Could this be the start of further acquisition activity in the telecoms sector? As a result, could a FTSE 250 sector peer be worth a closer look?

A done deal?

But first, CityFibre. The board is recommending that shareholders accept the deal. Already Bidco has irrevocable undertakings and a letter of intent from 67.8% of shareholders in the company. As such, the chances of it being concluded seem to be relatively high, and it would represent an all-time high valuation for the business. As such, the prospect of investors who are set to make a profit from the deal deciding to vote against it seems relatively low.

Improving outlook

Alongside news of the bid approach, CityFibre also released its full-year results. They showed a rise in revenue of 126%, while gross profit moved 48.4% higher. During the period, it was able to deliver on a £201.8m fundraising which is being used to fund growth of the company’s full fibre network and to pay for the acquisition of Entanet.

However, the company’s net loss increased to £16.6m from £12.6m in the previous year. This shows that while it has the potential to become a highly profitable business in the long run, in the near term it may struggle to deliver a financially-appealing outlook. As such, the acquisition approach seems to be good news for the company’s investors.

Further bid activity?

Also operating within the telecoms sector is FTSE 250-listed Talktalk (LSE: TALK). The company has experienced a difficult period which has had a negative impact on its financial performance. However, it now seems to have found the right strategy under a refreshed leadership team, with the company’s bottom line forecast to rise by 62% in the current year and by a further 20% next year.

Despite such a strong rate of growth, Talktalk trades on a price-to-earnings growth (PEG) ratio of just 0.9. This suggests that it could offer growth at a reasonable price. And since dividends per share are expected to increase by 78% next year, it appears as though the company is optimistic about its investment outlook.

Certainly, the UK quad-play sector is becoming increasingly crowded and remains highly competitive. But with a strong position and the potential for further growth due to its focus on efficiency and customer service, it would be unsurprising for the company to become a takeover target over the medium term.

The post CityFibre surges 90% on bid approach: could this FTSE 250 peer be next? appeared first on The Twelfth Magpie.

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Peter Stephens owns shares of TalkTalk Telecom Group plc. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Backed by Neil Woodford, it is trying to take on BT by building its own fibre optic infrastructure in UK towns and cities. The company is facing a massive uphill struggle to get to where it wants to be, but it is making steady progress. Last year it signed a groundbreaking strategic partnership with global telecommunications firm Vodafone to roll out Fibre-to-the-Premises to at least 1m homes in 12 existing CityFibre towns and cities. As well as this deal, last year management inked two contracts with public bodies to expand and develop network infrastructure.

Pushing ahead 

According to a trading update issued by the firm today, progress is already well under way in the partnership with Vodafone. Detailed planning and preparation work is in progress for all the 12 cities in the pilot programme with work in the first location, Milton Keynes, expected to start in the first quarter of this year.

Unfortunately, while the company is making progress, it will be some time before shareholders see any results. City analysts are expecting the group to remain lossmaking for the next few years as it invests in its network. Still, for long-term investors, the opportunity here could be enormous. For any telecoms business, building out the network is the hardest part, after this, capital spending should fall dramatically and recurring income from customers’ subscriptions provides a healthy cash flow to reinvest back in the business or return to shareholders. 

It might take several years before CityFibre is in the position where it can consider cash returns, but the longer it waits, the more dominant it will become in the market, which should ultimately lead to higher returns for investors. Put simply, barring any unforeseen setbacks, its growth appears to be only just getting started.

Market leader 

Another company I’m positive on the outlook for, and believe could achieve steady returns for investors over the long term, is GYG plc (LSE: GYG).

Another favourite of Neil Woodford, this company provides services to superyacht owners around the world. The great thing about this business is its defensive nature. People who spend tens of millions of pounds buying their yachts are not going to cut corners on repairs and maintenance. They will turn to the provider with the best reputation, no matter what the cost. And GYG has an excellent reputation among clients. The firm recently signed a letter of intent to work on ‘REV 182’, the world’s largest research and expedition vessel currently under construction.

As it builds on its reputation, City analysts are expecting the company’s earnings per share to leap by 55% during 2018, leaving the stock trading at a forward P/E of 10.4. Moreover, analysts believe the shares will support a dividend yield of 4.8% for 2018. In fact, GYG’s dividend potential is what attracted Woodford to it in the first place. Commenting on his decision to take a 17.2% stake in the business at the time of its IPO, Woodford said: “It is a cash generative business, which is expected to pay an attractive dividend and support a progressive dividend policy going forward.”

The post This Neil Woodford high-growth small-cap stock is just getting started appeared first on The Twelfth Magpie.

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Rupert Hargreaves owns no share mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

One smaller company within the portfolio that has performed well recently is CityFibre Infrastructure Holdings (LSE: CITY). Indeed, the shares jumped over 40% last Thursday. Given that Woodford holds approximately 18% of the company, he has no doubt done quite well from the stock’s rise. By my calculations, he made a paper profit of around £20m in a single day.

So what caused the sharp spike in CityFibre’s share price and more importantly, does the stock offer further potential for investors?

Transformative opportunity

CityFibre is a provider of wholesale fibre optic infrastructure. The £392m market cap company designs, builds and operates pure-fibre networks across the UK and is aiming to become a third national network operator, alongside BT and Virgin Media.

Thursday’s share price surge was the result of an announcement that the company had signed a “major strategic partnership” with Vodafone. The company stated that under the agreement, it will provide full-fibre connectivity to a minimum of one million UK homes, with the potential to extend this to up to five million (20% of the current broadband market) by 2025. Construction is due to commence next year, and be mostly completed in four years. Over 20 years, the initial phase of the agreement for one million homes is estimated to be worth over £500m.

Chief Executive Greg Mesch commented: “This agreement has unlocked the UK’s full-fibre future and is a major step forward in delivering our vision for a Gigabit Britain. With this forward-thinking commitment from Vodafone, we have a partner with which we can transform the digital capabilities of millions of homes and businesses and establish an unassailable wholesale infrastructure position across 20% of the UK broadband market.”

Still time to buy?

So what does this deal mean for investors? Is there still time to get on board the stock?

Placing an intrinsic value on CityFibre shares is difficult at present. At the current share price, its market capitalisation is almost £400m, which seems high for a company that generated revenues of £15.4m last year, and made a net loss of £12.6m. Of course, after signing the contract with Vodafone, the company could potentially make sizeable profits in the future. According to The Financial Times, analysts at Finncap described the agreement as “the dawn of a new UK.”

Personally CityFibre is not a stock I would invest in, as I prefer to buy companies that are already profitable. I’ve found this strategy tends to minimise the chances of experiencing big losses. However, for long-term risk-tolerant investors, I can see appeal in holding a small position (the stock was just 0.49% of Woodford’s portfolio at the end of September) as a speculative buy.

The post This Neil Woodford stock jumped 45% last week appeared first on The Twelfth Magpie.

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Edward Sheldon has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

However, small-cap Cityfibre Infrastructure (LSE: CITY) seems to be up for the challenge, The company is building a UK-wide network of duct and fibre optic infrastructure, with the specific goal of trying to take on BT. 

Growing rapidly 

Today Cityfibre reported its results for the six months to the end of June with some fanfare. According to the release, CityFibre is now the largest alternative owner of wholesale duct and fibre infrastructure outside London with a presence in 42 UK towns and cities. 

After establishing a presence across the UK, management is now focused on the “densification” of the firm’s existing city networks. The company wants to be in 50 cities by 2020 and is rolling out its residential connectivity initiative in 2018, which should address the residential and enterprise markets in five to 10 UK towns and cities during 2018. 

To help fund its growth, the company raised £202m by way of a placing earlier this year. Some of the funds were used to acquire Entanet International Limited, a smaller fibre player. 

During the first half, the company reported revenue growth of 36% to £9m, gross margin improved to 88% and adjusted earnings before interest, tax, depreciation and amortisation leapt 302% to £1.7m. The number of “route fibre kilometres” increased 20% year-on-year and in York, where the business is rolling out its residential connectivity programme, the number of homes connected hit 13,583 giving a penetration of 28%. 

The next BT? 

CityFibre is taking market share at a time when regulators and broadband providers alike are becoming increasly fed up with BT, the country’s main telecoms infrastructure provider. 

The government has introduced several initiatives to help sponsor competition in the fibre market. These include the introduction of 100% business rates relief on new fibre builds for five years, and the Local Fully Fibre Networks government stimulus packages of a minimum £1.5bn for full fibre infrastructure investment. 

CityFibre is taking full advantage of this favourable environment. The £202m raised earlier this year will help accelerate its fibre rollout and fund bolt-on acquisitions to help the process. 

And as the company expands, City analysts expect the firm’s revenue to hit £29.1m for 2017 rising to £47.6m for 2018, up 2,400% since 2013. Pre-tax profit of £0.5m is pencilled in for 2018 off the back of this explosive revenue growth. 

I believe that as CityFibre continues to expand, the company could become one of the UK’s premier fibre network providers, taking on BT in this highly specialist market. That said, for the time being, it’s difficult to try and value the company’s shares, as the business is not profitable. 

Still, City analysts are projecting profitability within the next two years, and by the end of the decade, the firm should be producing a steady income for investors. 

The post Could this small growth stock be the next BT Group plc? appeared first on The Twelfth Magpie.

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Rupert Hargreaves does not own any share mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Improving outlook

The company in question is designer, builder, owner and operator of fibre optic infrastructure in UK towns and cities, CityFibre (LSE: CITY). On Wednesday it said that it has now completed the acquisition of Entanet Holdings for a total consideration of £29m in cash.

The deal looks to be a good one for CityFibre. It will significantly increase its wholesale capabilities as well as its relationships with service providers. This will extend the company’s channels to market. Through combining the fibre infrastructure with Entanet’s established wholesale products, systems and relationships with Channel Partners, there are expected to be synergies of over £3m per annum within the next three years.

The effect of this on the company’s bottom line is likely to be positive. However, it is still due to remain lossmaking in the current year and in 2018. Despite a potential for narrower losses versus prior years, other telecoms companies such as Vodafone may offer superior catalysts over the medium term.

A potent mix

In fact, Vodafone is expected to report a rise in its bottom line of 5% in the current year, followed by further growth of 20% next year. Given its size and diversity, this would be a stunning result and would show that its aggressive acquisition and investment strategy is starting to bear fruit. And since it trades on a price-to-earnings growth (PEG) ratio of just 1.3, it appears to offer excellent value for money at the present time.

As well as its growth potential, Vodafone also offers defensive characteristics. For example, it has far more geographical and product diversity than sector peers such as CityFibre. This means that a slowdown or difficulty in one part of the business could potentially be offset by strength elsewhere. It also means that the stock may be deserving of a higher rating versus riskier industry peers.

In addition, Vodafone also offers a dividend yield of 5.8% at the present time. Given its financial strength and diversity, the chances of dividends being maintained or increased in future seem high. With inflation moving up, this could give the investment a competitive advantage versus other high-yielding stocks in the FTSE 100.

Therefore, while CityFibre may have a degree of investment appeal after today’s acquisition update, buying Vodafone seems to be a better move from a risk/reward perspective.

The post One turnaround stock I’d sell to buy Vodafone Group plc appeared first on The Twelfth Magpie.

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Peter Stephens owns shares of Vodafone. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Shareholders of CityFibre Infrastructure Holdings (LSE: CITY) may understand this. The company – in which Neil Woodford’s fund management group has a 17% stake – is building fibre networks in secondary cities around the UK. The plan is to attract corporate customers and do deals with retail broadband providers.

Initial progress may have seemed slow, but things are changing. CityFibre’s £90m acquisition of KCom‘s fibre network last year has boosted momentum. CityFibre added 5,063 new connections last year and now has contracted future revenues of £75.5m. This compares well with 1,100 new connections and £23.2m in 2015.

Revenue rose 140% to £15.4m in 2016, while gross profit increased by 145% to £13.5m. This highlights the potentially profitable nature of this business, but rising administrative costs meant that the firm still reported an operating loss of £5.1m.

CityFibre is aiming to become a third national network operator, alongside BT Group (LSE: BT-A) and Virgin Media. It’s an ambitious goal but the political climate seems to be improving. BT is being forced to separate Openreach more cleanly from its other operations, and is coming under increased pressure to level the playing field for smaller rivals.

Putting a value on CityFibre shares is difficult at the moment. The group’s stock has risen by 17% over the last month after the firm hinted that it might consider a trade sale. But if this doesn’t happen CityFibre is almost certain to need more funding. Recent press reports have suggested the group will look to refinance its entire £100m borrowing facility this year.

Although I’d rate CityFibre as a speculative long-term buy at current levels, smaller shareholders do face the risk of heavy dilution in future fundraising rounds.

Is there worse to come?

When BT confessed to a £530m Italian accounting scandal in January, it hit the headlines. But many commentators appeared to overlook the other big news it released on the same day – a profit warning.

BT told investors that it was experiencing a slowdown in UK public sector and international corporate business. This would result in “a double-digit percentage decline” in fourth quarter underlying earnings in its Business and Public Sector division.

This downgrade – plus the group’s Italian problems – led to a 5% fall in consensus earnings forecasts for the 2016/17 financial year, which ended on 31 March.

In May, we’ll find out whether the outlook for the year ahead has worsened since January. We’ll also learn whether BT’s £11bn pension deficit has got any bigger, and whether the group’s net debt of £8.9bn has started to shrink.

The wrong time to buy

At first glance, BT’s forecast P/E of 11 and prospective yield of 4.9% may seem cheap. But the weakness reported for Q4 may persist this year. I think there’s a good chance of more bad news on profits at some point this year.

I also expect BT to abandon its commitment to maintain 10% annual dividend growth and, in my view, a dividend cut is quite likely. Until the group’s highly-rated new chairman Jan du Plessis takes charge in November, I plan to remain on the sidelines.

The post This Neil Woodford small cap might be a better buy than BT Group plc appeared first on The Twelfth Magpie.

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Roland Head has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

CityFibre’s turnover increased by 147% versus the same period of last year. Alongside a stable gross margin of 86% this caused the company’s EBITDA (earnings before interest, tax, depreciation and amortisation) to move from a £1.8m loss in the first six months of last year to a £0.4m profit this time round.

New contracts with an initial value of £53.8m were added in the first part of the current year. This is a major improvement on the £23.2m for the full 2015 financial year, as well as being 6.6 times more than the comparable figure of £8.1m from last year. CityFibre’s £90m acquisition of KCOM’s 2,200km national duct and fibre assets could prove to be transformational and deliver further rises in profitability over the medium-to-long term.

CityFibre has also announced the acquisition of 137km of fibre network assets from Redcentric for £5m today. This is backed by a £4.5m revenue commitment under a 10-year leaseback agreement. The deal adds 188 customer connections to the CityFibre estate and could positively catalyse the company’s earnings in future.

Clearly, it’s a rapidly growing business but is yet to deliver a black bottom line. It’s forecast to remain in the red in the current year and the next one. Despite this, it has significant long-term growth potential and could be worth buying for less risk-averse investors.

Great potential

However, with the outlook for the UK economy and for the stock market being uncertain, buying a highly profitable company such as BT could be a better idea. BT offers less risk and upbeat potential returns thanks to its strategy of moving into the quad-play (mobile, broadband, landline and pay-TV) market. This could provide strong long-term growth prospects for the company.

Although BT is expected to record a fall in earnings of 11% this year, it’s due to return to positive growth next year. Its bottom line is forecast to rise by 8% in 2016 and with its shares trading on a price-to-earnings (P/E) ratio of 13.1, it offers upside potential. In fact, BT’s price-to-earnings growth (PEG) ratio of 1.6 shows that it offers upbeat growth at a reasonable price.

Certainly, BT’s strategy is an aggressive one. The integration of EE into the business and its investment in sports rights means that it faces additional risk in the short term. However, with a growing customer base and cross-selling opportunities, BT should be able to power into the quad-play space. This could lead to strong growth that makes its risk/reward ratio superior to that of CityFibre at the present time.

The post Is this telecoms stock a better buy than BT Group plc after today’s results? appeared first on The Twelfth Magpie.

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Peter Stephens has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

As a believer of “time in” the market, not “timing” the market, Woodford makes investment decisions based on years rather than months. He may be dubious about banks, oil companies and miners right now, but he does see “pockets of undervaluation” in the market, and is happy to be a buyer in these areas.

So I’m taking a look at three smaller companies whose valuations and prospects Woodford is excited about — and whose shares he’s been recently buying.

Strong market position

Woodford participated in the IPO of Hostelworld (LSE: HSW) at 185p a share last autumn, taking a 14.1% stake in the company. This FTSE SmallCap firm describes itself as “the world’s leading hostel-focused online booking platform”. Woodford is attracted by Hostelworld’s strong market position and growth prospects, as well as strong cash generation, which will see the board distribute an annual dividend of 70%-80% of profits.

Hostelworld’s shares have been rising since the IPO — currently trading at 268p — but Woodford has continued to buy, with his most recently notified purchase on 29 April taking his stake in the company to 21%. He sees the valuation as “attractive”, and I can see why. Forecasts from house broker Numis put this £256m company on a reasonable P/E of 15.5 with an eye-catching dividend yield of 4.9%.

Impressive prospects

Equiniti (LSE: EQN) has a few things in common with Hostelworld: it floated last autumn, it’s in the FTSE SmallCap index, and it describes itself as a leader — “in pension and loan administration, share registration and investment services”. Woodford bought in a placing at the end of last month (which, like the IPO, was priced at 165p a share), and currently has a 5.5% stake in the company.

Equiniti is described in today’s update from the Woodford fund as “a business with impressive prospects”. Despite a rise in the share price to 191p, the consensus earnings forecast for the current year puts Equiniti on an undemanding P/E of 12.5 with a dividend yield of 2.5%. According to data provider Digital Look, five brokers covering this £573m company all rate the stock as a buy.

Long-term optimism

Woodford first bought into CityFibre Infrastructure (LSE: CITY) in a placing at 50p a share in December, taking an 11.3% stake in the company. A notification earlier this week shows his stake has now reached 16%. The shares have been trading at near 60p in recent days, but this is another company whose valuation Woodford sees as “attractive”.

CityFibre describes itself as “a leading designer, builder, owner, and operator of fibre optic infrastructure in UK towns and cities”. Revenues are growing rapidly, but with the company investing heavily in infrastructure, profits are forecast to be negative for the next few years and, of course, there’s no dividend. CityFibre is valued at £159m in the market, or over 10 times current-year forecast sales, which, on the face of it doesn’t scream “value”, but perhaps Woodford is optimistic on a longer-term view.

The post Should you follow Neil Woodford into Hostelworld Group plc, Equiniti Group plc and CityFibre Infrastructure Holdings plc? appeared first on The Twelfth Magpie.

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G A Chester has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

Still, selectivity may be wise when global economic growth is being downgraded. With this in mind, I’ve been looking at the latest buys reported by ace fund manager Neil Woodford’s equity income fund.

GlaxoSmithKline (LSE: GSK), Purplebricks (LSE: PURP) and CityFibre (LSE: CFHL) are three stocks Woodford has been funnelling cash into.

GlaxoSmithKline

Big pharmaceuticals companies have long been core holdings in Woodford’s funds. It is an industry he sees as “fundamentally undervalued”.

The performance of FTSE 100 giant GlaxoSmithKline has been “frustratingly disappointing” for some years, but Woodford maintains that the market is under-appreciating the group’s HIV and consumer healthcare businesses, and that the sum of the parts is significantly greater than the whole.

As such, the fund has further increased its stake in Glaxo “at attractive valuation levels”. The company is expected to return to growth this year, and trades on 16 times forecast earnings with a running yield of 5.9%. I can see why Woodford has been keen to snap up more shares in this defensive blue-chip heavyweight.

Purplebricks

Companies with exposure to the UK housing market have seen a strong recovery since the financial crisis. However, you won’t find the likes of housebuilders Barratt, Persimmon and Taylor Wimpey, or property portals Rightmove and Zoopla in Woodford’s portfolio. His favoured play on the sector is “hybrid estate agency” Purplebricks.

Woodford had been a major backer of Purplebricks when it was a private company, and upped his stake when it joined the stock market in December. His buying just before Christmas gave him ownership of 29.1% of the company’s shares.

The attraction of the company to Woodford? “Purplebricks already sells more properties than all the main online agents combined and its IPO is the latest step as it seeks to cement its leading position in the UK”.

The placing price of the shares was 100p, but the January market turmoil has seen a fall to 73p, so you can buy today at a good discount to the price Woodford was willing to pay. This fast-growing company is expected to turn a profit for the first time in 2017, and currently trades on 22 times that year’s forecast earnings.

CityFibre Infrastructure

CityFibre is a designer, builder, owner, and operator of fibre optic infrastructure in UK towns and cities. Last month the company raised £80m in a placing to facilitate the £90m acquisition of certain national infrastructure assets of KCOM Group.

Woodford participated in the fundraising at 50p a share, attracted by an acquisition that expands CityFibre’s footprint to 36 cities and major towns, and which “accelerates the company’s growth plans”. Woodford sits just behind another renowned investor — Odey Asset Management — at the head of the shareholder register with an 11.3% stake in the company.

With heavy capital expenditure, CityFibre isn’t expected to make a bottom-line profit for some years. But if Woodford and Odey are right this small-cap company will grow to be worth considerably more than its current £155m valuation at 58.5p.

The post Neil Woodford Pumps Cash Into GlaxoSmithKline plc, Purplebricks Group PLC & CityFibre Infrastructure Holdings PLC appeared first on The Twelfth Magpie.

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• Up 446% in 12 months! What’s next for the Ceres Power share price?
• How much is needed in an ISA to unlock £1,220 of passive income a year?
• Forget meal deals! Here’s how £8 a day could be worth £357,000
• Up 132% and surging, how is this FTSE 250 share STILL so cheap?

G A Chester has no position in any shares mentioned. The Motley Fool UK has recommended GlaxoSmithKline. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.