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Last close As at 09/06/2023
HUF648.00
▲ −5.00 (−0.77%)
Market capitalisation
HUF193,801m
Research: TMT
4iG reported growth in pro forma EBITDA for Q322 and 9M22, despite the effect of cost inflation, new Hungarian supplementary telecom taxes and supply chain challenges, resulting in a pro forma EBITDA margin of 23.7% for 9M22 (9M21: 21.8%). During Q322, the company concentrated on integrating recent acquisitions and developing an organisational structure to support the group’s growth. Work continues on the Vodafone Hungary acquisition, which, when complete, will cement 4iG’s position as the number two telecom operator in Hungary.
4iG |
Structuring the group for growth |
Q322 results |
Telecoms |
6 December 2022 |
Share price performance
Business description
Next events
Analyst
4iG is a research client of Edison Investment Research Limited |
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4iG reported growth in pro forma EBITDA for Q322 and 9M22, despite the effect of cost inflation, new Hungarian supplementary telecom taxes and supply chain challenges, resulting in a pro forma EBITDA margin of 23.7% for 9M22 (9M21: 21.8%). During Q322, the company concentrated on integrating recent acquisitions and developing an organisational structure to support the group’s growth. Work continues on the Vodafone Hungary acquisition, which, when complete, will cement 4iG’s position as the number two telecom operator in Hungary.
Year end |
Revenue |
PBT* |
EPS* |
DPS |
P/E |
Yield |
12/19 |
41.1 |
3.3 |
30.8 |
22.0 |
22.7 |
3.1 |
12/20 |
57.3 |
4.2 |
37.7 |
22.5 |
18.6 |
3.2 |
12/21 |
93.7 |
8.7 |
74.6 |
29.0 |
9.4 |
4.1 |
Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments.
Q322 results reflect accounting housekeeping
4iG reported Q322 revenue of HUF74.9bn and EBITDA of HUF24.5bn (32.7% margin). The finalisation of purchase price allocation and harmonisation of accounting standards across the group resulted in an operating loss of HUF1.5bn. For the first nine months of 2022 (9M22), 4iG reported revenue of HUF196.7bn, EBITDA of HUF55.1bn (28.0% margin) and operating profit of HUF7.2bn. Both divisions felt the effect of cost inflation and the IT division saw weaker demand from the public sector. Despite this, the telecom businesses have made progress with initiatives such as price rises, combined fixed/mobile tariffs, launching a 5G service in Montenegro and transitioning customers from pre- to post-pay contracts. The IT division entered into a joint venture with 25% shareholder Rheinmetall, providing the potential for international expansion.
Progress made with integration
During Q3, the company made good progress with integrating recent acquisitions and creating a new corporate governance structure to more effectively run and grow the business. The process to acquire Vodafone Hungary is ongoing (see Building a Hungarian-owned national champion) and the financing structure has not yet been revealed; this will be a transformational acquisition, with pro forma telecom revenue and EBITDA likely to make up more than 85% of group revenue and more than 95% of group EBITDA once complete. We plan to reinstate forecasts on completion of the deal.
Valuation: Factoring in pending acquisition
4iG is partway through the creation of a group with attractive (potentially 30%+) EBITDA margins, high recurring revenues, a leading domestic position in Hungary and an expanding regional footprint. With the Vodafone Hungary transaction pending and the prospect of substantial annual synergies (management targets HUF20–30bn) to be realised once completed, multiples should fall once investors can focus on the expanded group’s forecasts for FY23 and FY24.
Review of Q322 results
As 4iG has made a series of acquisitions over the last year, mainly in the telecoms sector, Q322 reported results are not comparable to Q321 results, although we include them in Exhibit 1 for reference. We include pro forma financials to more accurately assess performance over the year.
Exhibit 1: Q3 results highlights
HUFbn |
Q322 |
Q321 |
y-o-y |
9M22 |
9M21 |
y-o-y |
Revenue |
74.9 |
20.9 |
258% |
196.7 |
53.0 |
271% |
IT |
18.5 |
19.5 |
-5% |
51.7 |
50.9 |
2% |
Telecoms |
56.4 |
1.4 |
N/A |
145.0 |
2.1 |
N/A |
Pro forma revenue |
74.9 |
82.0 |
-9% |
232.7 |
240.7 |
-3% |
IT |
18.5 |
19.4 |
-4% |
51.7 |
53.0 |
-2% |
Telecoms |
56.4 |
62.6 |
-10% |
181.0 |
187.8 |
-4% |
EBITDA |
24.5 |
1.8 |
N/A |
55.1 |
3.5 |
N/A |
IT |
1.9 |
1.4 |
32% |
3.5 |
3.5 |
2% |
Telecoms |
25.7 |
0.9 |
N/A |
52.0 |
1.2 |
N/A |
Central costs |
(3.2) |
(0.5) |
N/A |
(0.4) |
(1.1) |
N/A |
EBITDA margin |
32.7% |
8.4% |
28.0% |
6.7% |
||
IT |
10.3% |
7.4% |
6.9% |
6.8% |
||
Telecoms |
45.6% |
61.0% |
35.8% |
55.1% |
||
Pro form EBITDA |
24.5 |
22.8 |
7% |
55.1 |
52.5 |
5% |
IT |
1.9 |
1.4 |
32% |
3.5 |
3.5 |
1% |
Telecoms |
25.7 |
21.9 |
17% |
52.0 |
50.1 |
4% |
Central costs |
(3.2) |
(0.5) |
N/A |
(0.4) |
(1.1) |
|
Pro form EBITDA margin |
32.7% |
27.8% |
23.7% |
21.8% |
||
IT |
10.3% |
7.5% |
6.9% |
6.6% |
||
Telecoms |
45.6% |
35.0% |
28.7% |
26.7% |
||
Operating profit |
(1.5) |
1.0 |
7.2 |
1.9 |
||
PBT |
(9.2) |
2.9 |
(6.4) |
3.7 |
||
PAT |
(9.3) |
2.4 |
(7.7) |
2.9 |
||
Minority interest |
0.3 |
0.2 |
1.5 |
0.2 |
||
Net income to shareholders |
(9.6) |
2.3 |
(9.2) |
2.8 |
||
Net debt/(cash) |
468.6 |
(46.0) |
468.6 |
(46.0) |
Source: 4iG
On a pro forma basis, telecom revenue for 9M22 was down 4% y-o-y and for Q322 was down 10%, due to the closure of the low margin event management business in Antenna Hungaria. The company has made good progress with price increases in DIGI, with minimal impact on churn, as well as launching 5G services in Montenegro and creating a merged business in Albania. It saw organic revenue and gross margin growth in the core activities of DIGI, Invitech and Antenna Hungaria, while EBITDA was affected by increased operating costs (wage, energy and other cost inflation) and the supplementary telecommunications tax on Hungarian revenues generated in Q322. Pro forma EBITDA increased 4% for 9M22 and 17% for Q322, with the 9M22 margin expanding by 2pp to 28.7%.
In the IT division, 9M22 pro forma revenue was down 2% y-o-y, while Q322 revenue was down 4% y-o-y. Q322 reported revenue was 2.7% higher q-o-q (Q222 reported and pro forma revenue were the same). The division has seen weaker demand from the public sector. The company noted that both the telecom and IT businesses have been affected by the energy crisis, currency fluctuations, the war in Ukraine, supply chain disruption and cost inflation. Despite the cost pressures, the IT division increased pro forma EBITDA by 32% for Q322 and 1% for 9M22 and the pro forma margin increased 0.3pp to 6.9% for 9M22.
On a pro forma basis, 9M22 group EBITDA increased 5% y-o-y and Q322 increased 7% y-o-y. Q322 reported EBITDA increased 51% q-o-q to HUF24.5bn (32.7% margin, up 10.5pp q-o-q).
The company finalised the purchase price allocation for two acquisitions made last year. This resulted in a reclassification of assets from goodwill to tangible, intangible and deferred tax assets and resulted in catch-up depreciation, amortisation and income taxes for prior quarters. This was a contributor to higher depreciation and amortisation in Q322 (HUF26.0bn versus HUF13.9bn in Q222) and the swing to an operating loss in Q322. The company noted that for 9M22, these adjustments plus the harmonisation of accounting policies in certain subsidiaries resulted in additional depreciation, amortisation and interest expenses of HUF21bn, of which HUF7bn were non-cash items that contributed to the loss after tax.
The company generated HUF14.5bn in operating cash flow in 9M22.
Business update
Since the company last reported, it has made good progress in integrating recent acquisitions and developing each of the two divisions. From 1 September, a new corporate governance structure was put in place, centralising the management team and operational functions. This supports better economies of scale and internal collaboration, with co-operation between the IT and telecom divisions already underway. We provide an update on progress within each division since the company last reported.
IT division
■
Joint venture with Rheinmetall: we recently wrote about the joint venture created between 4iG and its 25% shareholder Rheinmetall (see Rheinmetall relationship steps up a gear). This should help the IT business expand outside of Hungary.
■
Buyout of minority interest: on 14 October, the company bought the remaining 30% of INNObyte that it did not already own.
Telecoms division
■
Merging the two Albanian telecom businesses: in March, the company separately acquired ALBtelecom and One Telecommunications (ONE). In July, 4iG announced that one leadership team had been created to manage both businesses. It has since received approval from the Albanian authorities for the merger of the two businesses.
■
Investing in Spacecom: in late September, the company signed a revised agreement for the purchase of Space Communications (Spacecom). Subject to the approval of the Israeli Ministry of Communications, 4iG can buy 20% of Spacecom’s shares in public and private issues. This is the first step of the multi-step transaction to buy a 51% majority stake in Spacecom. In the three years after the closing of this first step, 4iG can acquire a further 31% of Spacecom, subject to approval by the Israeli Ministry of Communications and shareholders. On 6 October, the company made its first purchase of Spacecom shares, buying a 9.5% stake in a public share issue.
■
Joined the O-RAN alliance: in November, 4iG became a full member of the O-RAN (Open Radio Access Network) Alliance. O-RAN is an industry association that provides an open platform for the development and operation of 5G radio network infrastructure. Other members include US, European, Japanese and Chinese telecom operators.
■
New CEO for Antenna Hungária: Lászlo Blénessy, who was previously deputy COO of 4iG, has been appointed CEO of Antenna Hungária, effective 1 December.
Credit rating under review
4iG’s current credit rating (B+) is under review by the Scope ratings agency for possible upgrade. Scope states that successful completion of the Vodafone Hungary acquisition would benefit 4iG’s business risk profile due to Vodafone Hungary’s strong market shares in mobile and fixed broadband in Hungary and higher EBITDA margins. Any positive impact on 4iG’s financial risk profile would be driven by the deal structure, and Corvinus (the Hungarian state-owned entity that is buying the remaining 49% of Vodafone Hungary) is financing much of the transaction. Scope notes that an upgrade of up to two notches is possible.
Exhibit 2: Financial summary
HUFm |
2018 |
2019 |
2020 |
2021* |
||
Year end 31 December |
IFRS |
IFRS |
IFRS |
IFRS |
||
INCOME STATEMENT |
||||||
Revenue |
|
|
14,007 |
41,129 |
57,300 |
93,653 |
Cost of Sales |
(8,938) |
(30,126) |
(41,372) |
(59,090) |
||
Gross Profit |
5,070 |
11,003 |
15,928 |
34,563 |
||
EBITDA |
|
|
842 |
4,075 |
5,047 |
12,094 |
Normalised operating profit |
|
|
240 |
3,332 |
4,211 |
7,924 |
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 |
7,924 |
||
Net Interest |
(21) |
(18) |
(36) |
814 |
||
Joint ventures & associates (post tax) |
0 |
0 |
0 |
0 |
||
Profit Before Tax (norm) |
|
|
219 |
3,314 |
4,175 |
8,737 |
Profit Before Tax (reported) |
|
|
219 |
3,314 |
4,175 |
8,737 |
Reported tax |
(117) |
(488) |
(736) |
(1,576) |
||
Profit After Tax (norm) |
102 |
2,827 |
3,439 |
7,161 |
||
Profit After Tax (reported) |
102 |
2,827 |
3,439 |
7,161 |
||
Minority interests |
0 |
66 |
(46) |
(203) |
||
Discontinued operations |
0 |
0 |
0 |
0 |
||
Net income (normalised) |
102 |
2,893 |
3,393 |
6,958 |
||
Net income (reported) |
102 |
2,893 |
3,393 |
6,958 |
||
Basic average number of shares outstanding (m) |
91.6 |
91.7 |
91.3 |
96.0 |
||
EPS - basic normalised (HUF) |
|
|
1.11 |
30.82 |
37.68 |
74.62 |
EPS - diluted normalised (HUF) |
|
|
1.08 |
30.07 |
36.58 |
73.52 |
EPS - basic reported (HUF) |
|
|
1.11 |
30.82 |
37.68 |
74.62 |
Dividend (HUF) |
0.00 |
22.00 |
22.49 |
29.00 |
||
Revenue growth (%) |
(17.2) |
193.6 |
39.3 |
63.4 |
||
Gross Margin (%) |
36.2 |
26.8 |
27.8 |
36.9 |
||
EBITDA Margin (%) |
6.0 |
9.9 |
8.8 |
12.9 |
||
Normalised Operating Margin |
1.7 |
8.1 |
7.3 |
8.5 |
||
BALANCE SHEET |
||||||
Fixed Assets |
|
|
1,571 |
1,948 |
3,989 |
185,199 |
Intangible Assets |
1,221 |
890 |
2,043 |
124,706 |
||
Tangible Assets |
140 |
322 |
777 |
42,022 |
||
Lease rights |
0 |
636 |
966 |
17,837 |
||
Investments & other |
210 |
101 |
203 |
634 |
||
Current Assets |
|
|
6,824 |
22,161 |
33,874 |
315,795 |
Stocks |
242 |
523 |
3,360 |
2,306 |
||
Debtors |
4,306 |
12,892 |
17,494 |
35,926 |
||
Cash & cash equivalents |
176 |
6,238 |
7,205 |
266,547 |
||
Other |
2,101 |
2,508 |
5,815 |
11,015 |
||
Current Liabilities |
|
|
(5,657) |
(18,225) |
(29,117) |
(58,628) |
Creditors |
(3,894) |
(16,361) |
(25,628) |
(55,044) |
||
Short term borrowings |
(1,758) |
(1,500) |
(3,019) |
0 |
||
Other (including finance lease liabilities) |
(5) |
(364) |
(470) |
(3,584) |
||
Long Term Liabilities |
|
|
(18) |
(392) |
(1,067) |
(424,715) |
Long term borrowings |
0 |
0 |
0 |
(407,739) |
||
Other long term liabilities |
(18) |
(392) |
(1,067) |
(16,976) |
||
Net Assets |
|
|
2,720 |
5,493 |
7,679 |
17,651 |
Minority interests |
0 |
64 |
(376) |
(1,686) |
||
Shareholders' equity |
|
|
2,720 |
5,556 |
7,303 |
15,964 |
CASH FLOW |
||||||
Op Cash Flow before WC and tax |
842 |
4,075 |
5,047 |
12,094 |
||
Working capital |
(1,369) |
3,587 |
(797) |
6,729 |
||
Exceptional & other |
(26) |
(5) |
91 |
2,650 |
||
Tax |
(117) |
(415) |
(773) |
(1,427) |
||
Net operating cash flow |
|
|
(671) |
7,243 |
3,568 |
20,046 |
Capex |
(120) |
(1,471) |
(1,230) |
(9,850) |
||
Acquisitions/disposals |
0 |
3 |
(383) |
(167,182) |
||
Net interest |
(11) |
(13) |
(42) |
(2,110) |
||
Equity financing |
0 |
185 |
(495) |
(243) |
||
Change in finance lease |
9 |
(356) |
28 |
(1,078) |
||
Dividends |
0 |
0 |
(2,001) |
(2,212) |
||
Other |
(3) |
36 |
(858) |
(70) |
||
Net Cash Flow |
(795) |
5,626 |
(1,413) |
(162,698) |
||
Opening net debt/(cash) |
|
|
792 |
1,587 |
(4,039) |
(3,192) |
FX |
0 |
0 |
30 |
8 |
||
Other non-cash movements |
0 |
0 |
536 |
232 |
||
Closing net debt/(cash) |
|
|
1,587 |
(4,039) |
(3,192) |
159,266 |
Source: 4iG. Note: *Restated.
|
|
Research: Healthcare
With its H123 interim results, ReNeuron highlighted progress across its proprietary exosome platform, CustomEx. The company reported H123 revenues of £438k (H122: £58k), primarily related to income associated with a £320k payment from Fosun Pharma as part of a technology transfer and supply agreement. ReNeuron pared back its operating losses (£4.3m in H123, down from £6.1m in H122), largely with reduced clinical trial-related costs following the company’s strategic refocus on exosomes. ReNeuron closed the half year with a gross cash position, including bank deposits, of £10.5m, which, given the company’s current cash burn rate and our projections, is anticipated to fund operations into Q4 CY23. We value ReNeuron at £44.2m or 77p per share.
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