Thus looks like it is well on the way to recovery. That doesn't mean it's a good investment though.
What's great for you as a consumer, can be terrible for you as an investor. The telecoms sector illustrates this beautifully.
During the dot.com boom, investors poured a huge amount of money into telecoms firms. Much of this money went into laying fibre-optic cable. This has resulted in plummeting prices for phone calls and data transmission. Consumers have benefited.
As a result, it has been very hard for telecommunications companies to make money. Shareholders have suffered.
Thus
(LSE: Thus)
which released its interim results on Monday, is one of the survivors. Almost six years after the crash, Thus might not be in the rudest health, but at least it's out of intensive care and on the way to recovery.
Thus says it made a profit for the first time in this half-year. It's not what I would consider a 'real' profit though because it was achieved through selling parts of its business, in particular Demon Netherlands, an Internet service provider. Excluding this sale, Thus lost £ 5.5 million, down from £ 7.1 million in the same period last year.
The sale of Demon Netherlands, however, contains a piece of very good news. The buyer paid £42.7 million or 21 times EBITDA. This is an excellent price for Thus and shows that some telecoms properties are starting again to command premium prices. Recently the Telegraph reported that Thus was also seeking to sell Demon UK. Given the price paid for the Dutch subsidiary, this is probably a good idea.
Because Thus is making a loss, some of the usual metrics, such as the price-earnings ratio, don't work to value the company. To get a handle on Thus, we need to use something else.
EBITDA was much maligned when telecoms companies started to abuse the measure a few years ago. None the less, I'll use it here.
Doing a bit of maths, I worked out that Thus's EBITDA for the full year ended 30th September was £31.1 million. Net debt on 30th September was £3.5 million. The market capitalisation is currently around £299 million. Enterprise value is therefore is £302.6 million. This makes EV/EBITDA for Thus 9.7. This isn't amazingly expensive, but it's not that cheap either.
There is a danger in using EBITDA. EBITDA is earnings before depreciation. Therefore, if the depreciation charge is low for the amount of capital investment that the company is having to make, EBITDA overestimates returns. This might be the case with Thus.
In its interim results Thus reports that it invested £23 million in plant and equipment during the six months while making a depreciation charge of £23.7 million. This suggests that we should probably focus a little more on the fact that Thus is still loss making.
On the positive side, Thus believes it will make an operating profit next year. However, given the less than cheap EV/EBITDA ratio as well as the risks inherent in the business, I can't see myself taking a position at the moment.
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