Stockwatch: An interesting AIM bid prospect

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Stockwatch: An interesting AIM bid prospect
 
Addressing a gap in broadband service technology  
Having listed in early 2015, SSW addresses the dilemma how "superfast" fibre broadband isn't possible in rural areas, or doesn't live up to the claim for users over a kilometre from the local exchange; also that drop-outs can happen even for those within-range.  It all reflects the dilemma of pushing optical technology down copper wires; and requires fibre-to-premises to be resolved; but which is going to take years if it happens at all in far-flung areas.  Thus alternatives are cropping up: for example. EE (acquired by BT two years ago) recently launched 4G broadband that doesn't require a landline - with a £50 a month, 50GB download proving popular.  Assuming you live in a 4G area.  Comparably Satellite Solutions Worldwide offers a 20Mb package starting at £9.99 a month, being rolled out internationally.  The comparison shows the risk of rival technologies emerging if possible to envisage a mix thriving quite like different sources of energy.  The Broadband Choices website describes satellite as "an excellent solution to certain internet woes...more satellites are being made which should eventually be capable of offering broadband access to almost anywhere in the world."  SSW's revenues presently comprise: 37% Australia, 16% Norway, 15% UK, 15% France and 17% rest of world.  Customer numbers have risen this year from 79,000 to about 90,000 helped by strong growth in Australia. Management is pleased with overall performance and confident of achieving 100,000 customers by year-end.
 
Acquisitions boost 13% like-for-like revenue growth
The stock originated in May 2015 from a reverse takeover with a 4.5p placing to raise £2.25 million, rising strongly to 9p in early 2016 and testing 10p earlier this year.  With 536 million issued it will trade with penny status for a good while: at 7p currently this capitalises the group at £37.5 million which compares with a 27 June update citing total revenue for the six months to end-May up 261% to £20.6 million, boosted by acquisitions - thus a moderate price/sales ratio of about 1.8 times.  (The table showing a drop in turnover from 2014 reflects the previous listed company in the reverse takeover.)   Organic growth was 13.1% in the first-half 2017 year compared with 11% in the year to end-November 2016 and 18% in 2015. Contracts are virtually all over two years which helps mitigate volatility.
Management also proclaims an opportunity to rationalise the industry of smaller broadband firms: in the 2016 year, six acquisitions were made across 5 countries supported by £12.1 million new equity placed at 6p last August.  These were relatively small-scale, aimed at growing customers, with three more last March for a total £1.8 million: one in Australia and two in Norway, integrating operations into SSW's hub and introducing a further 5,500 customers.  Nearly £12 million unsecured convertible debt has also been provided from the Business Growth Fund: as of end-May 2017 the group had £13.2 million net debt including a £2.0 million cash balance, with £1.5 million headroom under the debt facility.  More such small deals can be made albeit with the question hanging over: when will this group turn cash generative?
 
Accounts show SSW yet to reach a tipping point
As befits a small but vigorously acquisitive group, the top line is soaring while underlying profitability is clouded by exceptional factors plus the interest charge.  Thus a 2016 operating loss of £777,000 becomes a £1.2 million "normalised" profit, although the 2016 cash flow profile statement shows £818,989 interest costs shearing £640,249 operating cash flow (after working capital movement) down to £178,740 in the red.  Such a profile explains the volatile share price with more placings likely - if the directors have the bit between their teeth to acquire - before the group turns genuinely cash generative.  Not surprisingly after acquisitions of technology/people businesses, intangible assets on the balance sheet have soared in the last financial year from £4.5 million to £24.8 million, thus negative net tangible assets of £17.1 million or minus 3.2p per share.
 
Yet SSW has passed the Christopher Mills test
Mills is a longstanding small-cap fund manager in UK and US equities and should be a capable judge, originating as a 1980's reverse takeover specialist and currently leading Harwood Capital, a £1.3 billion asset manager.  Being in the enterprising seam of the stockmarket his track record has also involved a few disappointments too, but he should have learned lessons.  Harwood's acquiring a 10.5% stake in SSW on 15 June therefore implies it has passed his and colleagues' tests - in particular, the odds of it becoming cash positive than running into classic small-cap over-stretch.  The stake was most likely an exchange from billionaire property developer Nick Candy who, if you follow the headlines, has a few legal bills currently.  Herald Investment Management came into the early 2015 listing/placing to own 6.8% and is generally respected - though just like Mills, has touched the occasional dog in the last 25 year.  If there's a flaw in noting what institutional support, it's the managers' need to regularly deploy fresh capital - which in relatively illiquid stocks means being responsive to what placings become available.    
 
Relationship with BT is the one to watch
Ultimately I suspect the long-term prospect here involves BT, bearing in mind its acquisitions of EE and Plusnet but also what future flexibility relative to its pension deficit.  That SSW moved to acquire Avonline Broadband last year, making the group the largest UK provider of satellite broadband, establishes capability and reach.  SSW already has a relationship with BT from last January, for satellite broadband to homes and businesses with internet connection speeds under 2Mb - as part of a government scheme to offer subsidised satellite broadband to homes and businesses.  Up to £350 per user is available for equipment/installation in the UK although SSW is also involved in a scheme with the Welsh government, involving subsidies up to £800.  Despite the risk of better technologies emerging, frustrated consumers are likely to bite on this carrot.
So although SSW lacks established investment value, as a long-term speculative play it looks likely to end-up as part of a larger group - with a premium for control to whatever market value pertains.  The chief risk being over-stretch from acquisitions, but with a fund manager like Mills as principal shareholder the board should be kept within limits.
 
For more information see: www.satellitesolutionsworldwide.com

A positive trading update from Satellite Solutions Worldwide Group (SAT) implies potential as a long-term bid target for an international telecoms group; quite as BT (BT.A) eventually acquired AIM-listed Plusnet.

The capabilities of this AIM-listed provider of satellite broadband telecoms are more pertinent to frustrated customers of BT and other broadband providers.

Addressing a gap in broadband service technology

Having listed in early 2015, SSW addresses the dilemma how "superfast" fibre broadband isn't possible in rural areas, or doesn't live up to the claim for users over a kilometre from the local exchange; also that drop-outs can happen even for those within-range.

It all reflects the dilemma of pushing optical technology down copper wires and requires fibre-to-premises to be resolved, but which is going to take years if it happens at all in far-flung areas.

Thus, alternatives are cropping up, with EE (acquired by BT two years ago) recently launching 4G broadband that doesn't require a landline – with a £50 a month, 50GB download proving popular, assuming you live in a 4G area. Comparably Satellite Solutions Worldwide offers a 20Mb package starting at £9.99 a month, being rolled out internationally.

The comparison shows the risk of rival technologies emerging if possible to envisage a mix thriving quite like different sources of energy. The Broadband Choices website describes satellite as "an excellent solution to certain internet woes...more satellites are being made which should eventually be capable of offering broadband access to almost anywhere in the world."

SSW's revenues presently comprise: 37% Australia, 16% Norway, 15% UK, 15% France and 17% rest of world. Customer numbers have risen this year from 79,000 to about 90,000, helped by strong growth in Australia. Management is pleased with overall performance and confident of achieving 100,000 customers by year-end.

Acquisitions boost 13% like-for-like revenue growth

The stock originated in May 2015 from a reverse takeover, with a 4.5p placing to raise £2.25 million, rising strongly to 9p in early 2016 and testing 10p earlier this year.

With 536 million shares issued it will trade with penny status for a good while: at 7p currently, this capitalises the group at £37.5 million, which compares with a 27 June update citing total revenue for the six months to end-May up 261% to £20.6 million, boosted by acquisitions - thus a moderate price/sales ratio of about 1.8 times. (The table showing a drop in turnover from 2014 reflects the previous listed company in the reverse takeover.)

Organic growth was 13% in the first-half of 2017 year compared with 11% in the year to end-November 2016 and 18% in 2015. Contracts are virtually all over two years which helps mitigate volatility.

Management also proclaims an opportunity to rationalise the industry of smaller broadband firms: in the 2016 year, six acquisitions were made across five countries supported by £12.1 million new equity placed at 6p last August. These were relatively small-scale, aimed at growing customers, with three more last March for a total £1.8 million: one in Australia and two in Norway, integrating operations into SSW's hub and introducing a further 5,500 customers.

Nearly £12 million unsecured convertible debt has also been provided from the Business Growth Fund: as of end-May 2017 the group had £13.2 million net debt including a £2.0 million cash balance, with £1.5 million headroom under the debt facility. More such small deals can be made albeit with the question hanging over: when will this group turn cash generative?

Accounts show SSW yet to reach tipping point

As befits a small but vigorously acquisitive group, the top line is soaring while underlying profitability is clouded by exceptional factors plus the interest charge. Thus a 2016 operating loss of £777,000 becomes a £1.2 million "normalised" profit, although the 2016 cash flow profile statement shows £818,989 interest costs shearing £640,249 operating cash flow (after working capital movement) down to £178,740 in the red.

Such a profile explains the volatile share price, with more placings likely – if the directors have the bit between their teeth to acquire – before the group turns genuinely cash generative. Not surprisingly, after acquisitions of technology/people businesses, intangible assets on the balance sheet have soared in the last financial year from £4.5 million to £24.8 million, thus negative net tangible assets of £17.1 million or minus 3.2p per share.

SSW passes the Christopher Mills test

Mills is a longstanding small-cap fund manager in UK and US equities and should be a capable judge, originating as a 1980's reverse takeover specialist and currently leading Harwood Capital, a £1.3 billion asset manager.

Being in the enterprising seam of the stockmarket his track record has also involved a few disappointments, but he should have learned lessons. Harwood's acquiring a 10.5% stake in SSW on 15 June therefore implies it has passed his and colleagues' tests – in particular, the odds of it becoming cash positive than running into classic small-cap over-stretch.

The stake was most likely an exchange from billionaire property developer Nick Candy who, if you follow the headlines, has a few legal bills currently. Herald Investment Management came into the early 2015 listing/placing to own 6.8% and is generally respected – though, just like Mills, has touched the occasional dog in the last 25 years.

If there's a flaw in noting what institutional support there is, it's the managers' need to regularly deploy fresh capital. In relatively illiquid stocks, this means being responsive to what placings become available.

Relationship with BT is one to watch

Ultimately, I suspect the long-term prospect here involves BT, bearing in mind its acquisitions of EE and Plusnet, but also future flexibility relative to its pension deficit. That SSW moved to acquire Avonline Broadband last year, making the group the largest UK provider of satellite broadband, establishes capability and reach.

SSW already has a relationship with BT from last January, for satellite broadband to homes and businesses with internet connection speeds under 2Mb – as part of a government scheme to offer subsidised satellite broadband to homes and businesses. Up to £350 per user is available for equipment/installation in the UK although SSW is also involved in a scheme with the Welsh government, involving subsidies up to £800.

Despite the risk of better technologies emerging, frustrated consumers are likely to bite on this carrot.

So, although SSW lacks established investment value, as a long-term speculative play it looks likely to end-up as part of a larger group, with a premium for control to whatever market value pertains.

The chief risk is that SSW becomes overstretched from acquisitions. However, with a fund manager like Mills as principal shareholder, the board should be kept within limits.

Satellite Solutions Worldwide Group - financial summary       Broker estimates
year ended 30 Nov 2014 2015 2016 2017 2018
           
Turnover (£ million) 26.5 7.4 21.5    
IFRS3 pre-tax profit (£m) -0.3 -6.0 -6.2    
Normalised pre-tax profit (£m) -0.3 -1.9 -3.8 0.4 1.3
Operating margin (%) -1.1 -24.9 -14.0    
IFRS3 earnings/share (p) -308 -2.0 -1.6    
Normalised earnings/share (p) -308 -0.6 -1.0 0.1 0.2
Earnings per share growth (%)         100
Price/earnings multiple (x)     -7.2 98.3 34.4
Cash flow/share (p) -1,971 -1.5 -0.1    
Capex/share (p)   0.8 0.5    
Net tangible assets per share (p)   -0.7 -3.2    
           
Source: Company REFS          

 

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.