There is a lot to like in today’s annual results from Aim-traded BigBlu Broadband (BBB:120p), a fast-growing satellite internet service provider offering an alternative high-speed broadband service.
The company has made no fewer than 20 acquisitions across nine countries since I first flagged up the investment potential three years ago when the shares were priced at 82.5p ('Blue-sky tech play', 21 Mar 2016). So, having achieved the requisite scale for the operational gearing of the business model to really kick in, BBB has now moved into the organic growth phase.
The company grew its customer base by 13 per cent to 113,000 in the 2018 financial year, and managed to increase average revenue per user (ARPU) slightly to £42 a month and drive up like-for-like revenues by 8 per cent. Cash profit margins improved, too, up from 10.7 to 12.3 per cent, which delivered a 45 per cent hike in annual cash profits to £6.8m on total revenues up by more than a quarter to £55.4m. Importantly, cash flow has improved no end, with over 70 per cent (20.9 per cent in 2017) of cash profits converted into operating cash flow. This meant that BigBlu generated free cash flow of £1.1m and cut net borrowings by 10 per cent to £11.9m.
Since the end of the 2018 financial year, BigBlu has added a further 3,000 customers organically, and chief executive Andrew Walwyn and finance director Frank Walters are confident that they can hit their 150,000 customer target by the end of 2020. They have reason to think this way. Ongoing government support across Europe is helping to deliver 'universal broadband coverage' under an EU directive that states that customers should have access to download speeds of at least 30 Mbps by 2020. The target is to extend coverage to more than 50 per cent of households by 2021 at broadband speeds of at least 100 Mbps.
Bearing this in mind, there are more than 27m customers in Europe who have broadband speeds of under 4 Mbps. However, without the use of super-fast alternative technologies such as satellite and fixed wireless broadband, European governments are going to struggle to meet the targets under the EU directive. As a result, the UK, France, Germany, Spain and Hungary now all offer government-funded support schemes to offset the cost of the hardware, and installation costs of getting online with satellite or fixed wireless are subsidised.
BigBlu is well placed to capitalise on this opportunity. In France, the company is the only distributor offering unlimited broadband access through satellite under a €100m (£85m) government-funded scheme that was launched last week and which aims to offer all households and businesses access to a minimum of 8 Mbps broadband through ADSL/Fibre by 2020. The French government is offering up to €150 per household as a subsidy to cover activation fees, kit purchase and installation costs. According to the Agence du Numérique, 2m households will be able to benefit from the scheme.
At the end of 2018, BigBlu was selected as a preferred partner by Eurobroadband Infrastructure (EBI), a subsidiary of Eutelsat (NYSE/Euronext: ETL), which is launching a market-leading superfast satellite broadband service to consumers and businesses across Europe at download speeds of up to 50 Mbps. Under this arrangement EBI provides satellite network capacity, as well as assisting with subscriber premises equipment, installation and marketing to support the 'Konnect' brand. BBB is promoting and selling satellite broadband services while managing all activities related to subscriber management including installation, billing and support.
Technology is playing a part, too, as new satellites from BigBlu's partners, which are fully funded and already in build, are set to offer consumers an enhanced satellite broadband proposition. By the middle of 2020, the directors expect to be able to offer their customers a fibre like service from the sky, with 100 Mbps download speeds and unlimited data allowances across key European markets. Mr Walwyn makes the valid point that a continually improving product offering is the key driver of uptake of satellite services, a view that is given further credence given that download speeds are set to hit 200 Mbps to 300 Mbps by 2021. All customers who connected to BigBlu's networks in Norway and the UK last year are able to connect at up to 100 Mbps.
The combination of technological change, government subsidies to promote superfast broadband and partnership agreements augurs well for another year of strong growth. Indeed, analysts at house broker Numis Securities predict current year cash profits of £10.1m on revenues of £62.5m and equity free cash flow of £4m. Factor in net debt and the company’s current enterprise value of £81m equates to a modest eight times forecast cash profits, a rating that fails to take into account the real possibility of BigBlu continuing to deliver increasing levels of profitability for years to come.
This has not been lost on investors, as BigBlu's shares have risen by a fifth since I last recommended buying them at 102p (‘BigBlu’s game changing deal’, 21 Dec 2019). Offering a further 38 per cent upside to my conservative looking 165p target price, which is well below Numis’s 230p target, I maintain my positive stance. Buy.
■ Simon Thompson's new book Successful Stock Picking Strategies and his second book Stock Picking for Profit can be purchased online at www.ypdbooks.com, or by telephoning YPDBooks on 01904 431 213 to place an order. The books are being sold through no other source and are priced at £16.95 each plus postage and packaging of £2.95, or £3.75 if you purchase both books. Details of the content of both books can be viewed onwww.ypdbooks.com.
