BigAir Group BGL AU / BGL.AX

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1 Vol m Telco - Mobile Australia BigAir Group BGL AU / BGL.AX Nick HARRIS T (61) E nick.harris@morgans.com.au Scott POWER T (61) E scott.power@morgans.com.au BGL Share price info Share price perf. (%) 1M 3M 12M Relative Absolute Major shareholders % held Microequities 7.1 Jason Ashton 6.4 Vorpal Pty Ltd 3.0 Current Another big year After becoming Australia s largest fixed wireless operator BGL s expansion into new and larger markets has only just begun. In the last six months BGL has grown its core business organically and undertaken two sizeable acquisitions. The 2H14 will another busy period with organic growth, system upgrades and acquisition integration the key focus. These will position BGL well for growth in FY15. In the short term BGL looks well valued but we see significant upside potential over the coming years and retain our Add. 1H14 vs expectations BGL reported another good result with headline numbers beating our forecasts and underlying EBITDA on-track. Revenue was up 31% yoy to A$17.8m (vs our A$17.9m forecast). EBITDA was up 35% yoy to A$7.1m (vs our A$7.0m forecast). BGL s gross margin and EBITDA margin dipped in 2H13 but tracked back to healthy levels in 1H14 as acquisition related cost savings and network synergies start to flow. BGL s gross profit margin improved 500bps (on 2H13) to 70% and the EBITDA margin improved 200 bps to an impressive 40%). NPAT was up 53% to A$3.1m and EPS increased 48% to 1.8cps. As expected no interim dividend was declared. BGL s policy is to pay a final dividend only. Adjusted operating cashflow conversation was strong at 146% as BGL showed positive working capital gains. Operating cashflow was reinvested back into the business and BGL took on a small amount of debt to fund acquisitions. A$0.96 Market Cap Avg Daily Turnover Free Float Target A$1.04 US$149.3m US$0.25m 86.7% Prev. Target A$0.86 A$163.8m A$0.28m m shares Up/Downside 8.9% Conviction As at 31 Dec 2013 BGL was conservatively geared with 0.25x EBITDA and 10% Net Debt to Equity. Debt increased to A$14m on the Anitell acquisition and remains less 1x EBITDA. In the absence of further acquisitions we expect BGL to pay down this debt over 12 months. Key points of interest We expect a strong 2H14 as BGL s recent acquisitions start contributing to earnings (vs being costs in 1H14). BGL commented that it is on track for an annualised EBITDA run-rate in excess of A$18m during the second half. We have upgraded our forecast ~5% to include the Anitell Comms acquisition. Investment view The 2H14 is about streamlining systems and process as a platform for growth and FY15 could surprise positively. We expect positive earnings growth to continue and retain our Add recommendation. Price Close Relative to S&P/ASX 200 (RHS) Mar-13 Jun-13 Sep-13 Dec-13 Source: Bloomberg 52-week share price range Current Target Financial Summary Jun-12A Jun-13A Jun-14F Jun-15F Jun-16F Revenue (A$m) Operating EBITDA (A$m) Net Profit (A$m) Normalised EPS (A$) Normalised EPS Growth 85.9% 3.2% 35.2% 31.1% 27.0% FD Normalised P/E (x) DPS (A$) Dividend Yield 1.05% 0.95% 1.33% 1.81% 2.37% EV/EBITDA (x) P/FCFE (x) NA NA Net Gearing (2.8%) (6.0%) 10.0% (2.6%) (17.1%) P/BV (x) ROE 19.6% 17.4% 20.6% 22.4% 24.5% % Change In Normalised EPS Estimates (0.66%) 4.01% 6.03% Normalised EPS/consensus EPS (x) SOURCE: MORGANS, COMPANY REPORTS IMPORTANT DISCLOSURES REGARDING COMPANIES THAT ARE THE SUBJECT OF THIS REPORT AND AN EXPLANATION OF RECOMMENDATIONS CAN BE FOUND AT THE END OF THIS DOCUMENT. MORGANS FINANCIAL LIMITED (A.B.N ) AFSL A PARTICIPANT OF ASX GROUP.

2 Financial summary Profit and loss Jun-12A Jun-13A Jun-14E Jun-15E Jun-16E Valuation details Jun-13A Jun-14E Jun-15E Jun-16E Revenue Share Price $0.95 Market Cap A$164.4m Gross Profit Price Target $1.04 Total Operating Costs Total shareholder return 10.8% WACC 10.5% EBITDA Depreciation Recommendation ADD Amortisation & impairments EBIT Multiple Weighting Valuation Net Interest Income DCF n.a. 50.0% $1.21 Pre-tax Profit P/E 14.0 x 25.0% $0.82 Tax EV/EBITDA 8.0 x 25.0% $0.93 Reported Profit Weight valuation $1.04 Exceptional items Premium / discount (%) 0% Underlying / Cash Profit Price Target $1.04 Gross dividends H14 EBITDA run-rate 18 Key metrics/ multiples Jun-13A Jun-14E Jun-15E Jun-16E IIPC acquistion adds A$1.4m EBITDA FY14 and A$2.5m in FY15 P/E Anitell Comms acq adds A$4.6m rev and A$0.7m EBITDA in FY14 and A$12 / A$1.6m in FY15 PEG Normalised EPS growth 3.2% 35.2% 31.1% 27.0% EV/EBITDA Cash flow statement Jun-12A Jun-13A Jun-14E Jun-15E Jun-16E Yield 1.0% 1.3% 1.8% 2.4% EBITDA Price/ Book Value Net interest Price/ Net Tangible Assets Tax Operating cash flow yield 5.8% 7.6% 10.0% 11.0% Changes in working capital Free cash flow yield 2.9% 4.7% 6.7% 7.5% Operating cash flow Capex Per share data Jun-13A Jun-14E Jun-15E Jun-16E Free Cash Flow Diluted shares on issue Acquisitions and divestments Normalised EPS (A$) Other Investing cash flow Normalised EPS growth 3.2% 35.2% 31.1% 27.0% Investing cash flows Dividends per share (A$) Increase / decrease in Equity Payout ratio 33.2% 33.3% 32.9% 33.0% Increase / decrease in Debt Dividends paid Result quality Jun-13A Jun-14E Jun-15E Jun-16E Other financing cash flows Cash flow conversion 97.9% 98.2% 104.7% 97.6% Financing cash flows FCF vs. NPAT 84.6% 107.6% 87.2% 100.4% Gross dividends vs FCF 0.0% 28.9% 31.4% 28.2% Balance Sheet Jun-12A Jun-13A Jun-14E Jun-15E Jun-16E Assets Gearing Jun-13A Jun-14E Jun-15E Jun-16E Cash And Deposits Net Debt Debtors Net Debt / Equity -6.0% 10.0% -2.6% -17.1% Inventory Net Debt / EBITDA (x) Other current assets EBIT interest cover (x) Total Current Assets Invested Capital Fixed Assets Enterprise Value Investments Intangibles & Goodwill Growth ratios Jun-13A Jun-14E Jun-15E Jun-16E Other non-current assets Revenue 21.3% 49.5% 40.9% 6.5% Total Non-Current Assets Operating costs 10.7% 32.4% 32.4% 2.8% TOTAL ASSETS EBITDA 17.8% 44.6% 23.8% 20.3% Liabilities EBIT 13.1% 54.5% 37.1% 27.4% Short Term Debt NPAT 11.6% 43.1% 33.9% 28.4% Creditors DPS growth -9.0% 39.6% 36.2% 30.6% Other current liabilities Operating cash flow 1.5% 31.2% 31.8% 10.1% Total Current Liabilities Long Term Debt Margin / ratio analysis Jun-13A Jun-14E Jun-15E Jun-16E Other Debt (inc hybrids) EBITDA Margin 6.0% 47.4% 40.4% 31.9% Other Non curren liabilities EBIT margin 24.1% 25.0% 24.3% 29.0% Total Non -Current liabilities NPAT margin 19.5% 18.7% 17.8% 21.4% TOTAL LIABILITIES ROE 13.5% 15.5% 18.5% 20.7% Equity ROIC 22.0% 22.3% 28.5% 37.4% Issued capital ROE less WACC 3.1% 5.1% 8.0% 10.3% Retained earnings ROIC less WACC 11.5% 11.8% 18.0% 27.0% Other reserves and FX Capex / Revenue 17.3% 11.3% 9.2% 9.4% TOTAL EQUITY Capex / Depreciation 143.0% 104.6% 116.3% 120.2% SOURCE: MORGANS, COMPANY REPORTS 2

3 1. FINANCIALS 1.1 Outlook The Board of BGL commented that it is on track for an annualised EBITDA run-rate in excess of A$18m during the second half. We have upgraded our forecast ~5% to include the Anitell Comms acquisition and now forecast A$21m of EBITDA for FY Review of 1H14 BGL delivered an impressive set of 1H14 results with EPS up 48% yoy and 2% ahead of our forecast. As expected, there was no interim dividend, but we expect a 1.3c final dividend. Revenue growth was strong at 31% while underlying EBITDA growth of 35% and the margin expansion hoh were the highlights. BGL also delivered very strong cash flow conversion and took on a small amount of debt to fund the two acquisitions. We see the company as conservatively geared with Gross Debt/EBITDA of <1x (post the January 2014 settlement of Anitell Communications acquisition). Figure 1: 1H14 result snapshot 1H13 2H13 1H14 A 1H14 F 2H14 F 1H14A vs F 1H14A vs 1H13 Morgans commentary Revenue % 31% Revenue grew 31% yoy and acquisitions should drive a stronger 2H Gross profit % 20% Inline with expectations and trending positively on network synergies Gross profit margin 77% 64% 70% 69% 61% Gross profit margin change is acquisition and new initiative related Operating costs % 8% Increased costs are acquisition related EBITDA % 31% Inline with our forecasts EBITDA margin 40% 38% 40% 39% 40% Underlying EBITDA % Underlying EBITDA slightly below our forecast but commentary suggests BGL is ontrack for the FY14 underlying EBITDA run-rate to exceed A$18m (vs Morgans 35% reported forecast of A$17m) Underlying EBITDA margin 41% 40% 42% 45% 0% EBIT % 44% Higher EBITDA and lower D&A NPAT % 53% Slightly ahead of our forecasts and up strongly yoy EPS % BGL has now cycled through higher shares on issue so the NPAT is flowing through 48% to strong EPS accretion DPS n.m. n.m. BGL typically pays a 2H dividend only Revenue split Fixed wireless Immaterial revenue growth short term but cost out expanded margins and capex/rev 1% ratio continue to trend lower Community BB BGL noted an impressive 12% ARPU expansion which should drive strong 2H 4% revenue growth. Furthermore a lower AUD increase international students/ beds. Unified comms n.m. This is a new segment which should grow strongly over time PBT splits Fixed wireless % Good margin expansion as acquisition integration delivers benefits Community BB New community broadband (WiFi) models were developed and commercials in Dec 13 which likely impacted margins short term but will yield positive results in the -2% medium term as new models (Corporate, Retirement and Council) grow the pie. Unified comms n.m. PBT margins Fixed wireless 38% 50% Strong margin expansion as acquisition synergies are realised Community BB 61% 57% Small amount of margin pressure as costs for new projects impacted 1H14 Unified comms n.m. 37% New division of BGL so no historic comparisons are available SOURCES: MORGANS, COMPANY REPORTS 3

4 1. DIVSIONS 1.1 Community Broadband Community broadband revenue grew at a 4% yoy while and PBT declined slightly on new project costs (which will be recouped in 2H). Average Revenue Per User expanded over the period and this combined with location and student number (beds) increases should see strong revenue and PBT growth in the 2H14. BGL s infrastructure now covers in excess of 32k beds in 160 locations. They have, in our view, a dominate position in this market and after years of perfecting this offering have expanded the range from internet only to triple play (internet, voice and movies).the first triple play offering should go live in Q3FY14. This should increase revenue per user and initial case studies have shown a tripling of revenue is possible. Given this is a relatively small niche BGL have opted to take these products and skills into Corporate WiFi (e.g shopping centres), Retirement living, and Council WiFi which over time should become much larger markets. 1.2 Fixed wireless Fixed wireless revenue grew just 1% yoy but PBT growth was impressive at 35% yoy and margins expanded from 38% to 50%. This was a strong result and proves that value can be created through M&A. This value largely represents network and admin synergies (cost out) from acquisitions in addition to revenue upside. BGL has Australia s largest business grade fixed wireless data network which can provide services of up 1 Gbps across most CBD and some regional locations. 1.3 Unified Comms After acquiring IIPC BGL expanded its offering to include unified communications. With consolidation of the fixed wireless market now largely complete BGL has moved its focus to ancillary services including Cloud, Managed Service and Unified Communications. This substantially increases the size of the market in which BGL operates. The PBT margin on Unified Comms is 37% and should continue to improve with scale. We see this division as the key to BGL s expansion outside of its core business niches of fixed wireless and Community Broadband and into a much larger market. Figure 2: BGL s product and geographic evolution SOURCES: COMPANY DATA 4

5 1.4 Operating costs Operating cost increases in the 1H largely relate to acquisitions and their associated costs. Over the last few years BGL has grown in scale materially and is now in the process of adding an executive management layer and undertaking system and process improvements. These system upgrades will help lower costs over time and also create a platform for acquisitions and organic growth as BGL looks to upsell more value add services (on-top of pure data services). 2. FORECAST, RECOMMENDATION AND TARGET PRICE CHANGES 2.1 What s changed In our BGL results preview note (3 February 2014) we applied a 10% premium to our valuation to compensate for the fact that we had not yet included the Anitell acquisition in our forecasts, due to limited details. When BGL released its 1H14 result presentation further details were provided and we have taken this opportunity to include Anitell in our forecasts and remove the 10% premium. After adding Anitell to our forecasts our FY14 EPS forecasts has increased 1% and our FY15 EPS increased by 6%. We have lowered our WACC from 11.5% to 10.5% (versus telco peers at 10%). Following these changes our valuation and price target have increased from A$0.86 to A$1.04 and we retain our Add recommendation. We see 2H14 as a period of internal business solidification and expect that FY15 could surprise positively from an earnings perspective. Figure 3: Changes to our forecasts 2014F 2014F % 2015F 2015F % 2016F 2016F % old revised change old revised change old revised change Revenue % % % EBITDA % % % EBIT % % % Cash NPAT % % % EPS % % % CASH EPS % % % DPS % % % PE $0.64 $ % DCF $1.02 $ % Wacc was 11.5% now 10.5% EV/EBITDA $0.67 $ % Weighted valuation $0.78 $ % Was 50/50 DCF/PE now 50% DCF, 25% PE, 25% EV Premium / (discount) 10% 0% n.m. We have removed our 10% premium after including Price target $0.86 $ % the acquisition of Anittel Comms SOURCES: MORGANS, COMPANY REPORTS 5

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