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Strong end to FY21, awaiting clarity for FY22

4iG 6 April 2022 Update
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4iG

Strong end to FY21, awaiting clarity for FY22

Q421 update

IT services

6 April 2022

Price

HUF820

Market cap

HUF84bn

HUF375/€

Net debt (HUFbn) at 31 December 2021

165

Shares in issue*
*Pre-dilution from placing

102.4m

Free float

34%

Code

4iG

Primary exchange

Budapest

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

13.1

(9.4)

26.1

Rel (local)

3.9

7.8

27.4

52-week high/low

HUF1,094

HUF598

Business description

4iG is a regional ICT/telecoms group based in Hungary and focused on three areas: IT services; telecoms and infrastructure, built around its strategic acquisition of Antenna Hungária; and space and defence. The group is targeting expansion in Central and Eastern Europe (CEE).

Next events

Full FY21 results

April 2021

AGM

April 2021

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

FY21 was a record year for 4iG, with net revenues rising 62% y-o-y to HUF93bn and EBITDA rising 125% to HUF11.4bn, driven by a mix of organic growth and M&A. 4iG completed six acquisitions in the year, with the acquisitions of DIGI Group, ALBtelecom and ONE completed in Q122. These have been funded by the HUF371bn bond issue from December 2021, together with the HUF125bn share placing, which brought in Rheinmetall as a strategic investor. FY21 net debt rose to HUF165bn and is likely to rise further in H122 with the closing of the additional acquisitions. Given the degree of uncertainty, we have chosen to withdraw our forecasts temporarily, pending greater clarity on the shape and financial structure of the enlarged group, with ongoing uncertainty over Spacecom. Assuming all announced acquisitions complete, 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

26.0

2.7

12/20

57.3

4.2

37.2

22.5

22.1

2.7

12/21**

93.0

8.1

62.0

39.6

13.2

4.8

Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments. **Unaudited results.

Strong Q4 helped 4iG beat our FY21 estimates

Supported by contributions from its acquisitions, Invitech and ONE Montenegro (formerly Telenor Montenegro), Q421 was a record quarter for 4iG, with net revenues up 68% y-o-y to HUF40bn and EBITDA soaring 251% y-o-y to HUF7.8bn. For the full year, in its unaudited preliminary results 4IG reported revenues of HUF93bn, c 12% above our estimate and EBITDA of HUF11.4bn, 27% above our estimate. Year-end net debt of HUF165bn is likely to rise further in H122 with the acquisitions of DIGI Group, ALBtelecom and ONE closed in Q122.

Withdrawal of forecasts pending company guidance

With the transformation of the group evident but not yet complete, we do not feel that we are in a position to update our forecasts with any degree of accuracy, particularly given uncertainties over Spacecom. As such, we are temporarily withdrawing our forecasts pending clearer guidance from the company. We hope that this will be forthcoming in Q222, once there is greater clarity on the pending acquisitions and the group’s new capital structure.

Valuation: Low rating reflects execution risk

In December 2021, assuming completion of all announced deals, Scope Ratings indicated pro-forma FY21 revenues for 4iG of c HUF380bn (c €1bn) and EBITDA above HUF100bn (c €260m), with group EBITDA margins of 25–30%. This would create a group with attractive EBITDA margins, higher recurring revenues and an expanding regional footprint. With the shares trading on an EV/EBITDA multiple of 2.5x Scope Rating’s pro forma FY21 EBITDA (versus 9–10x for the sector), much of the execution risk seems to be priced into 4iG’s share price.

Q421 update

FY21: A transformative year for 4iG

Supported by contributions from its acquisitions, Invitech and ONE Montenegro (formerly Telenor Montenegro), Q421 net revenues rose to HUF40bn, up 68% y-o-y (Q420: HUF24bn). Q421 EBITDA rose 251% y-o-y to HUF7.8bn (Q420: HUF2.2bn), delivering a net profit of HUF3.4bn, a 119% increase y-o-y (Q420: HUF1.6bn). As can be seen in Exhibits 1 and 2 below, Q421 was a record quarter for 4iG, delivering 43% of FY21 revenues and 69% of the total annual EBITDA. Although the company has not provided a detailed breakdown, we estimate that the three acquisitions noted above may have contributed c HUF15bn of revenues and HUF3.5bn of EBITDA based on historic disclosures.

Exhibit 1: Quarterly revenues FY21 versus FY20

Exhibit 2: Quarterly EBITDA FY21 versus FY20

Source: 4iG

Source: 4iG

Exhibit 1: Quarterly revenues FY21 versus FY20

Source: 4iG

Exhibit 2: Quarterly EBITDA FY21 versus FY20

Source: 4iG

For the year as a whole, 4IG delivered net revenues of HUF93bn, c 12% above our estimates and EBITDA of HUF11.4bn, 27% above our estimate. Both gross margin and the EBITDA margin closed above our estimates as well as the FY20 margin, with a 35% gross margin (FY20: 28%) and a 12% EBITDA margin (FY20: 9%). The EBITDA margin in Q421, boosted by acquisitions, was 20% versus 7% for the first nine months of the year. Normalised net income of HUF5.9bn rose 75% y-o-y (FY20: HUF3.4bn), with normalised EPS rising 67% y-o-y.

Exhibit 3: Unaudited FY21 results versus Edison estimates

HUFm

2020

2021e

2021

FY21

y-o-y

Actual

Edison

Actual

Variance

growth

Revenues

57,300

82,710

92,983

12%

62%

Gross profit

15,928

24,987

32,666

31%

105%

Gross margin

27.8%

30.2%

35.1%

EBITDA

5,047

8,916

11,360

27%

125%

EBITDA margin

8.8%

10.8%

12.2%

Normalised PBT

4,175

7,254

8,060

11%

93%

Normalised net income

3,393

5,398

5,940

10%

75%

Normalised basic EPS (HUF)

37.2

55.5

62.0

12%

67%

Net debt/(cash)

(2.7)

5.7

164.7

N/M

Source: 4iG, Edison Investment Research

Having completed a further HUF371bn bond issue in December 2021 (in addition to the HUF15bn issue in March 2021) to fund its announced acquisitions, net debt at the year end was HUF165bn, a significant step-up from the net cash of HUF3bn at the end of FY20. Net debt is likely to rise further in H122 following the completion of DIGI Group, which closed in January 2022, as well as ALBtelecom and ONE, which closed in March 2022, alongside the completion of the HUF125bn share placing.

Partnership with Rheinmetall delivers a strong message

Rheinmetall, a leading German defence group, has acquired a 25.1% minority stake in 4iG, validating 4iG’s strategy and underpinning the group’s valuation. The partnership 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’s investment makes it 4iG’s largest strategic investor, accelerating its development as a leading security technology systems supplier in CEE. Rheinmetall purchased 24.9m 4iG shares off-market from KZF (an investment vehicle controlled by Gellért Jászai), as well as participating in the HUF125bn share placing at a price of HUF670 per share, with iG COM (a separate investment vehicle controlled by Gellért Jászai) and a fund managed by Alpac Capital also participating alongside Rheinmetall.

The investment closed on 3 March 2022, following approval of the transaction by the Ministry of the Interior as well as by shareholders at 4iG’s extraordinary general meeting on 24 February 2022.

M&A: Six deals closed in FY21, three more in Q122

In FY21, 4iG closed six deals: Rotors & Cams (24%); ACE Network (formerly Spacenet) (70%); Poli Computer; Hungaro DigiTel (HDT) (75%); Invitech; and ONE Montenegro. As a result, the total number of employees in the 4iG group has increased to over 5,500 people, including over 600 engineers. The group also now has close to 100 vendor partners.

In addition to the M&A noted above, in February 2022 4iG acquired a 72% controlling stake in Antenna Hungária through the injection of its assets, DIGI Group (which closed in January 2022), ONE Montenegro and Invitech, into the holding company, to create a regional telecoms group in Hungary and the CEE region. The Hungarian government currently holds the remaining 28% in Antenna Hungária. 4iG’s holding is expected to increase in the near future (although its maximum holding is capped at 80% of the equity) with the injection of further telecoms assets (ALBTelecom, ONE) as these acquisitions have now completed.

The assets 4iG injected in the equity swap were valued at HUF402bn, providing a read-across equity value for Antenna Hungária of HUF561bn. This implied asset valuation stands at a substantial premium to 4iG’s enterprise value, currently HUF240bn.

Exhibit 4: M&A update Q421–Q122

Source: 4iG

Sensitivities: Uncertainties remain for the moment

In FY21, 4iG announced a series of transformational acquisitions that will create a new regional ICT/telecoms group, funded by a bond placing (HUF371bn raised in December 2021) and the HUF125bn equity raise (ongoing). 4iG also achieved another of its medium-term goals, by becoming the market leading (by revenues) IT systems integrator in Hungary.

However, with the other pending M&A deals having completed, we note the delayed closure of Spacecom, initially expected to complete by the end of February 2022, now expected in Q222. Management’s intention was that Spacecom would be owned 51% by HDT, which in turn is 75% owned by 4iG and 25% by Antenna Hungária (in which 4iG will own a 72–80% stake).

With the transformation of the group evident but not yet complete, we are not able to update our forecasts with any degree of accuracy. As such, we are temporarily withdrawing our forecasts pending guidance from the company. We hope this will be forthcoming in Q222, once there is greater clarity on the remaining acquisitions and the group’s new capital structure.

Finally, press reports from January 2022 indicate that the Hungarian government has been referred to the EU by opposition parties over alleged illegal state aid to 4iG and circumvention of rules around competition clearance. We are not in a position to validate the truth or materiality of these reports. However, from conversations with the company, we understand that it is usual for MNB (Central Bank of Hungary) and MFB (Hungarian Development Bank) to participate in domestic bond auctions. With further details not publicly available, we are not able to ascertain if their level of participation was exceptional.

Exhibit 5: Financial summary

31-December

HUFm

2018

2019

2020

2021

INCOME STATEMENT

IFRS

IFRS

IFRS

IFRS

Revenue

 

 

14,007

41,129

57,300

92,983

Cost of Sales

(8,938)

(30,126)

(41,372)

(60,317)

Gross Profit

5,070

11,003

15,928

32,666

EBITDA

 

 

842

4,075

5,047

11,360

Normalised operating profit

 

 

240

3,332

4,211

7,243

Amortisation of acquired intangibles

0

0

0

0

Exceptionals

0

0

0

0

Share-based payments

0

0

0

0

Reported operating profit

240

3,332

4,211

7,243

Net Interest

(21)

(18)

(36)

817

Joint ventures & associates (post tax)

0

0

0

0

Exceptionals

0

0

0

0

Profit Before Tax (norm)

 

 

219

3,314

4,175

8,060

Profit Before Tax (reported)

 

 

219

3,314

4,175

8,060

Reported tax

(117)

(488)

(736)

(1,709)

Profit After Tax (norm)

102

2,827

3,439

6,351

Profit After Tax (reported)

102

2,827

3,439

6,351

Minority interests

0

66

(46)

(411)

Discontinued operations

0

0

0

0

Net income (normalised)

102

2,893

3,393

5,940

Net income (reported)

102

2,893

3,393

5,940

Basic average number of shares outstanding (m)

91.6

91.7

91.3

95.7

EPS - basic normalised (HUF)

 

 

1.11

31.54

37.17

62.04

EPS - diluted normalised (HUF)

 

 

1.08

30.77

36.09

61.24

EPS - basic reported (HUF)

 

 

1.11

30.82

37.68

66.33

Dividend (HUF)

0.00

22.00

22.49

39.60

Revenue growth (%)

(17.2)

193.6

39.3

62.3

Gross Margin (%)

36.2

26.8

27.8

35.1

EBITDA Margin (%)

6.0

9.9

8.8

12.2

Normalised Operating Margin

1.7

8.1

7.3

7.8

BALANCE SHEET

Fixed Assets

 

 

1,571

1,948

3,989

183,163

Intangible Assets

1,221

890

2,043

127,820

Tangible Assets

140

322

777

36,715

Lease rights

0

636

966

17,530

Investments & other

210

101

203

1,098

Current Assets

 

 

6,824

22,161

33,874

433,970

Stocks

242

523

3,360

2,788

Debtors

4,306

12,892

17,494

36,972

Cash & cash equivalents

176

6,238

7,205

266,474

Other

2,101

2,508

5,815

127,736

Current Liabilities

 

 

(5,657)

(18,225)

(29,117)

(52,815)

Creditors

(3,894)

(16,361)

(25,628)

(50,342)

Tax and social security

0

0

0

0

Short term borrowings

(1,758)

(1,500)

(3,019)

(0)

Other (including finance lease liabilities)

(5)

(364)

(470)

(2,473)

Long Term Liabilities

 

 

(18)

(392)

(1,067)

(429,531)

Long term borrowings

0

0

(106)

(409,075)

Other long term liabilities

(18)

(392)

(962)

(20,456)

Net Assets

 

 

2,720

5,493

7,679

134,787

Minority interests

0

64

(376)

(1,905)

Shareholders' equity

 

 

2,720

5,556

7,303

132,882

CASH FLOW

Op Cash Flow before WC and tax

842

4,075

5,047

11,360

Working capital

(1,369)

3,587

(797)

(115,246)

Exceptional & other

(26)

(5)

91

0

Tax

(117)

(415)

(773)

(2,059)

Net operating cash flow

 

 

(671)

7,243

3,568

(105,945)

Capex

(120)

(1,471)

(1,230)

(4,527)

Acquisitions/disposals

0

3

(383)

(7,007)

Net interest

(11)

(13)

(42)

817

Equity financing

0

185

(495)

0

Change in finance lease

9

(356)

28

0

Dividends

0

0

(2,001)

(2,212)

Other

(3)

36

(323)

0

Net Cash Flow

(795)

5,626

(878)

(118,875)

Opening net debt/(cash)

 

 

792

1,587

(4,039)

(2,740)

FX

0

0

30

0

Other non-cash movements

0

0

(451)

(48,531)

Closing net debt/(cash)

 

 

1,587

(4,039)

(2,740)

164,665

Source: 4iG accounts, Edison Investment Research

General disclaimer and copyright

This report has been commissioned by 4iG and prepared and issued by Edison, in consideration of a fee payable by 4iG. Edison Investment Research standard fees are £60,000 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 2022 Edison Investment Research Limited (Edison).

Australia

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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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60325 Frankfurt

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London, WC1V 7EE

United Kingdom

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1185 Avenue of the Americas

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United States of America

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General disclaimer and copyright

This report has been commissioned by 4iG and prepared and issued by Edison, in consideration of a fee payable by 4iG. Edison Investment Research standard fees are £60,000 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 2022 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

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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