4iG — Record results; integration plan well under way

4iG (BSE: 4IG)

Last close As at 21/05/2024

HUF815.00

6.00 (0.74%)

Market capitalisation

243,747m

More on this equity

Research: TMT

4iG — Record results; integration plan well under way

4iG’s H123 results reflect the inclusion of Vodafone Hungary (VH) since its acquisition on 31 January. Since then, 4iG has been working through its integration plan, which includes monetising the DIGI mobile network infrastructure and launching a strategic review to consider carve-out options and further asset optimisation (the scope is Hungarian fixed and Albanian/Montenegrin passive mobile infrastructure). After a multi-year series of telco and IT acquisitions in Hungary and the Western Balkans, 4iG is focused on realising revenue and cost synergies from the combined businesses.

Katherine Thompson

Written by

Katherine Thompson

Director

TMT

4iG

Record results; integration plan well under way

H123 results

Telecoms

5 September 2023

Price

HUF850

Market cap

HUF250bn

HUF384.2/€1

Net debt (HUFbn) at end H123

846.9

Shares in issue (excluding 4.6m treasury shares)

294.5m

Free float

14.5%

Code

4iG

Primary exchange

Budapest

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

22.5

28.8

6.5

Rel (local)

18.8

10.8

(19.7)

52-week high/low

HUF859

HUF632

Business description

4iG is a regional ICT/telecoms group, based in Hungary. It is focused on two core areas: telecoms and infrastructure in Hungary and the West Balkans; and IT services, where it is the number one IT systems integrator in Hungary.

Next events

Q323 results

30 November 2023

Analyst

Katherine Thompson

+44 (0)20 3077 5700

4iG is a research client of Edison Investment Research Limited

4iG’s H123 results reflect the inclusion of Vodafone Hungary (VH) since its acquisition on 31 January. Since then, 4iG has been working through its integration plan, which includes monetising the DIGI mobile network infrastructure and launching a strategic review to consider carve-out options and further asset optimisation (the scope is Hungarian fixed and Albanian/Montenegrin passive mobile infrastructure). After a multi-year series of telco and IT acquisitions in Hungary and the Western Balkans, 4iG is focused on realising revenue and cost synergies from the combined businesses.

Year
end

Revenue
(HUFbn)

PBT
(HUFbn)

EPS
(HUF)

DPS
(HUF)

P/E
(x)

Yield
(%)

12/19

41.1

3.3

30.8

22.0

27.6

2.6

12/20

57.3

4.2

37.7

22.5

22.6

2.6

12/21*

93.7

8.1

68.6

29.0

12.4

3.4

12/22*

277.4

(15.2)

(67.5)

0.0

N/A

0.0

Note: *Restated for finalised purchase price accounting.

Vodafone Hungary drives record performance

4iG reported H123 revenue of HUF266.2bn (+119% y-o-y) and EBITDA of HUF95.3bn (+190% y-o-y, 35.8% margin), which included a five-month contribution from VH. Pro forma revenue was HUF292.2bn (+2% y-o-y) and pro forma EBITDA was HUF100.3bn (+19% y-o-y, 34.3% margin). Profit after tax of HUF7.8bn (FY22: -HUF2.8bn) benefited from a one-off gain on disposal of certain DIGI assets as well as unrealised FX gains, partially offset by acquisition and restructuring costs and the impact of higher lease depreciation and interest charges and amortisation of acquired intangibles relating to the VH and earlier acquisitions.

Ongoing integration the focus for FY23

The company has already made progress integrating VH into the business and has just announced changes to the management team to support this. It has shifted DIGI subscribers over to the VH mobile network and sold certain DIGI mobile assets to Pro-M for HUF68bn. 4iG is also reviewing other infrastructure (Hungarian fixed line, Albanian/Montenegrin passive mobile) with a view to unlocking the value of its infrastructure portfolio to improve asset utilisation and optimise capital allocation. Having recently rebranded its Albanian operations as ONE Albania, it is planning to introduce the ONE brand in Hungary.

Valuation: Synergies key to upside

4iG has made substantial progress with its strategy to create a converged telco-IT group with attractive (30%+) EBITDA margins and high recurring revenues. Post the Vodafone Hungary acquisition, it now has the number two position in mobile and fixed line telephony and leading positions in fixed broadband and TV services in Hungary, along with market-leading positions in Albania and a robust presence in Montenegro. As 4iG works through its integration plan, there is scope for substantial synergies to be realised, boosting EBITDA profitability and reducing debt.

Business update

4iG completed the acquisition of a 51% stake in Vodafone Hungary on 31 January. As we wrote on 22 March, 4iG swapped its indirect stake in Yettel for an additional 19.5% stake in Vodafone Hungary, taking its effective ownership to 70.5%. Since then, the company has been focused on integrating the business and optimising cost and revenue synergies from the deal.

Post-acquisition performance

The company provided details on the standalone performance of Vodafone Hungary in the year to 31 March 2023 (its fiscal year when owned by Vodafone) – see Exhibit 1, explaining the effect that certain items had on profit before tax and providing normalised profitability metrics.

Exhibit 1: Vodafone Hungary standalone performance 1 April 2022 to 31 March 2023

HUFm

FY23 actual

FY23 normalised

Difference

Net sales revenue (HAL)

295,263

295,263

0

EBITDA (IFRS)

92,158

106,217

14,059

Financial income/(expense) (HAL)

(37,791)

831

38,622

Profit before tax (HAL)

(50,963)

1,718

52,681

Source: 4iG. Note: Vodafone Hungary’s full year reported results based on standalone financial statements, reported in line with Hungarian Accounting Law (HAL) covering the period 1 April 2022 to 31 March 2023.

The adjustments to arrive at normalised results include:

telecommunications windfall tax of HUF10.3bn;

higher energy costs and other one-off items of HUF3.8bn; and

an interest charge of HUF38.6bn on an intercompany loan from Vodafone group. The loan was dissolved when the acquisition closed and is therefore not an expense for 4iG.

Since the date of acquisition, VH has contributed revenue of HUF123.2bn and EBITDA of HUF42.5bn (34.5% margin). The company noted that for the five months of ownership, VH profit before tax was HUF17.1bn higher year-on-year.

Disposal of certain DIGI assets for HUF68bn

On 13 April, 4iG announced it was considering the sale of certain mobile network infrastructure elements (including more than 2,500 base stations) and spectrum from the DIGI business. On 31 May, the company announced the DIGI assets had been transferred to a new subsidiary called MIS Omega Mobilhálózat Korlátolt Felelősségű Társaság (MIS Omega) in preparation for its demerger from the group. On 1 June, all DIGI subscribers were switched over to the VH mobile network. On 30 June, the company announced that MIS Omega had been sold to Pro-M for HUF68bn. Pro-M is the telecom operator for the Hungarian emergency services network – through this acquisition Pro-M is gaining access to infrastructure to support broadband data transmission for law enforcement agencies, the Hungarian Defence Forces and Disaster Management services. The consideration is to be paid in three instalments by 31 July 2024. The total transaction value includes the cost of one-year operation by 4iG for Pro-M and the costs of building the new core network for the tower infrastructure. The deal boosts 4iG’s return on its investment in the company and should enhance DIGI’s operating efficiency and EBITDA-generating capacity. The plan is to use the sale proceeds to reduce debt and to invest in the development of 4iG’s fixed and mobile network infrastructure.

Strategic review of other telecom assets

On 31 May, the company announced it has launched a strategic review of its infrastructure assets, with a view to a potential carve-out. The assets in question are the fixed-line infrastructure in Hungary and passive mobile infrastructure in Albania and Montenegro. The company is seeking to unlock the value of the infrastructure portfolio to improve asset utilisation and optimise capital allocation.


Exhibit 2:
Strategic review of infrastructure

Source: 4iG

Reshaping the management team

On 31 August, the company announced changes to the management team. Effective 1 September, Tamás Bányai was appointed CEO of VH. He joined Vodafone in April from Epic Malta, where he had been CEO. He has been focused on the separation of VH from Vodafone’s global systems. The resigning VH CEO, László Blénessy, will be responsible for developing and implementing the strategy of the space and defence business in addition to running the business IT and network infrastructure as deputy CTO for the group. Tamás Bányai will be supported by deputy VH CEO Tamás Tábori, who also holds the role of managing director of DIGI. Mohamed ElSayad was appointed as the new group commercial strategy director, responsible for developing the commercial strategy of the group’s domestic and international telecoms companies and managing the brand transition in Hungary.

Agreement signed with government of Montenegro

In July, the company announced that it had signed a memorandum of understanding with the government of Montenegro. Both parties declared a shared commitment to fast-track the digital transition in Montenegro, including 5G network and infrastructure and the development and introduction of innovative solutions.

Share buybacks and changes to major shareholdings

Since the end of May, the company has bought back 1.81m shares, taking the percentage of treasury shares held from 0.93% to 1.53% of outstanding shares. Since the end of June, the chairman of 4iG, Gellért Jászai, purchased 3.3m shares via his investment vehicle, taking his stake in the company from 51.22% to 52.33%.

Review of H123 results

4iG’s H123 results reflect the inclusion of VH since 1 February. The table below summarises the divisional performance at a revenue and EBITDA level and includes pro forma data to adjust for acquisitions. The valuation of the assets and liabilities of Vodafone Hungary at the time of the acquisition is still in progress, in accordance with IFRS 3 Business Combinations.

Exhibit 3: H1 divisional performance

HUFbn

H123

H122

y-o-y

Revenue

266.2

121.9

119%

IT

33.8

33.2

2%

Telecoms

235.2

88.7

165%

Holding & elimination

(2.8)

0.0

N/A

Pro forma revenue

292.2

286.1

2%

IT

33.8

33.2

2%

Telecoms

261.2

252.9

3%

Holding & elimination

(2.8)

0.0

N/A

EBITDA

95.3

32.8

190%

IT

2.3

1.6

43%

Telecoms

83.0

28.4

192%

Holding & elimination

9.9

2.8

N/A

EBITDA margin

35.8%

27.0%

IT

6.9%

4.9%

Telecoms

35.3%

32.1%

Pro forma EBITDA

100.3

84.2

19%

IT

2.3

1.6

43%

Telecoms

88.1

79.8

10%

Holding & elimination

9.9

2.8

N/A

Pro forma EBITDA margin

34.3%

29.4%

IT

6.9%

4.9%

Telecoms

33.7%

31.5%

Source: 4iG

The IT business now makes up only 11% of pro forma revenue and 3% of pro forma EBITDA (pre-central costs). IT revenue increased marginally year-on-year, with growth held back by the lower level of public sector tenders. The company noted that the Rheinmetall-4iG joint venture (R4) launched its first service, supporting the Rheinmetall factory in Zalaegerszeg where the Lynx infantry fighting vehicle is made.

The Telecoms business included VH for five months. On a pro forma basis, Telecoms revenue increased 3% y-o-y and EBITDA increased 10%, with the margin increasing 2.2pp to 33.7%.

In Hungary: the company noted that VH enacted a CPI-driven price increase for B2C and B2B mobile as well as B2C fixed services during Q1. VH also saw increased sales of equipment and from wholesale MVNO (mobile virtual network operator). DIGI also put through a CPI-driven price increase that helped revenue growth and, combined with cost savings, improved operational efficiency. Invitech saw robust growth in monthly recurring revenue (MRR) from the connectivity, cloud and IT security segments.

In Albania: with ONE Telecommunications and ALBtelecom formally merged from 1 January 2023, the ONE brand was launched in Albania. The business has started to extend its fibre-to-the-home (FTTH) coverage. A recent benchmarking assessment by Finnish analyst firm Omnitele ranked the ONE Albania network as the highest scoring mobile network in the country.

In Montenegro: B2C was the key driver of growth, particularly from the post-paid segment. ONE Montenegro received a 5G spectrum licence in Q123 and launched its 5G rollout and deployed 5G networks across all major coastal destinations in time for the summer tourist season.

At the EBITDA level, the holding company line reported a positive contribution of HUF10.0bn in H123. This includes the gain on disposal of MIS Omega offset by acquisition and restructuring costs (net HUF12.2bn). Taking group pro forma EBITDA and adjusting for these one-offs and supplementary telecoms taxes of HUF5.1bn in H123, group pro forma normalised EBITDA was HUF93.3bn (31.9% margin).

Exhibit 4: H123 results highlights

HUFbn

H123

H122

y-o-y

Operating profit

22.08

2.37

830%

PBT

9.31

(2.29)

N/A

PAT

7.79

(2.75)

N/A

Minority interest

(4.51)

(0.81)

N/A

Net income to shareholders

3.28

(3.56)

N/A

Net debt (company)*

846.9

456.0

86%

Source: 4iG. Note: *Also includes provisions (short and long term) and other long-term liabilities.

Exhibit 4 summarises 4iG’s performance in H123. Operating profit increased significantly year-on-year, benefiting from the VH contribution for five months and the gain on disposal of MIS Omega. Combined depreciation and amortisation increased from HUF30.5bn in H122 to HUF73.2bn in H123, reflecting the higher level of leases acquired with VH as well as amortisation of acquired intangibles. Finance costs increased from HUF15.6bn to HUF37.5bn reflecting debt used to fund the VH acquisition and interest charges linked to the higher level of leases. Finance income of HUF24.7bn in H123 benefited from a HUF9.3bn non-realised exchange gain on the long-term loan that financed the VH acquisition. After deducting the minority interest, net income attributable to shareholders was HUF3.3bn compared to a loss of HUF3.6m a year ago.

4iG closed FY22 with a company reported net debt position of HUF451bn (this includes certain provisions and other long-term liabilities). By the end of H123, this had increased to HUF847bn. The table below shows the movement from FY22 to H123, with the main changes being an increase in long-term debt of HUF313bn (to fund the VH acquisition) and leases increasing by HUF85bn (from VH and earlier acquisitions).

Exhibit 5: Net debt reconciliation

Q123

Q422

q-o-q

Short-term debt

11.1

7.7

43%

Long-term debt

737.0

424.3

74%

Short-term leases

23.7

9.1

162%

Long-term leases

104.6

34.5

203%

Provisions

11.5

9.7

19%

Other long-term liabilities

6.0

11.9

-50%

Cash and cash equivalents

(47.0)

(46.0)

2%

Net debt

846.9

451.2

88%

Source: 4iG

Exhibit 6: Financial summary

31-December

HUFm

2018

2019

2020

2021*

2022*

INCOME STATEMENT

IFRS

IFRS

IFRS

IFRS

IFRS

Revenue

 

 

14,007

41,129

57,300

93,653

277,421

Cost of Sales

(8,938)

(30,126)

(41,372)

(59,090)

(93,466)

Gross Profit

5,070

11,003

15,928

34,563

183,955

EBITDA

 

 

842

4,075

5,047

11,793

74,054

Normalised operating profit

 

 

240

3,332

4,211

7,043

(773)

Amortisation of acquired intangibles

0

0

0

0

0

Exceptionals

0

0

0

0

0

Share-based payments

0

0

0

0

0

Reported operating profit

240

3,332

4,211

7,043

(773)

Net Interest

(21)

(18)

(36)

1,059

(14,474)

Joint ventures & associates (post tax)

0

0

0

0

0

Exceptionals

0

0

0

0

0

Profit Before Tax (norm)

 

 

219

3,314

4,175

8,102

(15,247)

Profit Before Tax (reported)

 

 

219

3,314

4,175

8,102

(15,247)

Reported tax

(117)

(488)

(736)

(1,518)

(3,585)

Profit After Tax (norm)

102

2,827

3,439

6,584

(18,832)

Profit After Tax (reported)

102

2,827

3,439

6,584

(18,832)

Minority interests

0

66

(46)

(185)

(2,052)

Discontinued operations

0

0

0

0

0

Net income (normalised)

102

2,893

3,393

6,399

(20,884)

Net income (reported)

102

2,893

3,393

6,399

(20,884)

Basic average number of shares outstanding (m)

91.6

91.7

91.3

96.0

278.8

EPS - basic normalised (HUF)

 

 

1.11

30.82

37.68

68.61

(67.54)

EPS - diluted normalised (HUF)

 

 

1.08

30.07

36.58

67.60

(67.54)

EPS - basic reported (HUF)

 

 

1.11

30.82

37.68

68.61

(67.54)

Dividend (HUF)

0.00

22.00

22.49

29.00

0.00

Revenue growth (%)

(17.2)

193.6

39.3

63.4

196.2

Gross Margin (%)

36.2

26.8

27.8

36.9

66.3

EBITDA Margin (%)

6.0

9.9

8.8

12.6

26.7

Normalised Operating Margin

1.7

8.1

7.3

7.5

(0.3)

BALANCE SHEET

Fixed Assets

 

 

1,571

1,948

3,989

187,703

618,121

Intangible Assets

1,221

890

2,043

123,923

288,935

Tangible Assets

140

322

777

43,189

281,690

Lease rights

0

636

966

19,957

43,937

Investments & other

210

101

203

634

3,559

Current Assets

 

 

6,824

22,161

33,874

315,677

134,634

Stocks

242

523

3,360

2,300

10,727

Debtors

4,306

12,892

17,494

35,798

58,910

Cash & cash equivalents

176

6,238

7,205

266,547

46,079

Other

2,101

2,508

5,815

11,032

18,918

Current Liabilities

 

 

(5,657)

(18,225)

(29,117)

(58,944)

(156,336)

Creditors

(3,894)

(16,361)

(25,628)

(55,160)

(139,568)

Tax and social security

0

0

0

0

0

Short term borrowings

(1,758)

(1,500)

(3,019)

0

(7,713)

Other (including finance lease liabilities)

(5)

(364)

(470)

(3,784)

(9,055)

Long Term Liabilities

 

 

(18)

(392)

(1,067)

(426,910)

(488,724)

Long term borrowings

0

0

0

(407,739)

(424,320)

Other long term liabilities

(18)

(392)

(1,067)

(19,171)

(64,404)

Net Assets

 

 

2,720

5,493

7,679

17,526

107,695

Minority interests

0

64

(376)

(1,623)

(102,520)

Shareholders' equity

 

 

2,720

5,556

7,303

15,903

5,175

CASH FLOW

Op Cash Flow before WC and tax

842

4,075

5,047

11,793

74,054

Working capital

(1,369)

3,587

(797)

5,766

(16,615)

Exceptional & other

(26)

(5)

91

2,894

3,854

Tax

(117)

(415)

(773)

(4,738)

(4,002)

Net operating cash flow

 

 

(671)

7,243

3,568

15,715

57,291

Capex

(120)

(1,471)

(1,230)

(4,412)

(25,978)

Acquisitions/disposals

0

3

(383)

(167,182)

(256,940)

Net interest

(11)

(13)

(42)

(2,110)

(24,568)

Equity financing

0

185

(495)

(243)

110,898

Change in finance lease

9

(356)

28

878

(1,299)

Dividends

0

0

(2,001)

(2,212)

(2,960)

Other

(3)

36

(858)

(70)

2,673

Net Cash Flow

(795)

5,626

(1,413)

(159,636)

(140,883)

Opening net debt/(cash)

 

 

792

1,587

(4,039)

(3,192)

160,572

FX

0

0

30

8

104

Other non-cash movements

0

0

536

(4,136)

(128,180)

Closing net debt/(cash)

 

 

1,587

(4,039)

(3,192)

160,572

429,531

Source: 4iG. Note: *Restated for finalised purchase price accounting.


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London │ New York │ Frankfurt

20 Red Lion Street

London, WC1R 4PS

United Kingdom

London │ New York │ Frankfurt

20 Red Lion Street

London, WC1R 4PS

United Kingdom

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The Pebble Group’s first half results are as indicated in July’s trading update, with revenues up 5% y-o-y and adjusted EBITDA margin expanding from 11.1% to 11.8%. Our full year estimates are unchanged. Facilisgroup is making particularly strong progress, growing revenues by 24% over H122 (+18% in US dollars, its main trading currency) as it builds its customer base and adds further offerings. Brand Addition, the more established segment, grew revenues by 2.5% in more challenging market conditions. Its utility to its blue-chip customers is clearly demonstrated by its high retention rates and we would expect revenues to pick up as corporate confidence rebuilds. This is a good H123 group performance, and the opportunities for further progress are not, in our opinion, fully reflected in the share price.

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