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Equity research update on BMIT Technologies plc

06744 CC Trader Talk V2

BMIT Technologies plc’s (“BMIT” or the “Group”) principal activities are the provision of data centre services, including provision of bandwidth, connectivity and co-location services, and the sale of hardware to third parties. BMIT operates predominantly in the Maltese market. Historically, its main target clients were online gaming companies operating out of Malta. While today this market still represents 75%/80% of total revenue, over the years BMIT extended its product, services offering and markets to cater for cloud and managed IT Services, and to target other knowledge-based segments in Malta. BMIT’s shares were admitted to listing last February 2019, following a successful initial public offering, whereby GO plc sold 49% of its shareholding in BMIT Group for a total value of €48.9 million.

Recently the research team at Calamatta Cuschieri issued a research report on BMIT with 12-month price target of €0.52 and a Hold recommendation. This means that we are taking a neutral view on the stock 12-months out and, based on this time horizon, we do not recommend either a Buy or Sell. Current shareholders should consider buying on dips and selling on peaks.

As at the time of writing, BMIT’s share price is trading at €0.53, which translates to a current price to earnings (P/E) ratio of 24.0x. Based on our 2019 projections, the forward P/E ratio is of 22.5x.

In the short-term, the BMIT Group will be undergoing a substantial capital expenditure program, which will enable it to significantly increase its data centre capacity. As previously announced, the Group will invest circa €10 million in its new data centre in Zejtun, which will be leased from Malta Properties Company plc. In addition to, the acquisition of the Handaq property for the total cost of €4 million, as recently announced by way of a company announcement.

Consequent to this investment, the Group is expected to incur additional salary costs, as the workforce is expected to increase by around 40%-50% in the next two years. Additionally, new costs will be incurred in operating the Zejtun data centre, coupled with new finance costs that will be sustained by the Group in financing its capital projects. Thus, in the short to medium-term this will result in the Group’s growth in costs surpassing the Group’s foreseeable growth in revenue.

The planned acquisition of the Handaq data centre will ensure that the Group has the necessary elbowroom should it experience abnormal growth in demand. It is important to note that as a result of this acquisition, the Group will eliminate any migration and reputational risk should it had to transfer its clients data from the Handaq centre to the new Zejtun centre. Additionally, this will enable the Group to phase its investment in the Zejtun data centre and accordingly, it will have more flexibility in managing its cash flow.

We like BMIT as the planned capital investment in its data centre capacity will ensure that should it experience abnormal growth in demand, it will be in a position to accept new contracts, which will give upside to our price target given that this was not priced in our model. This is substantiated by the fact that the data centre and cloud services industry is the backbone for the continued technological advancement of other industries.

We like BMIT as it is currently offering a dividend yield of 3.7%; and despite the short-term impact on profitability as further described above, we are of the opinion that the Group will be in a position to continue distributing stable dividends, with an anticipated forward dividend yield of 4.0%, based on our 2019 projections.

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