subscribe: Daily Newsletter

 

Huge posts solid maiden results

0 comments

Managed telecommunications company the Huge Group, which listed on the AltX in August 2007, has produced a respectable set of maiden results – exceeding the original profit forecast of 16.42 cents per share it published in its prospectus by 169%, and further improving on the revised profit forecast of 34.77 cents per share it published on 12 September 2007 by 27%.

The Huge Group released a trading statement on 24 April 2008 informing the market that it expected to exceed its revised profit forecast by between 10% and 20%, and the final annualised headline earnings per share for the seven month trading period ending 29 February 2008 of 44.17 cents exceeded this range by a further 7%.  The Huge Group has 106 760 000 ordinary shares in issue.
As James Herbst, the Huge Group’s financial director, points out: “These results are for a period of only seven months as a listed company – so using percentage increases on prior year figures to demonstrate to shareholders the potential of this company is simply not realistic. We have no prior trading-results as a listed company, which makes prior period comparisons practically impossible.
"Potential investors may therefore want to unpack these results in a slightly different way, possibly by making comparison to our industry peers and drawing conclusions by extrapolating the track record in organic revenue growth achieved by our principal subsidiary over the past five years.”
In the light of this Herbst maintains that investors and stakeholders should compare and extrapolate based on the revenue growth generated by TelePassport in the last five years. TelePassport (now Huge Telecom) has grown revenue since 2003 by a compound annual growth rate averaging 19%. The nine-year annual compound growth rate in revenue is 35% and last year Huge Telecom grew revenue by 26%.  Herbst notes that this supports the Huge Group’s view that telecommunications is still very much a growth industry.
These maiden results also take into account only a single month’s contribution from the CentraCell acquisition, which is being merged with Huge Telecom, the subsidiary company (formerly known as TelePassport) that formed the foundation of the Huge Group on listing.  A promising feature of these maiden results is that revenue, operating profit and cash flows are only representative of a seven-month and one-month trading period for Huge Telecom and CentraCell respectively, making the annualised trading performance figures quite staggering.
Furthermore, this performance excludes any projected effects of the more recent purchase of Eyeballs Mobile Advertising and the pending acquisition of iTalk Cellular.
The South African telecoms group had initially forecast lower earnings, but significant sales impetus emanating from TelePassport was created in the five months leading up to the listing, which allowed the group to deliver results far exceeding shareholder expectations.  In addition, associate company TelePassport Namibia, the market leader in that country with over 70% market share, continued to deliver strong organic growth at a rate of 27%.
Huge Group CEO Anton Potgieter, says: “The CentraCell acquisition has allowed us to reach critical mass for this market segment, and has substantially improved our purchasing power with our suppliers, and our presence and market share in the managed telecommunications industry.  We are not in the business of issuing shares for the sake of acquiring revenue and have rather focused on acquisitions that bring far more synergistic value, so that the resulting whole far exceeds the sum of the parts.
"We will continue to focus on growing revenue by organic means – we currently operate a contracted annuity business with monthly billing in excess of R47-million, and this fact alone underpins our value.
“In an annuity based business the greater your base, the greater the resulting absolute value of your growth. We used the correct base figure when computing our original forecast during the drafting of the prospectus, but the compounding effects of a larger base have been substantially more beneficial,” says Potgieter.
These results augur well for the Huge Group, particularly if the ratios are compared to other AltX listed companies and, more specifically, Huge’s industry peers.  
The revenue generated for the period of R243-million and the operating profit before taxation of R26-million at an operating profit margin before taxation of 10.35% translate into extrapolated annualized figures of around R540 million in revenue, after taking into account full 12-month trading results for both Huge Telecom and CentraCell and R55.89-million for operating profit before taxation if extrapolated on a similar basis.
In this regard, the Huge Group’s return on equity on an annualised basis stands at 21.74%, while its nearest AltX-listed industry competitor’s latest results delivered comparative returns of 8.55%.  Huge’s net operating profit margin before taxation stands at 10.3%, compared to the AltX-listed companies’ 2007 average ratio of 6.7%.
“Cash flow generated from operations of R26-million,” Herbst continues, “further underpins the quality of our earnings and has allowed us as a board of directors to propose a maiden dividend of 12 cents per share.  It is significant for investors that we generate negative working capital, where our suppliers fund our customers and our investment in stock.  This is the only negative ratio in our business that is acceptable to us,” he quips.
On the subject of the market’s future, Herbst is upbeat: “With so many choices, customers are going to need a trusted intermediary to make the appropriate selection between the carriers and the different technologies they adopt – whether these are VoIP, Wimax, GSM or CDMA.  We expect significant increases in revenues generated from our managed telecommunications services in the near future.
"In fact, the benefits are already clearly evident, and this growth may well be compounded by the fact that there are now far fewer players in the managed telecommunications space than a few years ago, which could make Huge the only logical supplier of choice for most of corporate South Africa.”
Potgieter adds: “There is an ever-increasing customer demand for real value-adding services. The acquisition of iTalk will diversify the revenue profile of Huge, to a nearly even split between corporate and consumer income.  The cross-selling benefits have not yet been calculated, but regional management are very excited at the prospect of selling GSM handsets into a market reputed to be suffering from poor service delivery and lack of innovation.  And the acquisition of Eyeballs will soon diversify our income streams even further, into the field of media.”