GO internet : Edison - GO internet update 09/10/2016

Go Internet Financing & interim results

Rights issue for accelerated network roll-out

Telecoms

The proposed €4m rights issue, if successful, will be used to re-accelerate the roll-out of GO's high speed network both within its existing regions and beyond, via its new agreement with Enel Open Fibre. While the offer is dilutive to earnings, the share price has been heavily marked down and appears to discount a continued slowing of subscriber growth, rather than the pick-up we expect as the network roll-out gets back on track.

12/14	3.9	1.4	0.5	4.3	11.7	N/A
12/15	5.1	2.0	3.8	3.3	8.3	35.6
12/16e	6.4	2.8	4.2	2.6	5.9	32.6
12/17e	7.7	3.4	4.4	2.2	4.9	31.2

Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments. Historic EPS restated to reflect rights issue.

Year end

Revenue (€m)

EBITDA* (€m)

EPS* (c)

EV/sales (x)

EV/EBITDA (x)

P/E (x)

Rights issue to support faster network expansion

If successful, the funds raised from the rights issue will enable GO to re-accelerate the pace at which it installs its high speed network, which had been managed in recent months in order to conserve liquidity. The introduction of 100Mbps base stations during 2015 was a milestone in the group's strategy to double its network coverage over the next few years and the planned introduction of next generation 'fibre like' 4.5G kit towards the end of this year will represent another significant

step forward for the group. In addition, in July, GO announced a major new initiative to extend its reach into new regions in Italy through its partnership with Enel Open Fibre. Meanwhile it continues to monitor the 'pending' spectrum auctions which could further support its strategy to widen its footprint.

Forecasts assume funding in place

We have updated our forecasts to reflect the slower network roll-out in recent months, as well as incorporating estimates for the Enel agreement. While this results in very little change to our overall medium-term subscriber forecasts, the change in the mix means a downgrade to our FY16 and FY17 EBITDA forecasts of 7% and 12% respectively. The full impact of the rights issue, which is significantly discounted, means a sharper 38% downgrade to our FY17 EPS estimate.

Valuation: Does not reflect growth and opportunities

The fall in the share price following the announcement of the rights issue is consistent with its pricing. Nevertheless, the shares were marked down this year as the company 'treaded water' while its majority shareholder, Gold Holdings (Gold) considered its position. With Gold opting to be diluted, this now removes a controlling majority. Despite management's solid track record to date and sound strategy, the share price now appears to assume very little in terms of the

expansion of the wireless network within its existing regions, or from the opportunity to widen its footprint with Enel. Our updated base case DCF, which excludes the option value associated with the spectrum, or possible participation in the upcoming spectrum auctions, is more than double the current share price.

9 October 2016 Price €1.36
Market cap	€14m
Net debt (€m) as at June 2016	4.8

Shares in issue (post rights)	10.6m
Free float	31%
Code	GO
Primary exchange	AIM Italia
Secondary exchange	NA

Share price performance

%	1m	3m	12m
Abs	(6.5)	7.8	(50.0)
Rel (local)	(4.9)	5.0	(38.0)

52-week high/low

€3.53

€1.30

Business description

GO internet provides fixed broadband internet and telephone services using fourth-generation (4G) wireless technology. The service is currently offered in the Emilia-Romagna and Marche regions of Italy, where GO has an exclusive right of use for 42MHz in the 3.5GHz frequency band known as 4G.

Next event

Rights period closed

17 October 2016

Analysts

Bridie Barrett	[phone]
Anna Bossong	[phone]

tech@ edi son gr ou p.com

Edison pr ofile p age

Go Internet is a research client of Edison Investment Research Limited

Investment summary Forecasts

At the interims, GO reported net debt of €4.8m, with cash of €1.5m. The current funding round, if successful, will leave GO in a position to honour its existing commitments and provide flexibility to accelerate the pace of the wireless network roll-out. Our post money forecasts assume that for the wireless services, capital expenditure and marketing steps up again during 2017 and after a period of 'catch up', subscriber growth gradually accelerates into 2018 reaching a total FY18 subscriber base of 44k. For the new wireline services with Enel Open Fibre (EOF), we assume 1k subscribers are added next year, increasing to 3.3k in FY18. Under this scenario, we forecast net debt of €2.3m post the rights issue, rising to €4.4m by FY18 (including €1.4m in cash).

Valuation and investment case

Assuming the funding can be secured, we believe GO is in a strong position to re-accelerate the deployment of its network both within, and beyond its existing regions. Our base case DCF valuation, which factors in our forecasts to FY18 followed by stable subscriber additions for a further five years (and assumes an 11.5% WACC and a 2% terminal growth rate), returns a

valuation of €3.1 per share, more than double the current share price. Investors should consider the following:

• GO is targeting the 1m homes in the Marche and Emilia-Romagna regions that have chosen to relinquish their fixed line and with 36.4k subscribers as of September 2016, there is considerable headroom for growth. Management plans to double its network coverage in the next few years to 30% of homes and the introduction of the 100Mbps and soon 300Mbps service should further improve its competitive offering.

• Enel's entry to the fibre market in Italy is potentially very disruptive. We view GO's recently- announced agreement with Enel as a relatively low risk route to extending its brand outside its current regions, potentially nationally in Italy. Even a fairly small degree of success nationwide could have a significant impact on GO's overall financial position longer term.

• The pending spectrum auctions offer a further opportunity for GO to expand its footprint beyond its current regions.

• With Gold Holdings, the holding company of the Umbrian industrialist Franco Colaiacovo's family (Giuseppe Colaiacovo is GO's chairman) opting to dilute its 52% position, the post rights shareholder structure where there will be no controlling majority, will be more appropriate for a public company.

  Risks and sensitivities

• GO competes with a number of much larger, well-funded operators. Our forecasts assume, from a lower base, a stable pricing environment and steady progression in subscribers. However, the market is highly competitive and GO needs to react to market trends.

• While we do not consider our subscriber forecasts for the new Enel service to be aggressive (peaking at 200 new subscribers a month), they are fairly speculative. The financial impact could be significantly higher or lower than we assume. However, even if we exclude the Enel deal from our estimates, our DCF of €2.1/share still remains above the current share price.

• Our forecasts assume the rights issue is fully subscribed; however, the final capital structure may differ from our assumption. The board has dropped previous plans to issue a €4m convertible bond, although additional finance would be required should GO wish to participate in the planned spectrum auctions.

  Company description: 4G wireless broadband

  GO internet provides fixed wireless internet and IP telephone services using 4G technology in the Marche and Emilia-Romagna regions of Italy, where GO has acquired licences for the exclusive right of use for 42MHz in the 3.5GHz frequency band (until 2023). It started rolling out its wireless broadband network in 2011 and currently provides coverage for about 500,000 people ie c 15% of the population in these regions and reported 36.4k subscribers at the end of September. It is targeting the approximately 1m homes in its licensed regions that have opted to relinquish their

  fixed-line connections and, consequently, have no fixed broadband service, along with homes in the region that have no DSL access. The company originally installed 7Mbps technology; however, during 2015, it started the installation of 100Mbps base stations and in the near term plans to introduce technology that would see it able to offer 4.5G services (300Mbps); a key part of its strategy to increase coverage (targeting 30% coverage by 2018) and its competitive position. In July, GO also announced an agreement with Enel Open Fibre that will enable it to extend its reach to other regions in Italy. We also believe the company is a strong contender for the forthcoming spectrum awards in Italy, which could enable it to considerably increase its wireless footprint.

  Background to the proposed rights issue

  GO listed on AIM Italia in August 2014, raising €5m from the issue of 1.8m shares at €2.75 per share. In December 2015 it announced plans for a €4m rights issue and a €4m convertible bond. In March 2016, its majority shareholder, Gold, issued a letter of comfort that it would provide pre- payments on its share of this rights issue by September 2016. Gold made one instalment on this funding promise, but in September 2016 it withdrew its commitment to inject a further €1.8m of funds. Having received an irrevocable commitment from a third party to take up Gold's share, as well as from existing shareholders to take up 68% of the rights, GO has now launched the 77 for

  100 rights issue at €0.86 per share (€4m, 4.6m shares in total). The subscription period will remain open until 17 October 2016. Assuming it is fully subscribed, following this rights issue Gold will own 31% of the shares (from 52%), while WN which is jointly owned by CEO/CTO Alessandro Frizzoni, CFO Alessandro Ronchi and COO Flavio Ubaldi will hold 15%.

  Management

  As the team that originally launched Aria, the executive management team brings considerable experience. During their time at Aria, the team members grew the company to 50,000 subscribers within four years, despite the poorer technology available at the time. Management also brings valuable experience with respect to the logistics of building a network and navigating the bureaucracy involved in placing sites with base stations in key areas, as well as other financial and operational experience. Senior management members agreed to a 36-month lock-up on their shares (13 months remain) and a 48-month, non-compete restriction. For further details on the management team, see page 15.

  GO uses 4G (3.5GHz) - WiMAX & LTE technology

  WiMAX and LTE are wireless technology standards that come under the umbrella of 4G services. Typically associated with mobile phone services, the technology can also be used for "last mile" connectivity (the most difficult and expensive to build for wire line services) to provide a fixed broadband service. This requires the installation of a base station on a networking tower (Exhibit 1), connected to a customer's home with customer premises equipment (CPE) or modem (Exhibit 2).

  Exhibit 1: Tower with a GO base station	Exhibit 2: GO internet's indoor CPE
  Source: GO Internet	Source: GO Internet

  Market overview and opportunity Broadband access - Enel's fibre solution

  Broadband penetration in Italy has increased considerably in the last couple of years, but still only ranks 32th in the OECD countries (with 63% internet penetration). According to AGCOM (the Italian regulator), high-speed internet or next-generation access (NGA) networks (ie where download speeds are above 30Mbps) account for around 8.5% of all fixed broadband connections. The government and network operators are under pressure to improve penetration and bandwidth to meet the directives of the EU Digital Agenda for Europe.

  The Italian market is unique in the EU because it has no cable offering and with the current limited coverage of fibre the two main delivery mechanisms for broadband access are ADSL and 4G. However, Italian PM Matteo Renzi has made the development of a nationwide fibre network a priority and with the potentially disruptive entry of Enel into the market, this looks set to change.

• ADSL: Telecom Italia (TI) is the dominant fixed broadband provider, with a 46.6% market share (down 1.2% on March 2015). Of the other licensed operators (OLOs), Wind is the largest (15.4% share), followed by Fastweb (14.8%), Vodafone (13.3%) and Tiscali (3.6%).
• 4G: Three 4G licences for 3.5GHz spectrum have been awarded in each region in Italy. In its two regions, GO faces two main competitors, both with national licences: Linkem is the largest with a 1.7% share of the national fixed broadband market, followed by Aria (which merged with Tiscali last year); the remainder is held by several regional operators including Aolus, air and GO Internet (with a total market share of 4.5%).
• Fibre: Fibre to the home (FTTH) in most markets proves uneconomical for residential users and to date in Italy, fibre coverage is largely restricted to Fibre to the Cabinet (FTTC), targeted at businesses in Milan and Rome. However, during 2015 state controlled power utility Enel (ENEL.SW) offered to use its domestic power network to run fibre all the way to homes and office. 'Enel Open Fibre' has started installing a new generation of smart electricity meters into 33m homes in Italy and has proposed laying fibre at the same time, making deployment more cost effective. Enel will be precluded from marketing its fibre directly to customers, but is partnering with selected third-party service providers on a wholesale basis. We understand that Enel has received a number of tenders from potential partners, with three partnerships announced to date - with Vodafone, Wind and GO Internet.