Al­ter­na­tive for land­line poised for big things

Financial Mail - Investors Monthly - - Analysis - Marc Hasen­fuss

It will take a huge amount of per­sua­sion to con­vince in­vestors that tele­com ser­vices spe­cial­ist Huge Group is a buy. The share price has risen 670% over five years, more than 350% over three years — and ac­cel­er­ated 46% in the past 12 months. Huge also trades on a de­mand­ing trail­ing earn­ings mul­ti­ple of 28 — which is a far head­ier rat­ing than the bet­ter­known “alt-tele­coms” play Blue La­bel Tele­coms.

There is lim­ited “in­sti­tu­tional” in­ter­est in Huge — save for Mike Beamish’s in­vest­ment bou­tique Prae­sid­ium, which has scored enor­mously from back­ing Huge since its launch.

While the Huge share price has run strongly in re­cent times, IM be­lieves con­sid­er­able fur­ther up­side will be driven by or­ganic growth and ac­qui­si­tions in the next few years.

The pos­si­bil­ity of Huge be­ing bought out by a larger tele­coms player can also not be dis­counted.

What the re­sults to end Fe­bru­ary sug­gest is that Huge can rea­son­ably lay claim to hav­ing a solid, cash-gen­er­a­tive busi­ness model — and that its core tele­coms busi­ness of­fers a GSM-based fixed-lo­ca­tion voice ser­vice that ap­pears a vi­able sub­sti­tute for the tra­di­tional fixed land­line.

Sim­ply put, Huge’s ser­vice re­volves around of­fer­ing an al­ter­na­tive to the fixed land­line in­fra­struc­ture — but with­out the has­sle long in­stal­la­tion lead times and cop­per ca­ble theft.

CEO and founder James Herbst ex­plains that a fixed lo­ca­tion voice ser­vice us­ing GSM is a “plug, play and walk away ser­vice”.

What is in­trigu­ing to note is that tele­coms heavy­weight Zu­naid Bul­bu­lia (former CEO of cel­lu­lar ser­vices gi­ant MTN) has joined the com­pany as

chief fi­nan­cial of­fi­cer. Bul­bu­lia — as well as an­other re­cent board ap­point­ment, re­spected tech sec­tor an­a­lysts Duarte da Silva — bought sig­nif­i­cant mi­nor­ity share­hold­ings in Huge at the end of 2016.

Herbst says Bul­bu­lia is cham­pi­oning the Huge Tele­com tele­phony ser­vice to the mo­bile op­er­a­tors, and has helped the com­pany re­duce the cost of sale. “He has been in­stru­men­tal in se­cur­ing full suite func­tion­al­ity for our tele­phony ser­vice, in­clud­ing line hunt­ing in hunt groups, call­ing name pre­sen­ta­tion and ge­o­graphic num­ber porta­bil­ity. This is go­ing to af­fect our busi­ness pos­i­tively in ways you can­not imag­ine.”

The cost of sale re­duc­tions ne­go­ti­ated in late Fe­bru­ary this year will be felt only in Huge’s 2018 fi­nan­cial year. What will also kick in then is re­cently ac­quired Con­nec­tNet. There should be am­ple cross-sell­ing and cross­over op­por­tu­ni­ties that could add mean­ing­fully to growth in 2018 and be­yond.

Fun­da­men­tally, the signs are en­cour­ag­ing. The gross profit mar­gin rose from 40% to 48%. The oper­at­ing mar­gin fat­tened from 10% to 17%. Op­er­a­tional cash flow was a sturdy R25.4m. The key to Huge’s value propo­si­tion is its dis­tri­bu­tion ca­pa­bil­ity. In the past fi­nan­cial year it in­creased its busi­ness part­ners by 20% to 641. Herbst ex­plains that each busi­ness part­ner has on av­er­age five sales rep­re­sen­ta­tives. “So in terms of “feet on the street”, Huge Tele­com’s in­di­rect sales force con­sists of more than 3,000 per­son­nel.”

An­other at­trac­tive at­tribute is that Huge Tele­com con­tin­ues in­creas­ing its fixed an­nu­ity in­come, which con­sists of chan­nel man­age­ment fees, ac­count fees, site man­age­ment fees and line ren­tals. These are pro­tected from price com­pres­sion, es­ca­lat­ing an­nu­ally.

Herbst says cur­rent monthly fixed an­nu­ity in­come charges are around R5m, adding that fixed an­nu­ity in­come is grow­ing at about R40,000/month now. “This has a 66 times mul­ti­plier ef­fect on rev­enue for the next 12 months, or R2.9m. Our an­nual fixed an­nu­ity in­come is there­fore run­ning at a rate of R63m (be­ing R5m mul­ti­plied by 12 plus R3m).”

Prospects hinge nicely on ex­pand­ing cus­tomer base of small to medium-sized en­ter­prises in­tent on re­duc­ing costs of sale, and an abil­ity to widen mar­gins and lever­age cross­selling and cross­over op­por­tu­ni­ties. With in­creas­ing scale and the ex­pan­sion of prod­ucts and ser­vices, Huge looks poised for big things.

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