Bigblu Broadband (LSE:BBB) at 116p a share, after news of becoming one of two satellite distributors for a French government-backed scheme to expand broadband connection.

Numis, its broker, was projecting £5 million pre-tax profit for the year to end-November 2021, for adjusted earnings per share (EPS) near 7p. Using a discounted cash flow approach the broker set a 230p target given “the company is likely to grow robustly for more than just the next few years”.  

Stock has trended sideways but is potentially at a watershed 

My chief concerns were, such technology being a moving feast: for example, rural fibre connections and 4G were expanding and could usurp early satellite innovators.

This year, Elon Musk’s SpaceX has started testing satellite broadband in the UK. It affirms my other concern how things could get more competitive. 

Since Bigblu had no established earnings, I thought the stock highly speculative, albeit a potential buy. Recalling how Plusnet was once a listed small-cap innovator that got swallowed by BT, possibly Bigblu would end up a useful bolt-on for a telecoms group to offer satellite provision. 

The stock subsequently trended in a volatile-sideways range of 90p to 130p with a brief drop below 65p during the Covid-19 sell-off a year ago. As you can see from the table, losses have continued, but after Wednesday’s preliminary results to the end of November 2020 the latest corporate broker – finnCap – has published a note implying this £60 million company is at a watershed. 

Contract wins should re-rate continuing operations revenue 

Various signs since last September imply that, despite only a 4% revenue rise in the last financial year, a 27% uplift beckons this year and 19% to £40.9 million in 2022.

After achieving £1.9 million adjusted pre-tax profit in the latest financial year, finnCap entertains the prospect of this soaring to £4.4 million in the current year and £5.8 million in 2022 , for adjusted EPS of 3.1p and 7.8p – on which basis the forward price-to-earnings (PE) ratio falls from 32x to 13x. No dividends are anticipated however. 

For now, the market remains wary: Bigblu’s price initially rising from 108p to 112p in response to the results, albeit fallen to 99p.  

This compares with finnCap setting a 155p target after appointment in February 2020, it has now raised to 180p.

Presumably with guidance from the finance director, it reckons Bigblu’s Australasian side will generate more than £3 million operational free cash flow a year. It also thinks its 57%-owned broadband ISP Quickline could generate more than £10 million EBITDA a year in the medium term and that a Nordic business can enhance its subscriber base and deliver organic growth.  

Disposal of UK and European satellite broadband operations 

This appeared quite a jolt to the story last July. While it fulfilled my sense that the niche satellite side could become attractive to an acquirer –indeed it marked a book gain of £18.9 million – it seemed quite like cutting off a limb. It did, however, result in an attractive £37.8 million gain plus a one-year potential deferred consideration of £1.5 million.  

In terms of where this leaves the group in the UK, at least Quickline has been among a few companies awarded superfast contracts under a UK public authority agenda to extend connectivity in the 20% of the country where it would not otherwise be viable.  

Quickline has a 3.8 out of 5 score out of 251 Google reviews, with the usual distribution of opinions ranging from excellent to dire. Having just had Open Reach tackle my own latest bout of dropped connections, I would say this typifies the challenges of rural areas. 

A consequent drop in customers, but they ought to recover 

After 10% growth to around 110,000 in 2020, the number is now cited at around 65,000 after disposal of the UK and European satellite operations. That does however mask encouraging 23% growth in Australian customers to 46,700, which constitutes 72% of the total.

The SkyMesh business there enjoys a ‘best satellite provider’ status with a circa 50% market share. 

Last February, a partnership was struck with Kacific – a satellite provider to South East Asia and Pacific islands, for high-speed provision initially across New Zealand. 

Norway has seen a 13% reduction in customers, to 11,200 in Norway. Even the residual UK fixed wireless service saw an 11% reduction to 7 million, or 11% of the total.

But Quickline has been selected to lead a £6 million government-backed 5G project to boost rural connectivity in North Yorkshire. It also won three tenders worth £15 million, under the BDUK superfast programme, to re-rate broadband speeds across West Yorkshire, Lincolnshire and North Lincolnshire.

And in early December it had a £15 million win for North Yorkshire – albeit requiring £6 million investment – to deliver to 30,000 premises. 

Bigblu Broadband - financial summary
Year end 30 Nov

  2015 2016 2017 2018 2019 2020
Turnover (£ million) 7.4 21.5 43.9 55.4 62.1 27.2
Operating margin (%) -80.8 -25.1 -18.3 -23.5 -9.1 8.8
Operating profit (£m) -6.0 -5.4 -8.0 -13.0 -5.6 2.4
Net profit (£m) -6.0 -6.0 -7.6 -13.3 -8.0 9.4
EPS - reported (p) -29.3 -23.6 -19.7 -25.8 -13.8 16.6
EPS - normalised (p) -5.7 -18.3 -17.1 -23.5 -10.3 2.6
Price/earnings ratio (x)           38.1
Operating cashflow/share (p) -22.2 -0.7 2.2 6.5 8.9 -9.9
Capital expenditure/share (p) 11.7 6.8 18.6 15.1 16.8 16.7
Free cashflow/share (p) -33.8 -7.5 -16.4 -8.6 -8.0 -26.0
Cash (£m) 1.7 3.3 3.5 5.1 6.0 15.3
Net debt (£m) 1.7 9.9 12.8 12.0 15.4 -4.1
Net assets (£m) 2.3 10.1 9.3 10.1 6.5 18.8
Net assets per share (p) 11.0 28.4 20.5 17.8 11.3 32.6

Source: historic company REFS and company accounts

2020 results re-presented as “continuing operations” 

Last July’s disposal explains the revenue plunge in historic context, whereas like-for-like revenue at constant currency edged up a modest 4% to £27.2 million.  

The operating margin is satisfactorily near 9%, but nothing special – as would appear to befit a competitive industry.  

Nearly £7 million of finance costs decimated £2.4 million operating profit to a £4.9 million continuing operations loss.

However, these costs involved a slew of exceptional ones. Considering how debt has been cut from £20.2 million to £7.9 million, and also reconstituted at the best competitive rates, I would expect this year’s finance charge to be a lot lower – which adds grist to finnCap’s seemingly ambitious forecasts. From a low profits base, a strong advance may only need significant change in one variable. 

Last July’s disposal helps explain year-end cash rising from £6 million to £15.3 million. It also explains near-term trade payables down £20 million to £12.5 million. (The acquirer did also assume £14 million working capital creditors.)

The November 2019 imbalance of £32.5 million trade payables versus £8.3 million trade receivables had been an eyesore with a ratio of current assets to current liabilities below 0.6.    

Adjusted cash flow from operations also rose markedly, from £700,000 to £3.8 million, albeit nearly offset by £3.1 million outflow, chiefly in capital investment. Otherwise, the reported annual cash flow statement is distorted by the disposal effect. 

Similarly, due to the sale, intangible assets fell 59% and property/plant/equipment by 31%, with overall non-current assets down from £45.9 million to £23.3 million. Yet the net asset position has improved to about 33p a share after cash inflow cut liabilities.  

Better positioned than at any time 

There is plenty to prove here, financially, and Bigblu’s story has been somewhat tortuous – maxing on satellite broadband then selling it in the UK and Europe. Yet the proceeds do look to have helped transform finances, and the operations look especially strong in Australia and are advancing in the UK. I would prefer to see more track record as a basis for forecasts but retain my stance: ‘Buy’. 

Edmond Jackson is a freelance contributor and not a direct employee of interactive investor.

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