Could this small growth stock be the next BT Group plc?

As BT Group plc struggles, this small-cap is trying to replicate its success.

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

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. 

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. 

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

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.

More on Investing Articles

Black woman using loudspeaker to be heard
Investing Articles

I was right about the Barclays share price! Here’s what I think happens next

Jon Smith explains why he still feels the Barclays share price is undervalued and flags up why updates on its…

Read more »

Investing Articles

Where I’d start investing £8,000 in April 2024

Writer Ben McPoland highlights two areas of the stock market that he would target if he were to start investing…

Read more »

View of Tower Bridge in Autumn
Investing Articles

Ahead of the ISA deadline, here are 3 FTSE 100 stocks I’d consider

Jon Smith notes down some FTSE 100 stocks in sectors ranging from property to retail that he thinks could offer…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

Why I think Rolls-Royce shares will pay a dividend in 2024

Stephen Wright thinks Rolls-Royce shares are about to pay a dividend again. But he isn’t convinced this is something investors…

Read more »

Investing Articles

1 of the best UK shares to consider buying in April

Higher gold prices and a falling share price have put this FTSE 250 stock on Stephen Wright's list of UK…

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

The market is wrong about this FTSE 250 stock. I’m buying it in April

Stephen Wright thinks investors should look past a 49% decline in earnings per share and consider investing in a FTSE…

Read more »

Black father and two young daughters dancing at home
Investing Articles

1 FTSE 250 stock I own, and 1 I’d love to buy

Our writer explains why she’s eyeing up this FTSE 250 growth phenomenon, and may buy more shares in this property…

Read more »

View of Tower Bridge in Autumn
Investing Articles

The FTSE 100 is closing in on 8,000 points! Here’s what I’m buying before it’s too late!

As the FTSE 100 keeps gaining momentum, this Fool is on the lookout for bargains. Here's one stock he'd willingly…

Read more »