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Tap into a blue-sky opportunity

A provider of alternative superfast satellite, fixed wireless and 4G/5G broadband products is effectively being valued on only five times operating profit, a harsh rating given its growth prospects
Tap into a blue-sky opportunity
  • Adjusted cash profit of £2mn on 14 per cent higher revenue of £14.9mn in six months to 31 May 2022
  • First-half free cash flow of £0.4mn and closing net cash of £4.5mn
  • Nil deferred consideration from Quickline disposal due to global chip supply issues impacting roll-out of 5G equipment

Quickline, a business that is building fixed wireless access (FWA) networks to address the ‘digital divide’ in the UK, has failed to achieve the growth shareholders in BigBlu Broadband (BBB:50p) were hoping for after the Aim-traded technology group sold its stake in the business last year.

BigBlu received £31.1mn in cash on completion, with up to a further £10.1mn payable as deferred contingent consideration subject to performance conditions being met. Although acquirer Northleaf has invested £40mn to accelerate Quickline’s growth since acquisition, the business has only been able to build 41 FWA masts due to challenges securing 5G equipment. This reflects global supply issues in the chip sector and associated delays in the commercial launch of 5G services. As a result, there will be no deferred consideration payable. Although disappointing, BigBlu still retains a 5.08 per cent stake in Quickline worth £7.3mn (12.5p a share), so is still benefiting to a degree from the value Northleaf is creating.

BigBlu’s main focus, though, 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 first half, total customer numbers increased from 58,300 to 60,400 even though Viasat, the provider of BigBlu’s satellite capacity in the Nordics, suffered a cyberattack (now materially resolved) that impacted 3,000 customers and led to 500 account closures. More importantly, having entered a distribution agreement with Telenor for ultrafast broadband via wireless 5G, offering speeds up to 500 Mbps with unlimited data packages, Bigblu Norge is now showing “real momentum and growing traction in the market”, so much so that finnCap expects it to return to double-digit organic growth in the current financial year.

Analysts also expect the Australian business to continue delivering robust growth. For example, the partnership in New Zealand with Asia Pacific broadband satellite operator Kacific is live and signing up customers, and SkyMesh has boosted its presence around Melbourne, having acquired Melbourne-based ISP Clear Networks. FinnCap expects the Australasian business to deliver 13 per cent organic revenue growth this year, and operating free cash flow above £3mn. As a standalone entity, Skymesh easily justifies a valuation more than BigBlu’s own market capitalisation of £29.1mn.

Moreover, the group holds net cash of £4.5mn (7.7p a share), the stake in Quickline (12.5p), and the recovering Nordic business. Effectively, SkyMesh and BigBlu Norge are in the price for £17.3mn, or five times their forecast operating profits of £3.4mn (after central overheads). A valuation of £42mn (72p) or 12 times operating profit far is nearer the mark, implying a sum-of-the-parts valuation of 98p for the group, or 84 per cent above BigBlu’s current share price.

Interestingly, the share price has pulled back to the March lows (47p) and is massively oversold (14-day RSI of 12.3), too, having previously rallied from 58p to 78p after I covered the annual results (‘A blue sky tech value play’, 21 March 2022). Once the dust settles, and investors focus again on the operational performance from SkyMesh and BigBlu Norge, expect the share price to recover the lost ground. Buy.

Simon Thompson was named Journalist of the Year at the 2022 Small Cap Awards.

 

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