Aim-traded BigBlu Broadband (BBB:110p), a fast-growing satellite internet service provider offering an alternative high-speed broadband service, has issued a robust pre-close trading update for the six months to end May 2019. It’s one that implies “meaningful upside risk to our profit forecasts for this year and beyond”, says analyst John Karidis at house broker Numis Securities.
BigBlu added a record 7,500 net new customers in the six month trading period to take the total to 120,000, the implication being that Numis’ full-year estimate of 13,000 net additions is on the low side. The target is to grow the total customer base organically to 150,000 by December 2020. Moreover, customers are increasingly profitable as highlighted by the 54 per cent rise in first half cash profits to £4.3m on revenues up 21 per cent to £30.5m. Gross margins rose by over six percentage points to 43.7 per cent, reflecting improved product mix and network support. An underlying cash profit margin of 14 per cent is three percentage points higher than in the same period last year, and looks set to rise to 18 per cent in the second half to 30 November 2019 as BigBlu benefits from the operational gearing of its business, a streamlining of customer service costs and declining churn rates.
Not only are more new and existing customers adopting new products with faster broadband speeds and unlimited download limits, but customer connections are set to benefit from BigBlu’s partnership with Eutelsat (NYSE/Euronext: ETL) during the second half of this year following the confirmed launch in December 2019 of its “Konnect” satellite that will enable 100Mbps services across the company’s core European markets for the first time. This is another positive for BigBlu’s average revenue per user (ARPU) and like-for-like revenues (the latter increased by 12 per cent in the first half to end May 2019) given that the company will be able to provide its retail customers double the 50 Mbps internet speeds that are currently available under its existing Eutelsat and Viasat contracts. Both operators plan to enable BigBlu to retail 200Mbps plus connectivity from 2021.
Government support across Europe is also supportive of BigBlu’s ongoing strong growth under an EU directive that states that customers should have access to download speeds of at least 30 Mbps by 2020. There are currently 27m European households which have internet speeds below 4Mbps and 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.
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 forecast net debt of £13m at the November 2019 year-end and BigBlu’s enterprise value of £74m equates to a modest seven times conservative looking 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. Indeed, that multiple drops to only 6.5 times 2020 cash profit forecasts of £11.1m.
I first flagged up BigBlu’s investment potential when the shares were priced at 82.5p ('Blue-sky tech play', 21 March 2016) and maintain the 165p target price I outlined at the time of the annual results (‘Big Blu targeting a blue sky opportunity’, 25 March 2019). Buy.
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