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New regional ICT/telecoms group emerging

4iG 9 February 2022 Update
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4iG

New regional ICT/telecoms group emerging

Q321 update

IT services

9 February 2022

Price

HUF822

Market cap

HUF84.1bn

HUF353/€

Net debt (HUFbn) at 30 June 2021

11.8

Shares in issue

102.4m

Free float

35.6%

Code

4iG

Primary exchange

Budapest

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

(8.1)

(8.2)

29.5

Rel (local)

(9.6)

(6.0)

8.3

52-week high/low

HUF1094

HUF598

Business description

4iG is a leading Hungarian IT services and systems integrator, working with public sector clients, large corporates and SMEs. Management is focused on becoming the market leader in Hungary by FY22 as well as targeting expansion in Central and Eastern Europe.

Next events

FY21 preliminary results

February 2022

Analysts

Richard Williamson

+44 (0)20 3077 5700

Katherine Thompson

+44 (0)20 3077 5730

4iG is a research client of Edison Investment Research Limited

4iG’s management is delivering on its promises, with the creation of a new regional ICT/telecoms group, funded by a bond placing (HUF371bn raised in December 2021) and HUF125bn equity raise (ongoing). 4iG has also announced a strategic partnership with Rheinmetall, a leading German defence group, which has agreed to take a 25.1% stake in 4iG, as part of the equity placing, alongside Gellért Jászai (4iG’s chairman and CEO), who will retain a majority stake in the group. The placing will be at a share price of HUF670 (an 18% discount to 4iG’s latest closing share price). Although our estimates do not take into account recent and pending M&A (a further four M&A deals are expected to complete in Q122 - Spacecom, Antenna Hungária, One and ALBtelecom), Scope Ratings expects total pro forma FY21 revenues of c HUF380bn and EBITDA above HUF100bn.

Year end

Revenue
(HUFbn)

PBT*
(HUFbn)

EPS*
(HUF)

DPS
(HUF)

P/E
(x)

Yield
(%)

12/19

41.1

3.3

31.5

22.0

26.1

2.7

12/20

57.3

4.2

37.2

22.5

22.1

2.7

12/21e

82.7

7.3

55.5

36.5

14.8

4.4

12/22e**

93.0

8.5

62.0

40.0

13.3

4.9

Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments. **FY22 estimates not yet adjusted for M&A.

9M21 results: 4iG on track to meet revenue estimates

4iG reported net revenues for the first nine months of FY21 (9M21) of HUF53bn, a 58% rise y-o-y (9M20: HUF34bn), with EBITDA up 25% to HUF3.5bn (9M20: HUF2.8bn) and net profit of HUF2.9bn, a 56% rise y-o-y (9M20: HUF1.9bn). The 9M21 EBITDA margin is 6.6%, meaningfully lower than the group’s 9M20 margin of 8.4%. As a result, although 4iG has delivered 64% of our FY21 revenue estimate, the group has reached only 40% of our EBITDA estimate ytd. However, we recognise that Q4 is 4iG’s seasonally strongest quarter and will be further boosted by the acquisition of Invitech and other deals closing in Q421. Management is confident that 4iG remains on track to become the leading Hungarian IT systems integrator in 2022, as well as having a significant presence in the Western Balkans.

New strategic partnership with Rheinmetall

Following the announcement in November 2021, 4iG confirmed on 25 January 2022 that Rheinmetall intended to take a 25.1% stake in 4iG, becoming its largest international strategic investor and accelerating its position as a leading security technology systems supplier in CEE. Rheinmetall, together with iG COM, Gellért Jászai’s investment vehicle, and Alpac Capital, a private equity group, has agreed to subscribe to a HUF125bn private placing in 4iG at HUF670 per share, a 20% discount to 4iG’s average closing price (HUF835) prior to approval of the resolution.

Valuation: Focus on the enlarged group

Pre-close of its announced M&A deals, 4iG trades on an FY21e P/E of 14.8x and EV/EBITDA of 9.1x, offering a historical yield of 2.7%. On a pro forma basis, based on Scope Ratings estimates, the acquisitions look set to lead to run rate FY21 revenues of HUF380bn (c €1.1bn) and EBITDA of HUF100bn (c €280m). This would transform 4iG’s prospects, creating a group with more attractive EBITDA margins, higher recurring revenues and an expanding regional footprint.

9M21 results

9M21 revenues on track

4iG reported 9M21 net revenues of HUF53bn, a 58% rise y-o-y (9M20: HUF34bn), with EBITDA up 25% to HUF3.5bn (9M20: HUF2.8bn) and net profit of HUF2.9bn, a 56% rise y-o-y (9M20: HUF1.9bn). The 9M21 EBITDA margin is 6.6%, meaningfully lower than the group’s 9M20 margin of 8.4% due to staff costs rising 71% to HUF10.1bn and opex rising by 151% to HUF4.2bn with a significant rise in M&A related costs. As a result, although 4iG has delivered 64% of our FY21 revenue estimate, the group has only achieved 40% of our FY21 EBITDA estimate ytd. On the face of it, this looks like a challenging target even for 4iG’s seasonally strongest quarter. However, the results will be further boosted by the acquisition of Invitech and other deals closing in Q421.

Exhibit 1: FY21e revenues on track

Exhibit 2: FY21e EBITDA bridgeable

Source: 4iG reports, Edison Investment Research

Source: 4iG reports, Edison Investment Research

Exhibit 1: FY21e revenues on track

Source: 4iG reports, Edison Investment Research

Exhibit 2: FY21e EBITDA bridgeable

Source: 4iG reports, Edison Investment Research

4iG did not disclose details of its forward contract pipeline with its results. However, management is confident that the company remains on track to become the leading Hungarian IT systems integrator (displacing T-Systems) by 2022, as well as having a significant presence in the Western Balkans.

Partnership with Rheinmetall and HUF125bn placing

As part of its digitisation strategy and ‘as a token of [its] special commitment to Hungary’, Rheinmetall announced in November that it intended to take a 25.1% stake in 4iG, becoming its largest international strategic investor and accelerating its position as a leading security technology systems supplier in CEE.

From 4iG’s perspective, Rheinmetall, a leading German defence group, has acquired a substantial minority stake in 4iG at HUF670 per share, validating 4iG’s strategy and underpinning the group’s valuation. The partnership also positions 4iG for future revenue opportunities, with 4iG operating as a strategic IT partner to Rheinmetall, using the relationship to identify and address new digital market opportunities.

Rheinmetall has agreed to purchase 24.9m 4iG shares off-market from KZF (an investment vehicle controlled by Gellért Jászai). Rheinmetall has also agreed to participate in a HUF125bn share placing, with iG COM (a separate investment vehicle controlled by Gellért Jászai) and a fund managed by Alpac Capital also participating alongside Rheinmetall. 4iG shares are to be issued at a price of HUF670, a 20% discount to 4iG’s average closing price (HUF835) prior to the date of the vote on the enabling resolutions, and a discount of 18% to the current market price. Gellért Jászai (4iG’s chairman and CEO) will retain a majority stake in 4iG.

The main steps of the transaction are as follows:

iG COM will subscribe to HUF78bn of shares in 4iG, subject to a 12-month lock-up;

4iG will convene a general meeting to approve the new Articles of Association of 4iG and appoint a new member of the Supervisory Board nominated by Rheinmetall AG;

assuming approval at the general meeting, Rheinmetall will purchase 24.9m 4iG shares from KZF, as well as subscribing to HUF33.65bn shares in 4iG. Both tranches of shares will be subject to a 24-month lock-up; and

Alpac Capital will subscribe to HUF13.2bn of shares in 4iG.

Rheinmetall and 4iG have indicated that they will establish a separate joint venture to manage critical IT infrastructure and services in Hungary, owned 49% by 4iG and 51% by Rheinmetall. As well as their planned activities in critical infrastructure, 4iG and Rheinmetall see potential for cooperation in IT security, sensor technology, AI, robotics and satellite communications.

M&A: Execution first, then the challenge of integration

As we have discussed in recent notes (Executing at pace on its five-year plan and M&A set to launch 4iG into orbit), 4iG has announced an ambitious M&A-led strategic agenda. As can be seen in Exhibit 3 below, Invitech was the first of these deals to complete in Q321, with Telenor Montenegro closing in December 2021 and DIGI Group in January 2022. This leaves 4iG with four further deals expected to complete in Q122 (Spacecom, ALBtelecom, One and Antenna Hungária – 4iG announced the termination of negotiations over the acquisition of a 70% stake in TeleGroup on 28 January 2022). Consideration multiples and contribution from these deals have yet to be disclosed, so our estimates remain unchanged until we are in a position to include these acquisitions (we last upgraded our estimates in June 2021).

That having been said, in the Q421 analyst presentation, management provided further detail on the acquisition terms for DIGI Group, confirming that the group was acquired for an enterprise value of €625m (c HUF630m), a transaction multiple of 11.6x FY20 EV/EBITDA and c 9x management’s estimated run-rate FY22 EV/EBITDA (including synergies).

Exhibit 3: Status of recently announced transactions

Source: 4iG. Note: Telenor Montenegro has subsequently closed in December 2021.

Management is aiming for 4iG to become the number one IT systems integrator in Hungary by the end of FY22 (displacing current market leader, T-Systems), and a significant regional player across CEE and the Western Balkans. The announced acquisitions accelerate 4iG’s move away from a lower-margin software and hardware reselling business model towards the higher margins and longer-term contracts available in telecoms services and increasing 4iG’s recurring revenue base.

Exhibit 4: 4iG pro forma group structure (including transactions pending)

Source: 4iG

4iG’s CarpathiaSat JV (August 2020) with its strategic partner, Antenna Hungária, laid the groundwork for 4iG’s ambitions in space. 4iG’s investment in Hungaro DigiTel (HDT) represented the next step in its strategic relationship with Antenna Hungária, diversifying 4iG’s presence in the telecoms and infrastructure sector and offering better revenue visibility through longer-term contracts and higher EBITDA margins than IT services. Its majority investment in Spacecom will take 4iG’s exposure to space and satellite communications to another level, delivering revenue-generating operating satellites as well as a team with significant technical and launch experience. The acquisition of DIGI Group is expected to strengthen the group’s position as a leading telecoms services provider, further moving the group’s centre of gravity away from IT services and infrastructure, and diversifying its revenues away from Hungary.

Exhibit 5: Strategic timeline H221–FY22

Source: 4iG

On 8 December 2021, 4iG announced a further step in its expansion into the Western Balkans, by agreeing to acquire an 80.3% stake acquire in ALBtelecom, the Albanian national telecoms provider. ALBtelecom is the owner of the largest fibre network in Albania and the country’s leading fixed line internet and TV operator, as well as an Albanian mobile operator with a significant owned network. The Albanian state will continue to hold a stake in ALBtelecom, through a 13.8% stake held by the Albanian Ministry of Finance and Economy and a 2.5% stake held by the Albanian Post.

Through the transaction, Çalik Holding, a large Turkish conglomerate, will also acquire a c 3.2% in 4iG. The transaction could open up further joint business opportunities for Çalik Holding and 4iG in the Balkans and Central Asia. The terms of the transaction were not disclosed, but the acquisition is expected to close in February 2022, subject to the approval of the Albanian authorities.

M&A supports 4iG’s strategic direction

Having consolidated the announced acquisitions, 4iG retains significant ambitions for its future growth and development.

These ambitions are set out in full in Exhibit 6 below, but the most important goals are:

To become the leading IT services/systems integrator in Hungary by the end of 2022.

To build a new regional telecoms group, leveraging 4iG’s position in its domestic Hungarian market and expanding across the Western Balkans ahead of EU accession talks (these appear unlikely to be before 2026 at the earliest).

Leveraging Spacecom’s expertise to launch and operate Hungary’s first geostationary satellite to become a leading satellite services provider, offering end-to-end communications for media, broadband and public sector clients.

Exhibit 6: Strategic goals by division

Source: 4iG

Scope Ratings downgrades 4iG from BB- to B+

Scope Ratings gave 4iG a BB-/Stable issuer rating ahead of its acquisition of HDT and the issue of the group’s initial 10-year bond as part of the Central Bank of Hungary’s growth bond programme in March 2021. Subsequently, in June 2021, 4iG’s BB- rating was placed under review for a developing outcome, pending completion of the Spacecom and DIGI Group transactions. In September 2021, 4iG’s rating was changed again to BB- under review for a possible downgrade, reflecting heightened execution and integration risk given its large and numerous potential acquisitions.

In December 2021, Scope Ratings downgraded 4iG's issuer rating to B+/Stable from BB- under review for a possible downgrade. The downgrade reflects a weakened financial risk profile, and heightened execution and integration risk from large, mainly debt-funded acquisitions, which outweigh the positive impact on 4iG's business risk profile from the significant growth being pursued.

4iG’s outlook is stable with assumptions underpinning the rating including:

the successful placement of a HUF350bn bond in Q421 (HUF371bn achieved);

a successful equity placing totalling more than HUF100bn in Q421–Q122 (outstanding);

completion of the announced M&A strategy (ongoing); and

Scope Ratings’ adjusted debt2/EBITDA below 5x in the medium term (TBC).

  Scope Ratings adjusted debt excludes cash and cash equivalents.

Over-subscribed 10-year bond issue

In December 2021, 4iG completed a HUF371bn senior unsecured bond issue (exceeding the HUF350bn targeted) under the Hungarian National Bank’s Bond Funding for Growth Scheme, the largest such bond ever issued under the programme. The bond was raised through two auctions, both offering a 6% coupon and 10-year tenor, with 10% annual amortisation from 2026 and a 50% bullet at maturity in 2031 (Exhibit 7). The first tranche of HUF291bn offered a 5.8% yield to maturity, with the second tranche of HUF82bn offering a 6.2% yield to maturity. The proceeds will be used for acquisitions as well as to refinance the existing HUF100bn Magyar Fejlesztési Bank (MFB) bond.

Exhibit 7: New bond structure under the Bond Funding for Growth programme

Source: 4iG

Total 2021 pro forma revenue of the enlarged group is expected to reach around HUF380bn and pro forma EBITDA should exceed HUF100bn, which is far above 4iG’s 2020 revenue of HUF57bn and EBITDA of HUF5bn. In terms of industries, telecom services, including satellite communications, are expected to account for a dominant share of total revenue and EBITDA. The remainder is mainly IT, IT infrastructure and media/event services.

Revision to our estimates pending

Our estimates were last upgraded in June 2021 and do not currently take account of the significant M&A completed in H221 and expected to complete in Q122. Until the announced deals close and we have better clarity on the terms and impact of the outstanding acquisitions and their funding, we are not in a position to revise our estimates.

However, following a detailed credit review of the acquisitions and their funding, Scope Ratings noted the following expectations in its credit rating downgrade announced on 2 December 2021:

FY21 pro forma revenue for the enlarged group to reach c HUF380bn, with pro forma EBITDA in excess of HUF100bn.

Estimated FY21 pro forma group EBITDA margin of 25–30%.

FY21 pro forma group recurring revenues are expected to exceed 60%, compared to below 20% for 4iG in FY20.

In terms of divisional mix, telecoms services, including satellite communications, are expected to account for a dominant share of total revenue and EBITDA, with a minority of revenues deriving from IT services and IT infrastructure services.

The group is expected to benefit from a broader geographical footprint, with FY21 pro forma group revenues derived from Hungary expected to decline to around 75–80% of overall revenues, from more than 95% in FY20. International revenues will be derived from the Western Balkans, with other regions (mainly CEE, the Middle East and sub-Saharan Africa) acquired via 4iG’s investment in Spacecom.

Scope Ratings also commented on 4iG’s ‘very weak position in the Hungarian mobile market’, as well as strong competition in the enlarged group’s main markets, including IT services and satellite communications.

Exhibit 8: Financial summary

31-December

HUFm

2019

2020

2021e

2022e

INCOME STATEMENT

IFRS

IFRS

IFRS

IFRS

Revenue

 

 

41,129

57,300

82,710

93,048

Cost of Sales

(30,126)

(41,372)

(57,723)

(64,936)

Gross Profit

11,003

15,928

24,987

28,112

EBITDA

 

 

4,075

5,047

8,916

9,903

Normalised operating profit

 

 

3,332

4,211

8,000

8,897

Amortisation of acquired intangibles

0

0

(133)

(133)

Exceptionals

0

0

0

0

Share-based payments

0

0

0

0

Reported operating profit

3,332

4,211

7,867

8,764

Net Interest

(18)

(36)

(747)

(386)

Joint ventures & associates (post tax)

0

0

0

0

Exceptionals

0

0

0

0

Profit Before Tax (norm)

 

 

3,314

4,175

7,254

8,511

Profit Before Tax (reported)

 

 

3,314

4,175

7,120

8,377

Reported tax

(488)

(736)

(1,306)

(1,617)

Profit After Tax (norm)

2,827

3,439

5,923

6,868

Profit After Tax (reported)

2,827

3,439

5,815

6,760

Minority interests

66

(46)

(526)

(526)

Discontinued operations

0

0

0

0

Net income (normalised)

2,893

3,393

5,398

6,342

Net income (reported)

2,893

3,393

5,289

6,235

Basic average number of shares outstanding (m)

91.7

91.3

97.3

102.4

EPS - basic normalised (HUF)

 

 

31.54

37.17

55.45

61.97

EPS - diluted normalised (HUF)

 

 

30.77

36.09

54.74

61.21

EPS - basic reported (HUF)

 

 

30.82

37.68

59.73

66.05

Dividend (HUF)

22.00

22.49

36.47

40.00

Revenue growth (%)

193.6

39.3

44.3

12.5

Gross Margin (%)

26.8

27.8

30.2

30.2

EBITDA Margin (%)

9.9

8.8

10.8

10.6

Normalised Operating Margin

8.1

7.3

9.7

9.6

BALANCE SHEET

Fixed Assets

 

 

1,948

3,989

20,193

23,966

Intangible Assets

890

2,043

9,975

13,271

Tangible Assets

322

777

5,015

5,493

Lease rights

636

966

3,000

3,000

Investments & other

101

203

2,203

2,203

Current Assets

 

 

22,161

33,874

59,634

70,236

Stocks

523

3,360

4,041

5,195

Debtors

12,892

17,494

24,813

27,914

Cash & cash equivalents

6,238

7,205

20,243

26,588

Other

2,508

5,815

10,538

10,538

Current Liabilities

 

 

(18,225)

(29,117)

(39,952)

(43,245)

Creditors

(16,361)

(25,628)

(36,464)

(39,756)

Tax and social security

0

0

0

0

Short term borrowings

(1,500)

(3,019)

(3,019)

(3,019)

Other (including finance lease liabilities)

(364)

(470)

(470)

(470)

Long Term Liabilities

 

 

(392)

(1,067)

(21,494)

(21,494)

Long term borrowings

0

0

(19,042)

(19,042)

Other long term liabilities

(392)

(1,067)

(2,451)

(2,451)

Net Assets

 

 

5,493

7,679

18,381

29,464

Minority interests

64

(376)

(414)

(462)

Shareholders' equity

 

 

5,556

7,303

17,967

29,002

CASH FLOW

Op Cash Flow before WC and tax

4,075

5,047

8,916

9,903

Working capital

3,587

(797)

(1,886)

(964)

Exceptional & other

(5)

91

0

0

Tax

(415)

(773)

(950)

(1,617)

Net operating cash flow

 

 

7,243

3,568

6,080

7,322

Capex

(1,471)

(1,230)

(4,527)

(825)

Acquisitions/disposals

3

(383)

(7,007)

0

Net interest

(13)

(42)

(747)

(386)

Equity financing

185

(495)

0

0

Change in finance lease

(356)

28

0

0

Dividends

0

(2,001)

(2,212)

(3,764)

Other

36

(323)

0

0

Net Cash Flow

5,626

(878)

(8,413)

2,346

Opening net debt/(cash)

 

 

1,587

(4,039)

(2,740)

5,673

FX

0

30

0

0

Other non-cash movements

0

(451)

0

0

Closing net debt/(cash)

 

 

(4,039)

(2,740)

5,673

3,327

Source: 4iG accounts, Edison Investment Research

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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.

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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.

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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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