It’s not often that you can buy into a fast-growing technology business on five times annual operating profits, but that’s what’s on offer at Aim-traded BigBlu Broadband (BBB: 58p), a provider of alternative superfast satellite, fixed wireless and 4G/5G broadband products.
Following the sale of its stake in Quickline (‘Targeting sky high returns, 31 August 2021), a business that is building fixed wireless access (FWA) networks to address the ‘digital divide’ in the UK, and a subsequent £26.1mn cash return (45p a share), BigBlu retains £7.6mn of loans and equity in Quickline, and net cash of £5.2mn. House broker finnCap estimates the £33.8mn market capitalised group is likely to receive £5mn of deferred cash consideration in the coming months, too. Admittedly, the forecast cash earn-out is less than the maximum of £10.1mn at the time of the disposal, the reason being the global shortage of microchips impacted the supply of 5G radio equipment and the milestones.
Effectively, BigBlu’s remaining businesses in Australia and Norway are in the price for £16mn even though they increased operating profit by 15 per cent to £3.2mn on revenue of £27.1mn in the 2021 financial year. It’s a valuation anomaly worth exploiting.
BigBlu’s growth underrated
- 11 per cent growth in cash profit (Ebitda) to £4.6mn, or 6 per cent ahead of expectations
- Adjusted free cash flow of £2.1mn
- Strong organic growth in customer base in Australia
- Regional expansion into New Zealand
- Nordic business restructured and now generating underlying growth
BigBlu’s focus is on two international businesses: SkyMesh, an Australian satellite broadband provider that targets customers in rural areas outside of the fibre footprint; and a Nordic satellite and FWA broadband business that has been restructured and plans to expand into Sweden and Finland.
In the 2021 financial year, SkyMesh’s cash profits surged by 43 per cent to £4mn on 31 per cent higher revenue of £21.8mn, buoyed by 3,700 new customer additions (to 49,700). Skymesh continues to secure a 50 per cent share of new satellite additions under the Australian government’s NBNCo scheme, and is seeing growing interest for its premium Sky Muster Plus product. This helped boost average revenue per user by 15 per cent to A$70 per month.
Moreover, the partnership in New Zealand with Asia Pacific broadband satellite operator Kacific signed its first customers in December 2021, and the post period end acquisition of Melbourne-based ISP Clear Networks adds 2,200 subscribers for a maximum consideration of A$2.9mn (£1.6mn), or six times trailing cash profit. House broker finnCap expects SkyMesh to deliver 13 per cent revenue growth, which supports a divisional cash profit forecast of £4.4mn and free cash flow above £3m.
Importantly, the Nordic business has been successfully restructured. Dismounting 100 lossmaking masts cut the user base by 4,000 customers, but this was mitigated by a network upgrade programme for 55 towers which increased internet speeds to 100 Mbps and helped add 2,000 new profitable customers.
Bigblu Norge has also entered a distribution agreement with Telenor to provide ultrafast broadband via wireless 5G, offering speeds up to 500 Mbps with unlimited data packages. Equipment shortages mean the roll-out is six months behind schedule, but it’s still growing. One fly in the ointment is last month’s cybersecurity attack on Viasat, the provider of BigBlu’s satellite capacity in the Nordics. Although the Nordics’ satellite customer base is likely to churn as a consequence, finnCap still expect the Nordics unit to deliver 5 per cent growth in cash profit to £2mn this year.
My sum-of-the-parts valuation of £58mn (100p a share) values BigBlu’s operational businesses at £40mn, or the equivalent of 10.5 times 2023 operating profit estimates. Buy.
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