MORAM - Unidata investment thesis

Moram - Sunday 11th June 2023

Hi there,

This week we are sharing two publications, a thesis on an Italian small cap that is growing a lot and we consider has a lot of potential and an analysis of Jadestone's situation after this week's proposed finance.

Unidata: an Italian telecommunication company whose principal service is providing broadband connectivity in Italy (lagging in deploying high-speed broadband connectivity to European peers and full of opportunity). Growing double digit and with presence in high-growing industries such as Cloud or IoT. Recurrent nature of the revenues, great margins of all the segments of the group, set several JV to expand itself, management owning 60% of its shares…

Best,

Moram team

(If you have any questions, feel free to reach out on info@moram.eu)

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Unidata Investment thesis

Unidata - Investment thesis in a nutshell

We go back to Italy to discover another small cap opportunity growing at a high pace in a high-growing sector with significant tailwinds trading at good prices. Unidata is an Italian telecommunication company whose principal service is providing broadband connectivity to residents, businesses and public sector administration mainly in Rome and the surrounding Lazio region.

Compared to the rest of big European countries, Italy was (and still is) lagging in deploying high-speed broadband connectivity. With this scenario, Unidata has profited from this opportunity and has been one of the first-movers, building a proprietary infrastructure of more than 5,700 kilometres of fibre optic. 

Apart from providing connectivity, Unidata competes in high-growing industries such as Cloud or IoT. We highlight the recurrent nature of the revenues and the great margins of all the segments of the group. Thanks to an aligned management holding more than 60% of shares, they are exploiting rising opportunities with an aggressive capital allocation, through Joint Ventures but also with an acquisition that will double Unidata’s top-line. This week, they have been included in the STAR segment, which will improve the liquidity and recognition of a company with low trading volume.

After 2019, the top-line growth has been an impressive 56% CAGR. This growth is partially explained by the measures to Covid to improve the broadband connection of the country that the Italian government and the EU have taken, accompanied by a growth in the quality demands of the customers. 

But there is another part of this growth that we believe that can be maintained for the next years that is explained by the aggressiveness in the strategy. Since 2019, Unidata has gone public, has made an acquisition of 58 million, which is more than doubling the revenues it had in 2022, has opened new headquarters in Bari, has started several business lines and is undertaking three joint ventures with well recognized partners with investments that go up to €100 million.

With a market cap below €125 million, Unidata is trading at a significant discount compared to the traded peers. Our play in Unidata is for the long term. During these years they will continue to build the fibre network which is expensive to build and significantly decreases the margins, but once it is finished, the operating leverage will play by their side, being the operator it is easy to make even better margins while gaining scale. 

Through the following pages, we analyse Unidata going through its history and business model, discussing the TWT acquisition with some comments about the management. We will see one by one the undertaken joint ventures as well as the markets where Unidata competes with a positioning relative to competitors. We will finish with a detailed PL model to get to a fair value of the stock and some conclusions of our thoughts of this company.  

Short History and Business Model

Although Unidata has a long history (around 38 years in business), it has not been until recent years when the company has accelerated their operations, being the last two years very active on the development of new projects and undertaking also a transformative acquisition.

Unidata was founded in Rome in 1985 by three of the current main shareholders (Renato Brunetti, Marcello Vispi and Claudio Bianchi) with the initial objective of designing and manufacturing computers and servers. The company keeped with these activities for 14 years, when given the initial uprising of the internet, they changed to become an Internet Service Provider (ISP) in 1994.

Unidata was sold to a British group in 1999 and was acquired back in 2002, when it began building the proprietary fibre optic infrastructure and the Data Centre. At this point, Unidata was both an ISP and a telecommunications operator. In 2017, they expanded their business to IoT and Cloud. And signed an ambitious  partnership agreement with OPen Fiber, a leading telecommunications operator for the development of fibre optic infrastructure.

In March 2020, Unidata launched their IPO, raising €5.7 million. In the recent years, the company has pushed hard to be one of the first movers in FTTH (Fibre To The Home), developing an extensive infrastructure in grey areas (markets with only one operator and where it is unlikely that another network will be installed. In Italy is common the governmental support to develop these areas), and launching a series of ambitious Joint Ventures.

Earlier this year Unidata bought TWT for €58 million, a telecom company that will enhance the recurrent nature of the revenues, the cash generation and that will expand the business from the Lazio region also to Northern Italy and will position the group with a more diversified customer base. To finance all these growth opportunities, Unidata raised over 15 million earlier this year at a share price of €42, (current valuation €40/share)

With a fibre-optic network of more than 5,700 km which is constantly expanding, and for which Unidata has already spent €60 million since 2018, a wireless network and a proprietary data centre, Unidata supplies very high-speed connectivity services using FTTH (Fibre to the Home) network architecture. Among other solutions, Unidata also offers VoIP, data centre and cloud services. 

This fibre infrastructure has been built in the Lazio region (Rome’s region) reaching in 2022, 290,000 housing units. To give an advance of the expected growth of the company, they expected to hit 500,000 in 2025.

80% of the network used to bring Fibre-to-the-home (FTTH) is proprietary and the rest is used thanks to agreements with wholesale grantors, the so-called IRU agreements, which are a telecommunication lease agreement that can't be annulled where operators purchase the infrastructure right of use. It is usually a very long term contract, in the case of Unidata with a length of around 15 years.

The company divides their revenues in different sources of revenue that, in our opinion, complement themselves placed in difficult to disrupt markets with a bright future.

Fibre & Networking: Unidata brings internet connectivity to final customers mainly thanks to their fibre proprietary FTTH network architecture. The growth in customers has been unstoppable during the last few years. As an example, in 2022, the number of Consumer customers grew by 30%. It currently reached 290,000 residential and business units and with one of their Joint Ventures they are continuing to build infrastructure in grey areas. In this source we group the revenues from internet access through optic fibre, XDSL and wireless, but also the voice trading and the wholesale service. 

Providing internet access is a service with  recurrent revenues, a short payback period and that can be scaled. A critical measure in businesses like this is the churn rate. Unidata has a c.12% churn rate, compared to a typical 14.7% (we have used the source with the lowest figure) in the telecom sector in Italy. However, Intred, the most comparable competitor has a churn rate below 4%.

We analyse each segment of its business model, discuss the TWT acquisition with some comments about the management. We see one by one the undertaken joint ventures as well as the markets where Unidata competes with a positioning relative to competitors. We finish with a detailed PL model to get to a fair value of the stock and some conclusions of our thoughts of this company