Could this small growth stock be the next BT Group plc?
BT is the UK's leading telecoms infrastructure company. The group has a huge network of assets built up over many decades, an enormous competitive advantage that is virtually impossible to replicate.
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.
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.
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Overall, even though CityFibre is not profitable today, as a long-term growth stock, the company looks attractive to me.
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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.