Trade idea #3: European nanocap telco with sub-€10M market cap
This restructured business trades at only ~3x EV/EBIT and is exploring a divestiture of a foreign subsidiary, the proceeds of which would be nearly equal to the company's current market cap
TalkPool AG is a small Swiss company with a market cap of ~€4 million, specializing in designing, building, and optimizing large communication networks. Since 2022, its revenues have decreased by approximately 40% due to the “Reduce to the MAX” program, which aimed to close or divest unprofitable, low-margin operations.
Reduce to the MAX Program
As detailed in the 2023 Annual Report, TalkPool has exited several markets, including the Netherlands, Tanzania, Belgium, Sweden, and the USA. The proceeds from these sales were used to significantly reduce the company's debt by ~75%. This streamlining has helped improve EBIT margins from ~2% to 10%+, and management expects to sustain a ~10% net income margin moving forward.
The company’s stock has dropped by ~75% since 2021, despite these improvements.
TalkPool screens cheap with a current P/E ratio of ~7x, and EV/EBIT of ~3.5x.
Understanding its valuation requires several adjustments, particularly because the company’s financials have been volatile, due to factors like currency gains or losses, subsidiary sales, and goodwill adjustments. Adjusting for these, the company’s earnings and valuation appear more stable with a normalized P/E ratio of ~5x and EV/EBIT of ~3x.
Capital Allocation
With the restructuring nearing completion, TalkPool plans to focus on capital allocation, including share buybacks, dividend payments, and investments in growth. The CEO, who owns 22% of the company, is aligned with shareholders, and the company’s employee incentive program avoids dilution through the issuance of warrants.
Business Overview
The company operates primarily in three regions:
Germany: Specializes in fixed network planning for fiber and copper technologies with 40 employees.
Switzerland (Haiti): Manages a large mobile and fixed network operation in the Caribbean with around 400 employees.
Pakistan: The largest segment, with nearly 1,000 employees, overseeing various telecom projects.
Despite differing staffing needs, these segments contribute roughly equal revenue. The Pakistani business, being capital-intensive and currently barely profitable, has long been a target for sale. A sale could reduce revenue by 30%, but it would likely not affect profits and could reduce the company's tax burden.
A €3 million bid for the Pakistani segment fell through, as management valued it at €4 million—almost equal to the company’s entire market cap. It appears mgmt is positioning the asset for a better sale price later.
Future Growth
TalkPool saw significant revenue growth from 2014 to 2022, driven by its IOT segment, which has now been closed. With cost-cutting initiatives complete, the company is well-positioned to resume growth, though it will likely be more cautious and focused on high-margin contracts.
Germany has been a standout performer, growing 37% in 2023 and continuing strong in 2024. A major contract with Deutsche Telekom, valued at €17.5 million over five years, represents a major milestone for the company.
U.S. Expansion Plans
In Q2 2024, TalkPool revealed plans to resume operations in the U.S., with discussions already underway with T-Mobile. While this opportunity could be significant, the company is cautious about committing to large deals without thorough preparation.