Aim-traded BigBlu Broadband (BBB:99p), a provider of alternative superfast satellite, fixed wireless and 4G/5G broadband products, is crystallising the value created in its European satellite operations, deleveraging the balance sheet and recycling some of the cash proceeds raised into its higher-growth activities.
Subject to approval by BigBlu’s shareholders at the end of August, Eutelsat (NYSE /Euronext: ETL), one of the world's leading satellite operators, will acquire the group’s UK and European satellite broadband businesses for £37.8m – a 50 per cent premium to the prices paid by BigBlu – and assume £13.9m of working capital creditors. The total consideration paid equates to an exit multiple of 9.2 times cash profits. After certain adjustments, BigBlu has net cash of £6m (10p a share).
Importantly, the disposal should enable BigBlu to deliver accelerated returns from its remaining businesses: Quickline, the largest rural fixed wireless broadband provider in the UK; SkyMesh, a leading Australian satellite broadband provider with more than 40,000 customers and one targeting 10,000 new accounts per year through organic growth; and a Nordic satellite and fixed wireless broadband business that aims to expand its geographic footprint into Sweden and Finland.
Tapping into rural broadband opportunities
Quickline is of particular interest. BigBlu’s 69.7 per cent-owned subsidiary builds its own fixed wireless access networks, supported by increasing amounts of fibre infrastructure, to target the ‘digital divide’ in the UK. Around 1m homes are still unable to receive superfast broadband services and 12.4m homes are unable to access ultrafast speeds. The cost of installing infrastructure in rural communities makes the economics of fibre unattractive, hence the opportunity for BigBlu’s wireless networks, which provide consumers and businesses with broadband speeds of up to 1 Gbps using 5G and other fixed wireless technologies.
The UK government has committed to a £1.7bn superfast broadband programme, a £200m 'rural gigabit programme' and set aside £5bn to fund gigabit-capable technologies to the hardest hit 20 per cent of households. BigBlu’s management was ahead of the game, having attracted new investors to Quickline to raise £8m of new equity for the subsidiary and secure a £4m credit facility to ramp up its own new infrastructure (masts, and customer equipment) programme (‘BigBlu’s accelerated growth strategy’, 29 August 2019). In light of the opportunity on offer, BigBlu’s directors see a clear path to deploy more than the £12m capital raised. It makes sense to do so given the economies of scale to be generated by rolling out multiple networks and the first-mover advantage that enables Quickline to make an immediate return once a network is deployed.
If all goes to plan, Quickline could quadruple its customer base to 30,000 and make a cash profit of £6.5m within three years. Given that listed managed services and telecoms peers are valued on enterprise value to cash profit multiples of 11 times, it’s not inconceivable that the stake in Quickline could ultimately be worth BigBlu’s market capitalisation of £56m.
In Australia, BigBlu’s SkyMesh business is the leading satellite retail service provider in the country, commanding a 50 per cent market share of net new customer account additions under the Australian government’s National Broadband Network scheme in the past 12 months. The scheme is focused on connecting around 1m households. The combination of organic growth – SkyMesh has added 2,500 accounts from the new SkyMuster Plus product since April this year – and scope for complementary acquisitions support decent growth prospects here, too.
As excess capital is redeployed from the disposal then I can see potential for upgrades to FinnCap’s conservative-looking estimates for the ongoing operations. The brokerage expects a cash profit of £6.2m, operating profit of £4.4m and pre-tax profit of £2.7m on revenue of £27.1m in 2020 to produce earnings per share (EPS) of 4.2p. Based on a modest rise in revenue to £28.6m in the 2021 financial year, the respective forecasts are cash profit of £6.7m, operating profit of £4.9m and a much higher pre-tax profit of £4.5m due to much lower interest costs. Even on this basis the shares are too lowly rated on a price/earnings (PE) ratio of 14 based on 2021 EPS of 6.9p.
So, having last recommended buying the shares at 70p (‘Four companies offering value opportunities’, 1 April 2020), I see clear scope for a rerating towards a target range of 150p-160p to value BigBlu in line with the ratings of peers (enterprise valuation to cash profit multiple basis). From a technical perspective, a chart breakout above the mid-April 2020 high of 108p would add further weight to my conviction. On a bid-offer spread of 97p-99p, BigBlu shares rate a buy.
Exploit ThinkSmart’s hidden value
Afterpay Touch (APT:ASX), a A$20.1bn (£11bn) market capitalisation Australian Stock Exchange-listed technology group that owns 90 per cent of Clearpay, a UK payment platform that enables consumers to split the cost of their retail purchases into more manageable interest-free payments, has released a bumper trading update for its UK subsidiary. More than 1m active shoppers in the UK are now using the service and their purchasing activity is outpacing Afterpay’s US business at the same stage of its lifecycle by a third.
Having only launched the service in the UK last summer, Clearpay is one of the fastest growing e-commerce payment companies in the European market. For instance, Afterpay reported 74 per cent growth in retailers actively offering the service in the three months to 30 June 2020, highlighting the ongoing appeal of the interest-free product to both consumers and retailers alike. More than 1,100 brands and retailers are now offering Clearpay to their customers.
The potential for strong growth in Clearpay as the UK retailing landscape changed due to Covid-19 was a key bull point when I advised buying shares, at 14p, in Aim-traded finance company ThinkSmart (TSL: 30p) in my April 2020 Alpha Report. The UK company retains a valuable 10 per cent stake in Clearpay that is subject to a call (exercisable from 23 August 2023) and put (exercisable from 23 February 2024) option arrangement with Afterpay. One of the agreed principles in determining the valuation of ThinkSmart’s stake being the market capitalisation of Afterpay.
Bearing this in mind, Afterpay’s share price is now A$72.54, or more than double the A$29.75 price at 31 December 2019 which was used to apply a discounted value of £16.2m to ThinkSmart’s retained stake. The stock is well supported: Afterpay has just raised A$650m in an institutional placing of shares, at A$66, a tiny discount to the previous closing price, to accelerate investment in growing sales and expanding into new territories.
On the basis that Clearpay now accounts for more than 10 per cent of Afterpay’s 9.9m active customer numbers, is trading ahead of the US operation at a comparable time, is earning a similar net transaction margin, and already accounts for 5 per cent of Afterpay’s quarterly transaction revenue, then these metrics add further weight to a valuation of the subsidiary equating to 10 per cent of Afterpay’s market capitalisation of £11bn. This suggests ThinkSmart’s 10 per cent stake in Clearpay is now worth £110m, of which £38.5m is set aside for an employee share ownership plan, implying the fully diluted stake is worth £71.5m (67p a share), or more than double the UK company’s market capitalisation of £32m. ThinkSmart also holds pro-forma net cash of £9m (8.4p) after taking into account today's £1.45m cash settlement (for its legacy business) from Dixons Carphone (DC.), and £5m (4.7p) of other net assets.
On this basis, my sum-of-the-parts valuation is £82.6m (78p). After applying a 25 per cent liquidity discount to the Clearpay stake, I arrive at a 63p target price. Non-executive director Peter Gammall certainly sees the upside. He has just snapped up 2m shares, at 24p, to lift his stake to 12.6m shares. Non-executive director David Adams has bought 100,000 shares, too.
ThinkSmart’s share price is up by a half since I last advised buying, at 19.5p (‘Four small-cap special situations offering outperformance’, 15 June 2020), and there is still compelling value on offer here. It will be for all to see when ThinkSmart releases results for the financial year to 30 June 2020. On a bid-offer spread of 29p-30p, the shares rate a buy.
LoopUp Teams up
LoopUp (LOOP:220p), a London-based premium remote conference meetings company, has just announced a major extension to its flagship product, LoopUp, as it strives to become a leading provider of telephony services for Microsoft’s Teams, a product that has 75m daily active users.
LoopUp will now offer global cloud voice services via a third-party network direct routing to companies using Microsoft Teams, alongside its own premium remote meetings capability. Users will be able to make and receive outbound and inbound voice calls directly from their Microsoft Teams user interface on any device, irrespective of geographic location, and with differentiated audio quality, reliability and security. It’s a win-win situation for both parties.
That’s because although Microsoft Teams has grown strongly in the professional services market segment, few companies use it for external voice telephony. That’s an issue because analysts at Gartner believe that 90 per cent of enterprises will adopt direct routing voice calls by 2022, up from only 10 per cent last year. This is a seismic shift and explains why Microsoft is seeking to increase its presence in this important segment of the market.
From LoopUp’s perspective, around 90 per cent of its customers already use Microsoft Teams so offering direct routing is a natural extension of the product offering. It should be profitable, too, as analyst Peter McNally at house broker Panmure Gordon “believes new and existing customers that sign up with Teams integration can at least double the average deal size for LoopUp”.
Mr McNally is maintaining his recently upgraded earnings forecasts (‘Watchlist small-caps on the upgrade’, 20 July 2020), but now believes that LoopUp's shares should trade in line with the UK Small-Cap Technology sector average multiple of 13.5 times 2021 enterprise value to cash profit, implying fair value of 324p.
Last week, LoopUp shares hit the 225p target price I outlined when I suggested buying last month at 138p (Alpha Report: ‘Tap into the remote working boom with LoopUp’, 2 July 2020), but I now feel a 300p target price is in order. There is little in the way of technical resistance to my new target either. On a bid-offer spread of 215p-220p, the shares rate a buy.
Duke Royalty material rebound
Duke Royalty (DUKE:29p), an Aim-traded company that makes its money by providing capital to companies in exchange for rights to a small percentage of their future revenues over a typical term of 25-40 years, has issued a far better than expected update on current trading.
As lockdown restrictions eased, its royalty partners have experienced a significant upturn in trading, so much so that cash distribution receipts exceeded £2m in the three months to 30 June 2020, well above the £1.8m guidance given at the May trading update, albeit still 20 per cent shy of the comparable period last year. The quarterly cash receipts cover all of Duke’s operating costs of £1.8m for the financial year to 31 March 2021 and guidance is to expect a higher level in the current quarter with an acceleration into the third quarter as expired forbearance requests are replaced with normalised monthly cash payments from those royalty partners. Moreover, Duke has announced a follow-on £3m investment in one of its royalty partners this morning, which will further boost annualised cash receipts by £400,000.
I estimate Duke could easily generate annual net operating free cash flow of £6m-£6.5m (2.25p-2.65p a share) prior to interest payments on its £16m debt, a healthy sum in relation to the current market capitalisation of £71m. This bodes well for the 0.5p-a-share scrip quarterly dividend to be replaced by a cash payout. I last advised buying the shares at 23.5p (‘Hunting down small-cap buys’, 14 May 2020) and they continue to offer compelling value (23 per cent share price discount to book value) on a bid-offer spread of 28.5p to 29p. Buy.
Hitting target prices
Shares in Aim-traded Jarvis Securities (JIM:730p), a financial services outsourcer and retail client stockbroker, hit a record high and passed through my 700p target price on Friday after the board declared a record 14p-a-share dividend for the third quarter (ex-dividend: 20 August). The payout is way ahead of expectations and takes the total dividends declared this year to 31.75p a share, including the supplementary 4p-a-share paid in the second quarter.
The news prompted analyst Nick Spoliar at house broker WH Ireland to upgrade his full-year normal payout forecast by 7 per cent to 40p (26.25p in 2019), implying the shares still offer a 5.5 per cent prospective dividend yield, and one underpinned by rock-solid EPS estimates of 50p (2019: 35.8p). On this basis, the forward PE ratio is 14.
The progressive and sustainable dividend was a key bull point when I suggested buying Jarvis’ shares at 460p (‘Jarvis offers medium-term value’, 15 August 2018), since when the board has paid out 72.5p a share (excluding the 14p-a-share third-quarter dividend) to produce a total return of 66 per cent. The FTSE Aim All-Share Total Return index has fallen 12 per cent in the same two-year period.
I expect the outperformance to continue for the reasons given when I covered the half-year results (‘Watchlist small-caps on the upgrade’, 20 July 2020). In fact, I am raising my target again to 800p. On a bid-offer spread of 700p-730p, the shares continue to rate a buy.
■ Simon Thompson's latest book Successful Stock Picking Strategies and his previous 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 £3.25 [UK].
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Simon Thompson was named 2019 Small Cap Journalist of the year at the 2019 Small Cap Awards.
