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NFON 29 October 2020 QuickView
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NFON

Cloud calling

Telecommunications

Deutsches Eigenkapitalforum 2020

29 October 2020

Price

€13.7

Market cap

€207m

Share price graph

Share details

Code

NFN

Shares in issue

15.1m

Net cash at 30 June 20

€13.5m

Business description

NFON provides telephony services via the internet to over 500k seats at more than 40k businesses across 15 European countries, including Germany, Austria, UK, France, Italy and Spain. It is the only pan-European cloud PBX operator and aims to be market leader across the region.

Bull

Strategy to be the dominant European player across Europe by exploiting economies of scale and advantage of using its own PBX system.

High (85%+) recurring revenues offers good visibility

European cloud PBX market forecast to double over next four years. GDPR favours EU over US providers.

Bear

Consensus forecasts EBITDA losses to 2021 and currently consuming cash.

Highly competitive market and low market share outside Germany

Ongoing R&D spend required to maintain cutting edge in products.

Analyst

Dan Gardiner

+44 (0)20 3077 57 00

NFON is a pan-European provider of business telephony services via the internet. The rising adoption of IP-based, cloud-hosted switching systems (cloud PBX) is driving rapid sales growth and, with penetration still at low levels, this trend is expected to continue. From a strong base in Germany, it aims to expand into Europe and believes the combination of its scale, in-house IP and balance sheet will enable it to execute this strategy.

Executing on its strategy, COVID-19 tailwind?

Sales grew 25% y-o-y in H1 (17% organically), driven by a growing customer base and rising number of seats in existing customers. Germany (78% of sales) performed well, delivering 19% organic growth. While economic activity was affected by COVID-19, management believes that as companies embrace the need for greater operational flexibility and homeworking, the benefits of cloud-based telephony will become more apparent. The incremental sales, combined with a control of marketing spend, saw H1-adjusted EBITDA improve €4m y-o-y to €1.4m.

Growth focus expected to continue

Consensus expects this growth to continue in H2 and beyond. Forecasts imply 22% y-o-y revenue growth in H2 and 27% in 2021. With over 85% of sales (high margin) being recurring revenue and solid fundamentals, in our view there is reasonable visibility on this growth even in the current turbulent environment. Cavell Service Provider estimates the penetration of cloud communications in Germany was just 4% at the end of 2019 and will rise to 14% by 2024 (implying at least a 23% CAGR). This forecast is supported by evidence from the UK and North America where penetration rates have already reached 15% and 25% respectively. NFON’s strategy is to build on the strong position in Germany (25%+ market share) and proprietary technology to establish a pan-European business. It expects to increase marketing spend in H2 and will consider making further acquisitions to scale up.

Valuation: Trading below peers on EV/revenue

The acceleration in marketing spend in H2 is expected to see NFON report EBITDA losses in H2 and FY20. Hence it is difficult to value the company on anything other than EV/Sales. At €13.7, the share price implies a FY21 EV/sales multiple of 2.2x, a substantial discount to its larger European peer (Gamma Telecom, which is valued at 4.2x) and below the multiples commanded by US players such as RingCentral and 8x8.

Consensus estimates

Year
end

Revenue
(€m)

Adj. EBITDA (€m)
(€m)

PBT
(€m)

EPS
(€)

EV/Revenue
(x)

EV/adj EBITDA
(x)

12/18

43.0

(1.2)

(8.6)

(0.68)

4.5

N/A

12/19

57.1

(5.1)

(10.8)

(0.93)

3.4

N/A

12/20e

70.4

(2.6)

(6.9)

(0.46)

2.7

N/A

12/21e

89.7

(2.4)

(6.8)

(0.48)

2.2

N/A

Source: Company data, Refinitiv (based on three estimates)

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United Kingdom

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United States of America

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This report has prepared and issued by Edison as part of a road show package for companies attending the Eigenkapital Forum. Edison Investment Research standard fees are £49,500 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the research department of Edison at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

Exclusion of Liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note.

No personalised advice: The information that we provide should not be construed in any manner whatsoever as, personalised advice. Also, the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The securities described in the report may not be eligible for sale in all jurisdictions or to certain categories of investors.

Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report, subject to Edison's policies on personal dealing and conflicts of interest.

Copyright: Copyright 2020 Edison Investment Research Limited (Edison).

Australia

Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Crown Wealth Group Pty Ltd who holds an Australian Financial Services Licence (Number: 494274). This research is issued in Australia by Edison AU and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. Any advice given by Edison AU is general advice only and does not take into account your personal circumstances, needs or objectives. You should, before acting on this advice, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. If our advice relates to the acquisition, or possible acquisition, of a particular financial product you should read any relevant Product Disclosure Statement or like instrument.

New Zealand

The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (i.e. without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision.

United Kingdom

This document is prepared and provided by Edison for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.

This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document.

This Communication is being supplied to you solely for your information and may not be reproduced by, further distributed to or published in whole or in part by, any other person.

United States

Edison relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. This report is a bona fide publication of general and regular circulation offering impersonal investment-related advice, not tailored to a specific investment portfolio or the needs of current and/or prospective subscribers. As such, Edison does not offer or provide personal advice and the research provided is for informational purposes only. No mention of a particular security in this report constitutes a recommendation to buy, sell or hold that or any security, or that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person.

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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