4iG — Structuring the group for growth

4iG (BSE: 4IG)

Currency in HUF

Last close As at 26/01/2023

HUF701.00

−7.00 (−0.99%)

Market capitalisation

HUF209,352m

Research: TMT

4iG — Structuring the group for growth

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.

Katherine Thompson

Written by

Katherine Thompson

Director

TMT

4iG

Structuring the group for growth

Q322 results

Telecoms

6 December 2022

Price

HUF700

Market cap

HUF208bn

HUF414/€

Net debt (HUF bn) at end Q322

468.6

Shares in issue (excluding treasury shares)

297.7m

Free float

11.2%

Code

4iG

Primary exchange

Budapest

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

1.7

(7.4)

(24.0)

Rel (local)

(2.9)

(14.7)

(13.4)

52-week high/low

HUF905

HUF668

Business description

4iG is a regional ICT/telecoms group, based in Hungary and focused on two core areas: telecoms and infrastructure, built around its acquisition of Antenna Hungária, and investments in the West Balkans; and IT services, where it is the number one IT systems integrator in Hungary.

Next events

FY22 results

April 2023

Analyst

Katherine Thompson

+44 (0)20 3077 5730

4iG is a research client of Edison Investment Research Limited

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
(HUFbn)

PBT*
(HUFbn)

EPS*
(HUF)

DPS
(HUF)

P/E
(x)

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.

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.

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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).

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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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Research: Healthcare

ReNeuron Group — Pushing on with CustomEx in H123

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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