Stockwatch: Put this AIM share on your radar

by Edmond Jackson from interactive investor |

This is a fast-growing technology business, and some believe the share price could double.

Is £60 million AIM-listed "alternative supplier of superfast broadband" Bigblu Broadband (LSE:BBB) achieving genuine critical mass, which could potentially be appealing to a larger telecoms group? And is it also at a genuine inflection point into earnings growth, like its broker Numis proclaims? 

In the last few days its stock has enjoyed a fillip from 105p to 116p - initially after 22 March news of becoming one of two satellite distributors certified for a French government-backed scheme to expand broadband connection, then full-year results on 25 March.

The numbers show operating cash flow up from £2.8 million to near £5 million, with revenue up 26% to £55.4 million albeit boosted by acquisitions with like-for-like revenue up only 8.2%. So, the context remains small, especially considering the business has existed since 2008 as Satellite Solutions Worldwide Group despite Bigblu often referred to as founded in 2014.

The stock has traded sideways in the last year after a placing at 126p a share (equivalent) raised £12 million to fund the purchase of satellite broadband providers in Italy and Germany, which the CEO described as "completing our footprint expansion across Europe" and which resulted in the plc name-change.

Potentially wincing aspects within the accounts

Perception of value rather hinges on whether you are prepared to overlook depreciation/ amortisation costs – the "EBITDA view" preferred by company promoters such as Bigblu's broker, Numis, in its latest note.

Prelims show Bigblu's operating loss widening from £7.6 million to £13.3 million albeit with £14.1 million depreciation/amortisation going through the income statement, up from £10.8 million in the 2016/17 year. So, positive EBITDA of £6.8 million - according to Numis's full adjustments - is projected to rise over 80% in the next three years, on which basis a price/earnings (PE) multiple of 25 reduces to 16 times.

If only company results would give a thorough explanation of why such costs should be overlooked, quite like my regular bugbear about how balance sheet trade payables are twice trade receivables (an imbalance potentially indicating delayed payments to suppliers, which could boost reported profit).

Mind how despite £5.1 million balance sheet cash, the extent of working capital creditors extend total current liabilities to £31.3 million versus £17.8 million current assets, before consideration of £17 million longer-term debt in a context of £10 million net assets – propped up by £36.1 million intangibles. The annual interest expense averages just over £2 million, so don't assume I consider this stock "investment grade"!

Bigblu Broadband - financial summary         Company broker estimates
year ended 30 Nov 2015 2016 2017 2018 2019 2020 2021
               
Turnover (£ million) 7.4 21.5 43.9 55.4 62.5 67.3 73.0
IFRS3 pre-tax profit (£m) -6.0 -6.2 -10.1 -15.2      
Operating margin (%) -24.9 -14.0 -18.3 -23.5      
Normalised pre-tax profit (£m)       -9.5 -1.3 2.5 5.0
IFRS3 earnings/share (p) -2.0 -1.6 -19.7 25.8      
Normalised earnings/share (p) -0.6 -1.0 0.0 -0.3 4.5 5.2 6.9
Cash flow/share (p) -1.5 0.0          
Capex/share (p) 0.8 0.5          
Net tangible assets per share (p) -0.7 -3.2 -3.1 -3.8      

Source: Company REFS and 25 March Numis note

Subsidies and new satellites could boost customers

More positively, if the business continues to gain steady traction – helped by government support for broadband access – and the stock market retains a conservative view/rating, it's possible an acquirer bolts Bigblu onto its operations.

A year ago, a UK broadband delivery grant gave the company £2.1 million for field trials of 5G broadband utilising unused TV whitespace, and there are subsidies also in France, Germany, Spain and Hungary for hardware and installation costs.

Management says it has added 3,000 net new customers during the first three months of the current financial year to 116,000 overall, and "remains confident of growing its customer base to 150,000 by 2020".

However, for comparison, looking back to BT Group's (LSE:BT.A) £67 million acquisition of 10-year-old Plusnet in early 2007, that smaller broadband company had subsequently achieved 750,000 customers by end-2013.

Bigblu proclaims there is a substantial target market of 27 million customers in Europe who endure speeds under 4Mbps, and a further 1 million such in Australia who are trapped in the digital divide with limited or no fibre broadband options. Moreover, European governments have targets for "universal broadband coverage at 30 Mbps by 2020 with half of homes on 100Mbps by 2025".

New satellites "which are fully funded and already in build" from Bigblu's partners, will make possible "a fibre-like service from the sky, with 100 Mbps download speeds and unlimited data”, furthermore "from 2021 we expect to be offering our customers 200Mbps to 300Mbps download speeds".

Unless this is replicated by advances from mainstream broadband providers, it could be a game-changer for Bigblu, why at the very least I suggest the company is on your radar, despite its accounting issues. 

Brexit preparations are curiously elusive

Given continental Europe is the group's revenue mainstay at 43% - for an Oxfordshire headquartered business, the UK representing 30% of last year's revenue and Australia 27% - you might expect management to describe what Brexit could entail, according to the Withdrawal Agreement or No Deal; how is it preparing etc. 

But, unless forthcoming in the annual report (under risk issues), there's no such mention at prelims.  Given the state of its balance sheet, international exposure poses greater risk than usual for a small company operating abroad.

And yet Numis's projections are for £5 million pre-tax profit in the year to end-November 2021, for earnings per share (EPS) near 7p, albeit writing back substantial depreciation/amortisation.

Can Bigblu truly thrive as a dedicated broadband supplier?

Chief marketing reasons I've been wary of this company (under both names) have been the classic liability for a sea-change in technology that could render satellite broadband specialists redundant. 

Friends in rural areas that I've mentioned the satellite option to, have tended to switch over from BT landline delivery to EE's 4G broadband which offers superfast speeds in the region of 100Mbps, admittedly at a cost of around £100 a month for unlimited download.

While Bigblu's offering already includes 4G - from its website, "prices starting from £25 a month for 200MB data and an average 21 Mbps download speed" - it would seem to be a dedicated broadband package, whereas the likes of EE tend to offer negotiated offers, in mobile especially, when rolling all such services into one provider.

Obviously, that assumes you're in a 4G area, although a significant reason BT acquired EE (and will ultimately, fully integrate it) was EE's extent of 4G reach.

Stock could double, according to Numis

Using a discounted cash flow approach "because Bigblu is not comparable to any connectivity providers in the UK or elsewhere" analysts at Numis derive a 230p target and argue that "the company is likely to grow robustly for more than just the next few years." As ever with a discounted cash flow approach, the end-result can vary significantly with assumptions behind inputs.  

I'd be surprised if the market reacts keenly to this target until there's more proof of like-for-like customer growth and, hopefully, balance sheet improvements. Decent conversion – 72% - of adjusted EBITDA to cash flow, offers one reason for existing holders to feel positive about how Bigblu's financials are evolving.

With fears of lower global growth potentially prompting another shift in investor sentiment, away from risk assets, I'm doubtful Bigblu will break out of its recent 104-125p range without more evidence of underlying progress, but potential certainly exists for an attractive longer-term rollout. Speculative Buy.

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

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