On October 3, GO plc issued a somewhat surprising announcement and explained that it intends to dispose of up to 49 per cent of its shareholding in its fully-owned subsidiary BMIT Technologies plc (BMIT) through an initial public offering (IPO).

An extraordinary general meeting is taking place on December 3 in order to obtain the approval of GO shareholders for this transaction to take place.

In line with the requirements of the Listing Rules issued by the MFSA, an explanatory circular was sent to all shareholders ahead of the EGM in order to provide detailed information on BMIT and the proposed transaction to enable shareholders to make an informed decision on the resolutions on the agenda of the meeting. The circular also provides the financial statements of the BMIT Group (both historic and projected) and the projected dividend policy which provides sufficient information for investors to understand most details of the upcoming new share offer.

Moreover, on November 14, GO announced that BMIT prepared a slideshow providing a graphical review of the business operations and future strategy as well as information on the valuation methodology adopted for the upcoming IPO which would be of interest to those investors contemplating an investment in the new share offer.

These details were also discussed during a meeting organised by GO with financial analysts in which GO’s CEO Nikhil Patil delved into detail about the rationale for the partial disposal of BMIT. The CEO explained that GO aims to maintain a balance between its capital expenditure requirements and its returns to shareholders while keeping an underleveraged balance sheet. Mr Patil referred to GO’s net debt to EBITDA multiple of under one time (effectively implying that all its net debt could be repaid with the operating profits generated in less than one year) which he indicated is possibly among the best gearing multiples across the global telecoms landscape.

The CEO explained that the partial sale of BMIT will aim to deliver returns to shareholders in a tax-efficient manner via dividends but will also assist GO in accelerating its planned investment in fibre infrastructure across the Maltese Islands.

GO is aiming for 80 per cent coverage within the next five years. Moreover, the separate listing of BMIT on the Malta Stock Exchange will improve the company’s profile which will help to accelerate its market penetration among the local business community and provide the company with access to the capital markets for future expansion so as not to remain dependent on GO’s balance sheet for its funding requirements.

BMIT is a leading IT services provider in Malta and is primarily focused on the provision of data centre, cloud and managed IT services, offering an extensive range of services and solutions to a wide range of business customers. BMIT is the largest data centre provider in Malta with a leading market share currently operating from two sites in Ħandaq and SmartCity.

Partial sale aims to deliver returns in a tax-efficient manner

Historically, the main target clients of BMIT were online gaming companies operating out of Malta. BMIT extended its offering especially following the acquisition of Kinetix IT Solutions and as a result, BMIT’s client portfolio today (comprising 500 corporate clients) also includes business customers operating in other sectors such as financial services, media, transportation and communication. In fact, 30 per cent of BMIT’s revenue is currently generated from cloud and managed services (mainly to non-gaming customers), expected to grow in future years as BMIT aims for increased penetration among Maltese business. BMIT also aims to assist companies in other new sectors such as blockchain, artificial intelligence and internet of things.

The financial information provided in the explanatory circular published by GO shows the profitable track record of the company. The directors expect this positive financial performance to be maintained and are forecasting that during the current financial year ending December 31, BMIT is expected to generate an EBITDA of €9.31 million (+8 per cent over 2017) and a net profit of €4.22 million (+11.3 per cent over 2017) on revenues of €21.7 million (+9.9 per cent over 2017).

The explanatory circular also provides projections for the financial years ending 31 December 2019 and 2020. The directors of BMIT are projecting that EBITDA will rise by 9 per cent to €10.1 million in 2019 and by a further 12 per cent to €11.4 million in 2020 as revenues are anticipated to continue growing in the coming years and reach €24.6 million by 2020.

 The continued growth in revenue and operating profits is based on the current healthy business pipeline and more importantly on the increase in the data centre capacity as a result of the new data centre in Zejtun as from 2020. The growth in revenue in 2020 also reflects the 50 racks (equivalent to half of the additional capacity) being taken up by GO which will also help BMIT reduce its dependency on the online gaming sector.

BMIT is projecting net profits to surge by 22 per cent in 2019 to €5.15 million but drop by 9.4 per cent to €4.67 million in 2020. The projected drop in profitability in 2020 is largely due to the much higher net finance costs as these are expected to increase to €0.94 million in 2020 from €0.31 million in 2019. This reflects the impact of fresh borrowings amounting to €10 million (from GO plc) related to capital investments in the new data centre located in Żejtun (owned by Malta Properties Company plc) and the recognition of charges in relation to committed leases by BMIT in line with the implementation of the new accounting rule IFRS 16.

The explanatory circular also discloses the expected dividend policy adopted by BMIT. The intention of the company’s directors is to retain a strong dividend payout ratio. In fact, the circular notes that BMIT paid its sole shareholder GO a total of €12.3 million in dividends between 2015 and 2017. The future dividend policy described in the circular states that dividend distributions will be made annually and they are expected to amount to a maximum of 90 per cent of the company’s free cash flow but not exceeding 95 per cent of distributable profits. This high dividend payout is possible as a result of the low annual requirement for capital expenditure following the upcoming €10 million investment in Żejtun as well as the underleveraged balance sheet.

The first dividend for the new shareholders after the IPO in early 2019 will be in or around May 2020 since this will need to be approved by shareholders during the AGM in respect of the 2019 financial year. The dividend is projected to amount to €0.0216 per share, representing a net dividend yield of 4.4 per cent based on the IPO price of €0.49 per share.

BMIT is projecting a net dividend of €0.024 per share for the 2020 financial year. This translates into a yield of 4.9 per cent on the IPO price. The expected dividends for 2019 and 2020 place BMIT among the highest dividend-yielding equities listed on the Malta Stock Exchange

The total issued share capital of BMIT Technologies plc amounts to 203,595,310 shares. In its initial announcement on October 3, GO had stated that it is seeking to dispose of up to 49 per cent of its shareholding in BMIT and it is seeking to raise up to €49 million. The explanatory circular also indicates that GO will retain a minimum of 51 per cent of BMIT and a maximum stake of 75 per cent. In essence, the IPO is for a minimum of 25 per cent of the total issued share capital (equivalent to circa 50.9 million shares) and up to a maximum of 49 per cent (equivalent to circa 99.8 million shares).

The explanatory circular states that the completion of the proposed IPO is dependent on the satisfaction of a number of conditions, namely (i) approval by GO shareholders during the EGM on December 3, 2018; (ii) regulatory approval for the admission to listing on the Official List of the MSE of the shares of BMIT; (iii) listing of the shares of BMIT; and (iv) a minimum of 25 per cent of the total issued share capital of BMIT Technologies is taken up at the IPO.

BMIT has been attributed a value of just under €100 million, based primarily on the income approach, whereby projected cash flows from the operations of the BMIT Group were discounted to their present value equivalent using a rate of return that reflects the relative risk of the investment. Based on the IPO price of €0.49 per share, an estimated net debt of €1.4 million as at 31 December 2019 as well as a projected net profit of €5.2 million in 2019, the valuation gives a forward enterprise value-to-EBITDA multiple of 10 times and a forward price-to-earnings multiple of 19.4 times.

The slideshow also indicates that a selected group of data centre operators listed across US and EU stock markets (InterXion, Internap and Equinix) currently trade on an EV/EBITDA multiple of 20 times. BMIT’s IPO was therefore priced at a discount to international peers to reflect some of the risks involved such as current dependency on gaming customers.

Shareholders of GO should eagerly attend next Monday’s EGM since it is an opportunity for them to seek any clarifications regarding the information published to date. Meanwhile, assuming the conditions are all satisfied for the IPO to take place, it would be another important milestone for the Maltese equity market since it not only provides investors with another possibility of diversifying their portfolios into the technology sector but it also shows how the larger companies can optimise shareholder returns.

Rizzo, Farrugia & Co. (Stockbrokers) Ltd is acting as Sponsor and Co-Manager to BMIT Technologies plc.

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