Alternative for landline poised for big things

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.