Bredband2: Value Accretive Acquisition
Research Update
2023-12-19
08:35
Redeye returns with an update on Bredband2's acquisition of Stockholm Stadsnät AB with a positive view. Following the acquisition, we increase our sales forecast by 3% for 2024e, implying a y/y sales growth of 6.8%, while adding 4% on 2024e EBITDA. Our estimate changes lead to an increased base case valuation.
OV
FN
Oskar Vilhelmsson
Fredrik Nilsson
Bredband2 (B2) expects to take over the company 1st of February 2024 following regulatory approvals. The target has a solid financial history with sales of around SEK50m, an average growth of c.5% for the last three reported years, and an EBIT margin of 7.7% most recently. We are encouraged by the acquisition as it strengthens B2’s presence in exclusive networks (to BRF) while adding some corporate clients. In total, B2 will have around 490 thousand customers after the transaction.
At first glance, the price tag of SEK50m seems high, implying an acquisition multiple of around 1x EV/sales or 13.4x EBIT based on 2022/2023 figures (representing 2022-05-01-2023-04-30). However, as we identify significant synergies, the underlying price tag would be around 6-9x EBIT, depending mainly on B2’s cost-cutting actions. We identify synergies on both the cost and sales side. On the cost side, B2 will move over the customer base while keeping some of the key employees from the target. For the last reported period, the company had c. SEK15m in staff and other external costs. We expect that B2 will keep around 7 employees, meaning that it will reduce half of the headcount plus additional consultants. The employees remaining in the company will strengthen the sales team in the Stockholm region.
For 2024 Stockholm Stadsnät will be included from the 1st of February. Following the acquisition, we increase our 2024e topline forecast by 3% implying a y/y growth of 6.8%. On EBITDA, the effect is somewhat larger, adding 4% to 2024e, while raising the margin to 17.3%. Below EBITDA, the positive effect will partly be mitigated by amortization on the acquisition. Following the acquisition, Bredband2's financial position will continue to be solid. We foresee that the dividend will be unchanged for the coming year, as the company will balance additional investments with debt while continuing to look for additional acquisitions.
Following the estimate changes mentioned above, we argue for a new base case valuation of SEK2.2 (2.1) per share based on our DCF valuation. Following the acquisition, Bredband2 is trading at a modest EV/EBITA of approximately 7.4x based on our 2024e, an EV/EBIT of 9.1x, or at price-earnings 14.5x. We find the share attractive given its characteristics with strong cash flow generation, low business risk, and a fair growth outlook. The upside to our base case is now 45%.
Case
Growth through the fibre wave, with subsequent margin expansion
Evidence
Strong market position and scalability support our view
Challenge
Intense competition and maturing market
Challenge
Dependence on network owners
Valuation
Low valuation does not reflect its market position
People: 4
Bredband2 receives a high score for the People rating due to various characteristics based on its management, board members, and owners. The CEO, Daniel Krook, has been in the industry and at the company for a long time and, therefore, has solid market knowledge. Krook has also been at the forefront of the new strategy that has transformed Bredband2 into a profitable growth machine. The company makes well-balanced reinvestments of its stable cash flows but can also distribute money to shareholders. Bredband2 has an active major owner in Anders Lövgren, the chairperson, who holds around c13% of the shares. The rest of the board generally has large shareholdings as well. The CEO owns c1.5% of the company.
Business: 4
Bredband2 receives a high Business rating due to several aspects. Bredband2 is the third-largest fibre player among Swedish consumers and benefits from its positioning in the growing fibre segment in a market where scale matters. Bredband2 has offset gross margin pressure by internal efficiency, which its asset-light business model can explain (low investment needs), not owning the underlying infrastructure, combined with its in-house developed CRM system called BOSS. Furthermore, the recurring revenues and the characteristics of its products being sold give rise to a stable, non-cyclical business with a strong cash conversion.
Financials: 3
Bredband2 receives the actual Financial rating for several reasons. On the positive side, the company has healthy profitability and reliable recurring cash flows that have increased gradually in recent years (customers pay in advance and with low investment needs), supporting its relatively high dividend. Also, we believe its financial position is solid. On the other hand, its gross and EBIT margins are relatively low, and the sales growth rate has decreased in recent years. However, the profitability can increase if the corporate side takes off to a greater extent.
Income statement | |||||
SEKm | 2020 | 2021 | 2022 | 2023e | 2024e |
Revenues | 787.9 | 1,511.9 | 1,531.4 | 1,578.3 | 1,686.2 |
Cost of Revenue | 529.3 | 978.4 | 995.5 | 1,039.2 | 1,097.7 |
Operating Expenses | 179.2 | 314.0 | 294.6 | 279.4 | 297.5 |
EBITDA | 79.4 | 219.5 | 241.3 | 259.8 | 291.0 |
Depreciation | 15.3 | 15.3 | 13.5 | 22.7 | 23.6 |
Amortizations | 21.3 | 36.8 | 40.9 | 33.2 | 36.3 |
EBIT | 42.8 | 93.9 | 94.8 | 116.7 | 139.2 |
Shares in Associates | 0.00 | 0.00 | 0.00 | 0.00 | 0.00 |
Interest Expenses | 0.00 | 0.00 | 10.5 | 12.7 | 12.0 |
Net Financial Items | 0.00 | 0.00 | -10.5 | -12.7 | -12.0 |
EBT | 42.3 | 84.7 | 84.4 | 104.0 | 127.2 |
Income Tax Expenses | 11.4 | 3.5 | 11.5 | 21.3 | 26.2 |
Net Income | 30.9 | 81.2 | 72.9 | 82.7 | 101.0 |
Balance sheet | |||||
Assets | |||||
Non-current assets | |||||
SEKm | 2020 | 2021 | 2022 | 2023e | 2024e |
Property, Plant and Equipment (Net) | 32.7 | 32.2 | 42.0 | 45.3 | 47.0 |
Goodwill | 677.2 | 652.8 | 652.8 | 652.8 | 652.8 |
Intangible Assets | 113.3 | 119.2 | 109.2 | 75.6 | 90.1 |
Right-of-Use Assets | 0.00 | 249.4 | 271.7 | 271.7 | 271.7 |
Other Non-Current Assets | 47.2 | 32.0 | 24.2 | 24.2 | 24.2 |
Total Non-Current Assets | 870.3 | 1,085.6 | 1,099.9 | 1,069.5 | 1,085.7 |
Current assets | |||||
SEKm | 2020 | 2021 | 2022 | 2023e | 2024e |
Inventories | 6.7 | 4.4 | 4.4 | 5.5 | 5.9 |
Accounts Receivable | 99.9 | 68.6 | 67.9 | 69.4 | 74.2 |
Other Current Assets | 51.9 | 48.7 | 20.2 | 23.7 | 25.3 |
Cash Equivalents | 119.3 | 125.5 | 116.9 | 174.4 | 203.6 |
Total Current Assets | 277.7 | 247.1 | 209.4 | 273.0 | 309.0 |
Total Assets | 1,148.0 | 1,332.8 | 1,309.3 | 1,342.6 | 1,394.7 |
Equity and Liabilities | |||||
Equity | |||||
SEKm | 2020 | 2021 | 2022 | 2023e | 2024e |
Non Controlling Interest | 0.00 | 0.00 | 0.00 | 0.00 | 0.00 |
Shareholder's Equity | 508.9 | 534.7 | 531.0 | 537.1 | 557.1 |
Non-current liabilities | |||||
SEKm | 2020 | 2021 | 2022 | 2023e | 2024e |
Long Term Debt | 102.2 | 53.3 | 31.7 | 31.7 | 31.7 |
Long Term Lease Liabilities | 0.00 | 149.5 | 166.1 | 166.1 | 166.1 |
Other Long Term Liabilities | 32.4 | 23.7 | 21.0 | 21.0 | 21.0 |
Total Non-Current Liabilities | 134.6 | 226.5 | 218.8 | 218.8 | 218.8 |
Current liabilities | |||||
SEKm | 2020 | 2021 | 2022 | 2023e | 2024e |
Short Term Debt | 48.3 | 43.3 | 21.7 | 21.7 | 21.7 |
Short Term Lease Liabilities | 0.00 | 82.6 | 94.7 | 94.7 | 94.7 |
Accounts Payable | 183.9 | 162.4 | 165.2 | 170.5 | 182.1 |
Other Current Liabilities | 272.3 | 283.3 | 277.9 | 299.9 | 320.4 |
Total Current Liabilities | 504.5 | 571.6 | 559.5 | 586.7 | 618.8 |
Total Liabilities and Equity | 1,148.0 | 1,332.8 | 1,309.3 | 1,342.6 | 1,394.7 |
Cash flow | |||||
SEKm | 2020 | 2021 | 2022 | 2023e | 2024e |
Operating Cash Flow | 115.7 | 151.0 | 257.5 | 246.8 | 278.2 |
Investing Cash Flow | -115.1 | -26.6 | -53.9 | -25.5 | -76.1 |
Financing Cash Flow | -34.9 | -118.2 | -212.3 | -163.8 | -172.9 |
Disclosures and disclaimers