The 2010 half-year results published by Go plc last week reveal the discrepancy in performance between the Group’s local operations and the Greek telecoms company Forthnet in which Go has an indirect shareholding of circa 20 per cent.
In view of this, it would be best to analyse the Go financial statements by taking a look at the trends within their local operations and the developments in Greece separately.
On the local front, Go reported a 7.2 per cent rise in turnover to €64.2 million as it managed to increase its client base across all areas of activity with the exception of fixed line telephony. The main increases were in broadband and TV with growth rates of 16 per cent each to 57,000 and 52,000 subscribers respectively. Meanwhile the mobile subscriber base edged 3.2 per cent higher to 188,000 while in fixed line voice the customer base remained unchanged at 200,000 despite the increased competition in the market.
The €4.3 million increase in overall turnover is mainly attributable to a full-six month consolidation of the BM Group. Go acquired a 60 per cent shareholding in this company in April 2009 and the increased revenue from the data operations arm amounted to €3.3 million in the financial statements. Commenting on the performance of the BM Group, Go chairman Deepak Padmanabhan explained that this is a key growth area for the Group going forward and has proved to be a rewarding investment with a very stable and steadily growing client base.
Go benefitted from various cost-cutting measures implemented last year including the reduced headcount. In fact payroll costs resulting from the lower number of employees decreased by €2.1 million. This was partially offset by higher charges for electricity. Go’s CEO David Kay explained that other cost reduction initiatives are in place while the overall headcount decreased by a further 59 employees since the start of the year to 1,060 as at June 30.
While in the past two interim periods, Go’s financial statements were negatively impacted by one-off items related to voluntary retirement costs and the provision for pensions, the results for the first half of 2010 do not reflect any one-off exceptional items. For comparison purposes, therefore, these one-off items should be taken into account. In fact, on this basis, the Group’s operating profit before exceptional items climbed by 46 per cent to €11.35 million (June 2009: €7.8 million) while EBITDA grew by 18.7 per cent to €23.1 million as depreciation was unchanged at €11.7 million.
The strong improvement in profitability from local operations is welcome news for shareholders following the sharp decline registered in the first half of 2009. Although the level of operating profit is still below that registered in prior years, it shows that the restructuring efforts within the Group and the investment in the BM Group started to produce the desired results.
The recovery in profitability from the local operations should continue on the back of the recent increase in TV subscribers following the introduction of a more attractive sports package and an overall improvement in the local economic performance including the probability of a record year in the tourism industry.
At the recent stockbrokers meeting, CEO David Kay explained that while the sports subscriber numbers were below expectations until June 30, in August there was a very strong demand for the sports package and this is expected to continue into September as the football seasons kick-off in the UK and Italy. Mr Kay attributed the initial slower take-up to the controversy surrounding the exclusivity of the sports content and the public pressure to share sports content.
The CEO re-iterated the Group’s position that the sports rights are on an exclusive basis after having sought legal advice on the matter. Despite the lower-than-expected take-up of the sports package until June 30, Mr Kay stated that the number of subscribers are still encouraging and justifies the investment in the football rights for the coming seasons as the TV business represents another key growth area for the Group.
While the local operations have showed signs of improvement, the same cannot be said for the situation in Greece. Although Forthnet was successful in increasing its overall level of revenue (+10.4 per cent to €198.8 million), EBITDA declined by 8.1 per cent due to the costs related to the increased number of customer connections while the overall losses suffered by the Greek company widened also as a result of the one-time special tax charge of €2.8 million introduced by the Greek government early this year as part of the extensive austerity measures to reduce its overall debt level.
Deepak Padmanabhan, who is also chairman of Forthnet, expressed his satisfaction at the increased level of telephony subscribers in Greece which according to him are beyond expectations.
Mr Padmanabhan also attributed the decline in operational profit at Forthnet to the overall deterioration of the Greek economy. After dropping by 0.8 per cent in the first three months of 2010, Greece’s gross domestic product declined by a further 1.5 per cent in the second quarter, mainly on the back of a significant reduction in public consumption. The IMF and the EU expect the Greek economy to shrink by four per cent this year due to the impact of tax increases and deep spending cuts.
Meanwhile the unemployment rate edged up to 12 per cent in May with youth unemployment rising to a record of 32.5 per cent. Notwithstanding the dire situation within the Greek economy, the chairman justified the recent further acquisition of Forthnet shares by explaining that, in his view, the Greek company’s share price on the Athens Stock Exchange does not truly reflect the underlying value of the company.
Back to the local front, Go recently announced that it will be embarking on an ambitious €100 million investment over a six-year period covering a new mobile network, upgraded TV infrastructure to roll-out new services and applications as well as Fibre-To-The-Home (FTTH).
FTTH involves the laying of fibre optic cables from the telephone exchange to individual households replacing the conventional existing copper wire. This infrastructure offers much faster speeds for the next generation services in broadband, digital TV and telephone.
In reply to questions from the floor on the possible impact of this investment on the Group’s dividend policy, Mr Brincat argued that such an investment should not be compared to the annual level of profit made by the Group especially since over €20 million per annum is recognised as depreciation and amortisation in the financial statements thereby depressing the level of profitability.
Following last year’s payment of a net dividend of €0.10 per share despite the disappointing financial results, one would expect this level of dividend at least to be maintained this year given the improved performance locally. Should this be so, Go’s equity would continue to rank as the highest dividend yielding equity in the market, comparing very favourably to bond yields available on the local market.
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Mr Rizzo is director of Rizzo, Farrugia & Co. (Stockbrokers) Ltd.