Our research team at Calamatta Cuschieri has recently updated its investment stance on GO plc shares (“GO”), downgrading it to a Hold from the previous Buy stance, with a 52-week target price of €4.43. As of this writing, GO’s shares were trading at a price of €4.34, with an expected net dividend per share of €0.14 per share, offering a respectable expected total shareholder return of 5.3%.
Demand for mobile data and top tier internet services is currently the broad trend of the telecommunications market. GO, to date, has not been able to fully-benefit from the general subscriber growth of the overall market. Competitors have been better able to capitalise on the larger market in Malta, mainly as a result of a more mature infrastructure and customer perception. Following good progress in its ongoing Fibre-to-the-Home rollout, the company should be well positioned to compete effectively going forward, increasing or at least sustaining its’ market share.
GO’s management embarked on a cost savings exercise and this should positively affect the Group in the long-term, at the expense of short-term costs such as the voluntary retirement scheme. Furthermore, in recent communications with the investing community, the company announced that it intends to wind gradually down its legacy copper systems over the next 5 years following the completion of its fibre network investment. This is expected to render improved operational synergies.
In H1 2019, GO plc’s Cypriot subsidiary Cablenet continued on its growth trajectory experiencing a growth of 9% in its customer base on an annualised basis, with revenue increasing by 8.2% and EBITDA increasing by 12% on a comparative basis. We expect Cablenet’s revenues to continue to increase, sustained by the growth of the Cypriot economy.
BMIT, the Group’s majority owned Data Centre company, is currently undergoing a significant investment program in extending its capacity, where in the short term we expect this to exert downward pressure on BMIT’s profitability margins. Despite this, through its investment program, BMIT is well positioned for abnormal growth, which is expected to boost its profitability in the medium term.
In the first half year of 2019, GO incurred €2.4 million of one-off costs, these relating to the IPO of BMIT as well as the voluntary retirement scheme. These were partially offset by a one-time gain of €0.9 million in relation to the St. George’s Exchange. Consequently, profit before tax decreased to €29.3 million in the LTM 2019 from €31.7 million in FY 2018. Moving forward, we are of the opinion that the Group will experience an increase in its EBITDA, driven by a growth in total revenue, with the most significant growth expected from Cablenet and BMIT. We expect the EBITDA margin to remain largely stable for the foreseeable future.
GO is currently trading at 26.6x normalised 2019 LTM earnings and at a forward price to earnings (P/E) multiple of 27.5x based on FY 2019F earnings. We expect the P/E multiple to be in the range of 28x during our valuation period, in view of the current low interest environment, where risk free securities are yielding zero or negative returns, which is effectively boosting up equity valuations across the board. On an Enterprise Value to EBITDA (EV/EBITDA) basis, GO is currently trading at 7.9x EBITDA, in line with other European telecommunications industry, which include companies such as Deutsche Telekom AG and Telecom Italia S.p.A. that are currently trading at an EV to EBITDA multiple of 6.7x and 7.7x, respectively.
GO plc remains a good candidate for a target investor who is looking for a defensive business model, with stable cash flows and limited foreseeable downside risk. The stock is however currently trading in line with its fair value, and currently offers little in terms of expectations for capital appreciation upside.
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