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Why the BigAir Group Limited share price plunged 22% today

Shares of BigAir Group Limited (ASX: BGL) have fallen sharply this afternoon, losing as much as 22.1% to a low of 60 cents after it released its first-half earnings results for financial year 2016.

Source: Google Finance

Source: Google Finance

At around 11:30am Sydney time today, BigAir Group, which is a wireless and cloud services firm, said that revenue had risen 54% compared to the prior corresponding period to $40.3 million, while its underlying net profit after tax (NPAT) rose 7%. Underlying earnings per share (EPS) rose just 5% to 2.12 cents while EPS from continuing operations were just 1.68 cents per share.

Indeed, that’s a big difference between revenue growth and earnings growth. Cost of sales rose by nearly 93%, indicating it is becoming more expensive for the company to acquire new contracts. Payments to suppliers and employees also outpaced receipts from customers on the cash flow statement, which isn’t a great sign.

BigAir Group said that the revenues and earnings from its two recent acquisitions, being Everywhere Internet and Applaud, would be recognised in the second half. However, the fact that earnings continue to grow at a slower pace than revenues indicates that the benefits from add-on businesses are not being realised as quickly as you would hope for a growth company.

For that reason, combined with the fact there is the threat of competition from the likes of Telstra Corporation Ltd (ASX: TLS) and TPG Telecom Ltd (ASX: TPM) for fixed wireless customers, I’d be inclined to avoid BigAir Group’s shares for now at least. The shares have regained some composure to trade 13% lower at 67 cents at the time of writing.

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Motley Fool contributor Ryan Newman has no position in any stocks mentioned. Unless otherwise noted, the author does not have a position in any stocks mentioned by the author in the comments below. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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