Fibre optic infrastructure operator CityFibre(LSE: CITY) has released an upbeat set of interim results. But do they mean now is a good time to buy it and is it a superior buy to telecoms peer BT(LSE: BT-A)?
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.
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.
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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.