The ramifications of COVID-19 has impacted the majority of businesses worldwide. Although the telecom industry was not directly affected by the outbreak, GO’s share price plunged by about 24% during the recently experienced sell-off, with a low price of €3.21 from the pre-pandemic levels of circa €4.20. Since then, the price has recovered back to the €3.40 level.
GO’s local telecommunication business has, for the past years, been losing its steam, with the revenue generated from this activity growing at a compound annual growth rate of 1.2% during the period 2014 to 2019. This rate is deemed low, when compared to the local economy which was growing at circa 7% annually during the same period. This substantiates our previous concerns that GO’s local telecom market has reached its saturation point, with minimal expected growth, or even worst, experience diminishing returns. The latter is evidenced by the performance of the local telecom revenue in FY19, which fell by 1.4% on a comparative basis.
The pandemic has continued to worsen the market conditions and exacerbated GO’s growth prospects in the local telecom market. Although the outbreak has not impacted the Group directly, the extent of the impact cannot yet be quantified, as the duration and economic damages of COVID-19 are essentially not yet known. One consequence emanating from the Coronavirus is that a number of expats, which grew significantly over the recent years, have started to leave the country following a downturn in the local labour market.
GO’s limited growth outlook is deemed be in line with other European telecom peers, where growth rates within Europe’s telecommunications industry are often assumed close to nil and in some cases even taken at negative rates.
Despite the slowdown in the local telecom segment, management expects Cablenet’s (GO’s Cypriot subsidiary) performance to continue on its strong growth trend. Recently, Cablenet approached the local market with a proposed bond issue of €40m with a 10-year maturity, which was approved yesterday. The bonds will be unsecured and incur a 4% coupon. As per the financial projections attached to Cablenet’s bond issue, management expects Cablenet’s revenue to increase to €43.3m this year (FY19: €39.6m), which translates into an annual growth of 9.5%. Furthermore, Cablenet is expected to boost its triple play operations by adding mobile services. It will offer mobile services through a fixed contract with its largest competitor, CYTA, being a government controlled entity.
Although the mobile business in Cyprus can offer additional growth to the Group, a number of challenges still lie ahead. Cablenet will incur a fixed contract which will impact margins during the period when the company is increasing its market share. Additionally, the Cypriot subsidiary has to win clients over from its competitors, which it plans to do by leveraging its existing customer base and offering value-for-money products through home pack offerings. The Cypriot mobile market is competitive with four established market players, with the larger two controlling circa 90% of the market.
Our assumptions on the other subsidiary of GO, being BMIT Technologies plc, are based on the forecasts issued by the company at IPO, adjusted for the latest developments; including the signing of new clients and partners, coupled with the re-evaluation of the investment in the Zejtun data centre.
Overall, we like GO given its strong cash position and potential to boost growth through Cablenet. Provided that the current situation will not deteriorate further, we are of the opinion that in the foreseeable future, GO’s defensive business model, will enable the Group to continue distributing a dividend similar to FY19 (€0.10 per share lowered from the initial proposed net dividend of €0.14 per share). Based on the consideration discussed above, we take a neutral view on the stock 12-months out.
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