First-half results from Aim-traded BigBlu Broadband (BBB:115p), a fast-growing satellite internet service provider offering an alternative high-speed broadband service, were well flagged in the pre-close trading update which I covered in some detail (‘Big Blu’s expansion on track’, 9 Jul 2018).
The key metrics made for a good read: like-for-like revenue increased by almost 7 per cent; recurring revenue accounted for over 91 per cent of the total; and underlying cash profits surged by more than a third to £2.8m on revenues up a fifth to £25.1m, buoyed by the contribution from acquisitions, and better gross margins too. Operating cash flow of £3.2m caught my eye, and closing net debt of £9.4m is comfortable relative to full-year cash profit forecasts of £6.8m.
The key take for me, though, is that BigBlu’s game-changing sales and marketing agreement with a European retail joint venture (between ViaSat and Eutelsat Communications) is gaining traction. Broadband operations have been launched in Poland, Norway, Spain, Sweden and Finland, and launches are scheduled later this year in Germany and Italy. Under the terms of the agreement, the joint venture provides marketing support, satellite network capacity and customer premise equipment. For its part, BigBlu is providing in-language/in-market sales, installation, billing, customer care and logistics services.
This means that the company can accelerate its organic growth and enter new markets off the back of a fully funded marketing programme. BigBlu is also benefiting indirectly as rival satellite operators are offering better terms in light of its larger distribution capabilities. Of course, there is a fair amount of execution risk here, and there is no guarantee that BigBlu will deliver the organic growth required to lift its customer base by half to 150,000 customers by 2020, and to boost profits. However, the business is certainly moving in the right direction, and the valuation remains attractive.
Numis Securities’ forecasts the company can deliver cash profit of £6.8m for the full-year and £10.1m in 2019, implying that the forward enterprise value to cash profit multiple falls from 12 to 8. That’s not expensive neither is a prospective PE ratio of 14 based on 14 times Numis Securities’ 2019 adjusted EPS estimate of 8p. So, having first advised buying BigBlu's shares at 82.5p ('Blue-sky tech play', 21 Mar 2016), I continue to see upside to my 165p target price. Buy.
Worth noiting the Outlook that was given in the July TU.
The Board is confident that the solid performance of the core business and the recently completed acquisitions will continue for the remainder of the current financial year and the outlook therefore remains encouraging. The Company continues to evaluate further complementary acquisition opportunities and technologies as part of its growth strategy and is confident of achieving its previously stated 2020 target of 150,000 customers.
Andrew Walwyn, CEO of BBB commented, "Trading in the period was strong due to continued customer sign up, improving retention rates and increased data demands of existing customers. I believe that we will see further growth in the second half of the year post the fibre disposal and the increased marketing spend in the JV as consumers continue to demand faster and more dynamic broadband services wherever they're located. The first half of the year has been mainly about consolidating our acquired customer bases and integrating systems across our networks. This momentum is expected to continue into the second half, and I look forward to updating shareholders in due course."