Bifrost And South Asia-Hongkong Cables Will Boost Global Connectivity

Key Takeaways

• Strategic investments in data centers, cable systems, and AI-driven customer service aim to enhance capacity, reduce costs, and drive revenue growth.
  
• Subscriber base expansion through innovative services and network infrastructure investment targets long-term growth in residential and underserved markets.
  
• Capital expenditures and heightened competition could strain financial flexibility, affect profitability, and challenge revenue growth and market share.

Catalysts

Converge Information and Communications Technology Solutions, Inc.

• The activation of two advanced data centers and two international cable systems (Bifrost Cable System and South Asia-Hongkong-Hainan Express Cable System) in 2025 is expected to enhance capacity and service offerings. This expansion supports cloud and enterprise services, potentially driving revenue growth.
  
• Converge aims to continue expanding its subscriber base with goals of reaching 4 million subscribers by 2027, driven by the launch of new service offerings such as Surf2Sawa and BIDAFiber. This growth strategy can bolster residential revenue.
  
• The company's investment in new subsea cable systems is projected to increase capacity at no additional cost, providing an opportunity to sell excess capacity and improve profitability margins.
  
• Enhancements to customer service processes, integrating AI for more efficient operations, can reduce churn and service costs, potentially positively affecting net margins.
  
• Planned capital expenditures (CapEx) on network infrastructure expansion, specifically targeting new geographical areas, are expected to support long-term revenue growth by addressing underserved markets.

Converge Information and Communications Technology Solutions Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Converge Information and Communications Technology Solutions's revenue will grow by 11.1% annually over the next 3 years.
• Analysts assume that profit margins will increase from 26.6% today to 29.9% in 3 years time.
• Analysts expect earnings to reach ₱16.7 billion (and earnings per share of ₱2.21) by about April 2028, up from ₱10.8 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 12.4x on those 2028 earnings, down from 13.0x today. This future PE is lower than the current PE for the PH Telecom industry at 36.0x.
• 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 10.85%, as per the Simply Wall St company report.

Converge Information and Communications Technology Solutions Future Earnings Per Share Growth

Risks

• Significant capital expenditure plans for 2025, including investments in subsea cables and data centers, may strain liquidity and cash flow, impacting overall financial flexibility and potentially affecting net margins.
  
• The increased competition from other telecom companies such as PLDT expanding their port rollouts could affect Converge's ability to maintain its current revenue growth trajectory, impacting market share and revenues.
  
• The heavy reliance on external managed service providers and outsourcing for customer service and installation may increase operating costs, affecting profitability and net margins.
  
• Possible declines in Return on Invested Capital (ROIC) to 16.5% to 17.5% due to the increased capital expenditures could signal less efficient use of capital going forward, impacting earnings.
  
• Potential churn risks associated with the competitive pricing and aggressive expansion of rival services could lead to subscriber losses, thus negatively impacting revenue growth and affecting earnings stability.

Valuation

• The analysts have a consensus price target of ₱20.875 for Converge Information and Communications Technology Solutions based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of ₱23.0, and the most bearish reporting a price target of just ₱17.5.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be ₱55.7 billion, earnings will come to ₱16.7 billion, and it would be trading on a PE ratio of 12.4x, assuming you use a discount rate of 10.8%.
  
• Given the current share price of ₱19.28, the analyst price target of ₱20.88 is 7.6% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• 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.