5G Rollout And Heavy Capex Will Pressure Margins Yet Ultimately Strengthen Long-Term Position

Catalysts

About Brisanet Participações

Brisanet Participações provides fixed broadband and mobile connectivity, with a dense fiber and 5G network focused on Brazil's Northeast and expanding into the Midwest.

What are the underlying business or industry changes driving this perspective?

• Although the company has built a modern standalone 5G network with coverage of 14.5 million inhabitants, the slow migration of consumers to 5G devices and the need to educate users that Brisanet is also a mobile operator may delay subscriber scaling and keep mobile revenue from offsetting current 5G driven margin pressure, which may limit earnings growth.
• While Brisanet has millions of homes passed and relatively low incremental costs to add new fixed broadband customers, persistent aggressive pricing from regional ISPs and large operators in core Northeast markets could force discounting and constrain average ticket levels, which may compress revenue growth and net margins.
• Although the company is positioned to benefit from rising data consumption and edge computing demand through its extensive backbone and edge data center footprint, a potentially overcrowded Brazilian data center build out and uncertainty around customer adoption of localized processing may cap B2B monetization and may keep high return expectations from fully materializing in EBITDA.
• Despite the opportunity created by Oi’s bankruptcy and aging fixed telephony infrastructure, complex migrations for government and corporate contracts and intense competition for these accounts could slow Brisanet’s ability to capture this base, which may mute the expected uplift to recurring revenue and delay contribution to net income.
• While the planned expansion into the Midwest via 5G and FWA avoids major backbone investments and targets higher average tickets, execution risks in new geographies, regulatory and licensing complexities, and the need to build local brand awareness could prolong payback periods and may keep leverage and interest expense elevated relative to earnings for longer than projected.

Assumptions

This narrative explores a more pessimistic perspective on Brisanet Participações compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts. How have these above catalysts been quantified?

• The bearish analysts are assuming Brisanet Participações's revenue will grow by 23.7% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 8.5% today to 16.1% in 3 years time.
• The bearish analysts expect earnings to reach R$418.7 million (and earnings per share of R$0.66) by about December 2028, up from R$115.9 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 5.9x on those 2028 earnings, down from 11.8x today. This future PE is lower than the current PE for the BR Telecom industry at 17.4x.
• The bearish analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 16.66%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• Intense and persistent price competition in the Northeast, with many rivals offering broadband plans between BRL 40 and BRL 49 while Brisanet sustains an average ticket of about BRL 88, could force discounting over time and structurally cap revenue growth and net margins.
• The heavy long-term investment in standalone 5G and FWA, including ongoing annual CapEx of around BRL 600 million to BRL 700 million and over BRL 600 million in assets not yet generating revenue, may fail to scale as quickly as planned if device migration to 5G and brand recognition as a mobile operator remain slow, which would pressure earnings and keep leverage elevated.
• The strategy to monetize edge data centers and AI related infrastructure at the local level might be undermined if hyperscale and capital city data centers overbuild capacity or capture most of the value chain, limiting Brisanet’s ability to translate its backbone footprint into meaningful B2B revenue and EBITDA expansion.
• The opportunity from Oi’s bankruptcy and migration of government and corporate fixed telephony and connectivity contracts is attracting multiple competitors and involves complex technical transitions, so Brisanet could win a smaller than expected share of this base, muting the incremental recurring revenue and earnings uplift embedded in the long-term story.
• Expansion into new geographies such as the Midwest using 5G and FWA, even with outsourced backbone, exposes the company to execution risk, regulatory complexity and slower than anticipated customer acquisition, which could lengthen payback periods, constrain free cash flow and limit improvements in net income and return on invested capital.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The assumed bearish price target for Brisanet Participações is R$3.5, which represents up to two standard deviations below the consensus price target of R$4.46. This valuation is based on what can be assumed as the expectations of Brisanet Participações's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of R$6.0, and the most bearish reporting a price target of just R$3.5.
  
• In order for you to agree with the more bearish analyst cohort, you'd need to believe that by 2028, revenues will be R$2.6 billion, earnings will come to R$418.7 million, and it would be trading on a PE ratio of 5.9x, assuming you use a discount rate of 16.7%.
  
• Given the current share price of R$3.06, the analyst price target of R$3.5 is 12.6% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.