Is this rising star a better buy than BT Group plc?
This year has been hugely challenging for investors in BT(LSE: BT.A). The company has released a profit warning following its issues in Italy, while it has come under fire regarding the deal to partially spin off Openreach. Its shares have fallen in value by nearly 15% and its outlook is somewhat uncertain, since competition within the quad-play sector is showing little sign of slowing. Therefore, could a smaller, faster-growing telecoms stock prove to be a better buy?
Zegona Communications(LSE: ZEG) released upbeat results on Thursday. The European telecoms company, which specialises in buying, fixing and then selling businesses across Europe, reported a rise in revenue of 3%, with cash flow increasing by 9.7%. In its first year of ownership of Telecable, Zegona has enhanced its product offering, while also providing a new, innovative mobile access agreement with Telefonica. This provides 4G services at a much improved cost, while online sales and greater efficiencies have also boosted the business.
Another year of double-digit cash flow growth is forecast in the current year. In terms of profitability, Zegona is expected to move from a red bottom line to a black bottom line in 2017. It is then due to follow this up with earnings growth of 68% next year. This puts its shares on a price-to-earnings growth (PEG) ratio of just 0.5. Compared to BT's forecast rise in earnings of 3%-4% per annum in the next two years and its PEG ratio of 2.5, the smaller telecoms company seems to offer the better value growth opportunity at the present time.
Improving financial performance should help to pay for an 11% rise in dividends, which puts Zegona on a dividend yield of 3.4%. Looking ahead, further dividend growth is expected in 2018. In fact, a rise in shareholder payouts of 50% is anticipated next year, which puts the company on a forward yield of 4.8%.
This compares unfavourably to BT's forward dividend yield of 6%. However, the growth rate of BT's dividend in future years may be somewhat disappointing. It continues to invest heavily in its sports rights, while the integration of EE also poses risks due to its sheer size. In addition, the uncertainty surrounding the company's Italian operations may mean it decides to retain a greater proportion of capital rather than paying it out to shareholders.
While Zegona is a relatively small and risky stock to buy, its outlook and valuation indicate that it offers significant upside potential. A rapidly rising dividend could also cause investor sentiment to improve, which could make it a sound income, value and growth proposition. By contrast, BT's future holds significant uncertainty. It may have a high forward dividend yield, but its valuation seems excessive given its disappointing growth outlook. As such, Zegona seems to be the more attractive investment 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. 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.