Update: As of October 9, 2020, Converge ICT made yet another revision to its IPO price, lowering it to P16.80 per share.
Update: As of October 7, 2020, Converge ICT (FIBER) announced that they are lowering their IPO price to P19 per share.
Converge ICT will make its debut in the Philippine Stock Exchange and will open at a maximum price of P24 pesos per share. This offering will amount to P35 billion pesos.
What is Converge ICT’s business?
Converge ICT is an ISP, Internet Service Provider. Its popular in the northern part of Luzon because of its origin in Pampanga. It’s not yet popular in some parts of the Philippines because they haven’t expanded there yet. Which makes this company a good investment if you’re looking for growth.
Is it really a good investment? Let’s find out.
How Converge ICT makes Money?
Converge provides internet connectivity. Its subscribers pay monthly for internet connection. And the good thing about Converge is that they focus on fixed line / wired connection. A business segment that the two big telco companies ignored.
The low hanging fruit of wired internet connectivity is where Converge shines. Since the two duopoly focused their attention to mobile, Converge has all the market share in this segment. Boasting a 56% market share for new wired internet connection.
Converge is very confident in their market. Because they said that the two duopoly focused their attention to mobile, their old, and outdated infrastructure is still using DSL and copper wires. Converge, having laid out their infrastructure already in fiber, has a huge cost advantage against the duopoly who still have to upgrade from copper to fiber.
Because of the pandemic, Converge saw its revenue increased by 50% because of the number of new subscribers grew during this times. They will use the proceeds of the IPO to expand the network and reach Visayas and Mindanao.
Converge ICT Valuation
Converge’s IPO price is at maximum of 24 / share. There is no final price as of yet, but if we use this price for our quick valuation, with 7.5 billion shares outstanding will result in 180 billion market cap. Just to keep into perspective TEL and Globe has around 250 to 300 billion market cap with operating income of around 44 billion for both. While Converge has 2.7 billion of operating income.
EPS for 2019 if we take into account its share dilution will amount to P0.31 per share. Using our IPO price of 24 per share, it will give us a P/E of 77. Certainly not cheap. And the main reason you would be investing in Converge is if you believe in its growth story. Just like MerryMart IPO.
Risk of Investing in Converge
You can read all about the risks in investing in Converge in its IPO document. But one thing that I think is one of the most important risk is the competition.
When PLDT and Globe do decide to upgrade their infra to fiber, would it be the end for Converge? What if 5G beats wired internet connectivity? I don’t know. Would 5G be just a huge disappointment just like how wireless is a huge disappointment for when there’s little rain, your internet connection would disconnect. Or would 5G be different and would actually beat the stability of wired connection?
And since we don’t know, we should demand a greater margin of safety. But I don’t think there is a margin of safety if I buy at IPO price. I might wait for better opportunities.
Converge ICT have no dividend. They will not distribute any dividends until further notice because all proceeds and cash generated by the business will be used for expansion. Adding to the growth story of Converge.
If you’re a dividend investor, Converge might not be the stock you’re looking for.
Just like the previous IPOs, I don’t think I will invest in Converge (FIBER) just because I couldn’t find any margin of safety for the stock. There are other great risk-reward investments that you can do for now while waiting for Converge to actually get to a decent price level after all the hype about its IPO is gone, like actually under valued stocks or commodities.
For example, you can invest in gold, silver and other commodities because, I think, inflation is coming. Governments are printing money and sooner or later, the effect of all those printing would be inflation. So gold, silver and commodities are good hedges. If you’re asking how you can invest in commodities, you can use platforms like etoro. You can read about my etoro review on the link.