Stock Focus. BigAir Group (BGL) Tuesday, 23 June 2015

Transcription

1 Stock Focus BigAir Group (BGL) Tuesday, 23 June $0.85 $1.09 $0.59 Share Price $1.34 Positive Neutral Negative Trading Data Last Price $ month range $ $1.05 Market Cap $116m Free Float $79m (68%) 12 month return (historical) (24.9)% UPDATE ON CONTRACT WINS & ORGANIC GROWTH PIPELINE BigAir Group (BGL) provided an update on recent customer wins and contract renewals/upgrades through 2H15. New contract wins vary across industry (healthcare, student accommodation, wealth management & mining) and product offering (managed data/wifi, hosted voice solutions, high speed internet & cloud), with initial contract values totalling c.$8.5m. The growth in new fixed wireless orders signed in 1H15 and delivered through 2H15, is expected to accelerate revenue growth from +3% in 1H15 (EAP: +8.9% 2H15e & +6% FY15e). BGL s student accommodation pipeline remains solid given greenfield opportunities & extensive site upgrades (EAP FY15e Community Broadband revenues +20%). Network expansion across new regional sites and new wireless technology (enhancing reach and quality) is expected to drive ARPU and cross-sell capabilities going forward. MARKET FOCUS ON ACQUISITION VALUE REALISATION The key focus will be visibility on unlocking earnings & value potential following the Oriel Technologies acquisition. More explicit guidance is expected at the FY15 result. We estimate Oriel will add annualised revenues of c.$20.5m ($10.3m in 2H15) and initially contribute c.$1m EBITDA. Returns supported through realisation of acquisition synergies, scale efficiencies and cross-sell opportunities across business segments. Operating profit margin decline reflects earnings contribution from lower margin Cloud/Managed Services businesses. Our FY15 EBITDA forecast is revised -5% lower to $18.1m after adjusting for the timing of Oriel earnings/synergies, and sit in line with consensus expectations, while FY16/17 EBITDA are revised -1-2% to $22.0m/$25.1m. Our blended valuation is revised to $1.01/share (from $1.15) primarily on lower multiple assumptions given limited visibility on acquisition synergies. M&A HIGH ON THE AGENDA, BUT DELIVERING SHAREHOLDER VALUE THE NUMBER ONE PRIORITY We stay Positive. Solid organic growth reflects BGL s unique and flexible value proposition. Nonetheless, a lack of news flow and transparency around operating performance/acquisitions following a subdued 1H15 result has clearly been a drag on share price performance. For BGL to deliver fully integrated ICT solutions to mid-market corporates at scale, the company will need to leverage its data network capabilities and successfully execute on cross-sell opportunities of unified communications, cloud & managed services products. Earnings Forecasts Yr to June 12A 13A 14A 15E 16E 17E EBITDA ($m) Rep NPAT ($m) Adj NPAT ($m) EPS ( ) EPS Gth (%) PER (x) PEG Ratio (x) DPS ( ) Yield (%) Franking (%) 100% 100% 100% 100% 100% 100% ROE (%) 15% 17% 15% 15% 17% 18% EV/EBITDA (x) Net Debt/EBITDA (x) (0.1) (0.2) Int. Cover (x) 52.6 (231.8) (18.4) (14.7) (17.9) (36.6) Valuation (blended) $1.01 PAGE 1 OF 5

2 EAP CORE DRIVERS 1. Fixed wireless revenue growth: The Fixed Wireless network has historically been the core driver and enabler of earnings for the group. BGL has shifted towards direct enterprise sales which exhibits lower price sensitivity (representing c.40% of total network sales and growing), and is now a market leader for providing redundancy solutions to fibre networks. i. Investment in key senior management personnel, new contract wins and a growing pipeline of market opportunities to deliver Virtual Data Centres, managed services and Voice/UC, complements and underpins the growth opportunity across BGL s core network offering. 2. Community Broadband opportunity: On an annualised run-rate, new adjacent verticals (ex-tertiary accommodation) are expected to contribute c.20% of segment revenues by the end of FY15. i. Tertiary accommodation business services >34k beds. Improving international student occupancy levels and new student accommodation constructions underpin a favourable growth outlook. Medium term ARPU opportunity on newly launched triple play product offering (IPTV/phone/internet). ii. New adjacent verticals: i) Retirement Village WiFi solutions being rolled out into brownfield sites, and ii) Public Wi-Fi as a service (i.e. to shopping centres). 3. Cross-sell of unified communications, cloud & managed services products into existing customer base: BGL provides unified communication, cloud & managed services through the recent acquisitions (Anittel, IIPC, Oriel), aimed at driving greater traffic across the group s established fixed wireless network. The ability to cross sell BGL s fixed wireless services into these newly acquired customer bases and upselling existing fixed wireless customers will be a key earnings driver across a sunk fixed wireless network capex cost. 4. Oriel Technologies acquisition: Oriel s expansive customer base & platform, technical capabilities and mature managed service products provides BGL with an ideal stepping stone to cross-sell services into both customer bases. i. BGL cross-sell into Oriel: We estimate there is an $11-13m revenue opportunity (c.50% of Oriel revenues) for BGL to sell its high speed data network offering into the Oriel customer base. Oriel s legacy customer base provides BGL with an established distribution channel. 5. Strategic acquisitions remain high on the agenda: Management continue looking out for bolt-on opportunities that enhance capabilities across Managed and Cloud Services, along with infrastructure assets complementary in nature to BGL s existing footprint. i. Unlocking synergies: Post-integration, i) driving efficiencies, ii) cross-sell opportunities and iii) transitioning off-net 3 rd party carrier costs to on-net will drive margin expansion across acquisitions over the medium term. EARNINGS & VALUATION Our FY15 EBITDA forecast is revised -5% lower to $18.1m after adjusting for the timing of Oriel earnings/synergies, and sit in line with consensus expectations, while FY16/17 EBITDA are revised -1-2% to $22.0m/$25.1m. Our blended valuation is revised to $1.01/share primarily on lower multiple assumptions given limited visibility on acquisition synergies (13x FY16 EBIT, 15% premium to ex-100 Industrials). EARNINGS REVISIONS Metric Sales ($m) Underlying EBITDA Underlying EPS ( ) DPS ( ) Yr to June Old New % Chg Old New % Chg Old New % Chg Old New % Chg 2015E (3%) (5%) (2%) % 2016E (5%) (1%) (2%) % 2017E (5%) (2%) (3%) (5%) Blended Valuation $1.15 $1.01 (12%) Source: Company data, Evans & Partners Research estimates PAGE 2 OF 5

3 FINANCIAL SUMMARY BigAir Group BGL As at: 23/06/2015 Recommendation: Positive Share Price $0.67 Year end June 2014A 2015E 2016E 2017E INCOME STATEMENT Sales Revenue $m Consolidated EBITDA $m D&A $m Consolidated EBIT $m Net Interest $m Tax Expense $m Associates/Minorities $m Adj NPAT $m NRIs $m (1) Reported NPAT $m Shares on Issue (end period) m EFPOWA m EPS DPS Franking % 100% 100% 100% 100% GROWTH/PROFITABILITY RATIOS Sales Growth % 39.6% 54.9% 26.8% 6.5% EBITDA Growth % 25.2% 19.7% 21.9% 13.8% EBIT Growth % 24.2% 12.0% 25.8% 18.4% EPS Growth % 9.8% 8.6% 29.2% 22.0% EBITDA/Sales % 36.2% 28.0% 26.9% 28.8% EBIT/Sales % 23.5% 17.0% 16.9% 18.7% EBIT Interest Cover x (18.4) (14.7) (17.9) (36.6) Tax Rate % 32.1% 32.0% 31.0% 31.0% ROE % 14.9% 14.8% 16.9% 18.0% ROFE % 18.2% 18.6% 22.9% 26.5% CASH FLOW EBITDA $m Change in Working Capital $m Other $m (2) Gross Operating Cash Flow $m Net Interest Paid $m (1) (1) (1) 0 Tax Paid $m (3) (3) (4) (5) Net Operating Cash Flow $m Maintenance Capex $m (6) (9) (9) (9) Free Cash Flow $m Dividends Paid $m (2) (2) (2) (3) Expansionary Capex $m (1) Acquisitions $m (15) (4) (2) (2) Asset Sales $m Dividends Received $m Shares Issues/Buybacks $m Other $m 0 0 (5) (6) Increase in Net Cash/(Debt) $m (13) GOCF/EBITDA % 94% 103% 104% 101% Total Capex/Sales % 17.0% 13.8% 11.0% 10.4% Total Capex/Depreciation x (1.3) (1.3) (1.1) (1.0) Source: Company data, E&P Research estimates Year end June 2014A 2015E 2016E 2017E VALUATION METRICS PER x P/EG (2YR) x Dividend Yield % 1.7% 1.8% 2.4% 2.9% EV/EBITDA x EV/EBIT x P/FCF x P/BV x BALANCE SHEET Assets Cash $m Working Capital $m PP&E $m Intangibles $m Investments $m Other $m Total Assets $m Liabilities Debt $m Working Capital $m Other $m Total Liabilities $m Equity $m Capital Employed $m Net Debt/(Cash) $m Net Debt/Equity % 27% 25% 13% 1% Net Debt/Debt+Equity % 21.4% 20.2% 11.4% 1.1% Net Debt/EBITDA x Working Capital/Sales % (8%) (7%) (7%) (8%) D&A/PP&E % (21.8%) (23.4%) (24.9%) (24.7%) DCF VALUATION $m $/share Risk Free Rate 5.0% Enterprise Value 166 $0.95 Market Risk Premium 6.0% (Net Debt)/Cash (16) ($0.09) Beta 1.20 Franking Credits $0.09 WACC 10.0% DCF Valuation $1.04 DIVISIONAL SUMMARY Fixed Wireless $m Community Broadband $m Cloud & Managed Services $m Group Revenue $m Fixed Wireless $m Community Broadband $m Cloud & Managed Services $m Group EBIT $m Fixed Wireless % 29.0% 27.5% 29.0% 30.5% Community Broadband % 9.4% 8.3% 10.8% 13.3% Cloud & Managed Services % 5.4% 11.9% 11.8% 13.8% Group EBIT/Sales % 18.8% 17.0% 16.9% 18.7% 44% Margin Trends 27% Return Trends 26% Gearing & Interest Cover 0 39% 24% 20% % 21% 14% % 18% 8% % 15% 2% % 12% -4% % 9% -10% -240 EBITDA/Sales EBIT/Sales ROE ROA ROFE - Reported Net Debt/Net Debt+Equity (%) EBIT Interest Cover (x) Source: Company data, E&P Research estimates PAGE 3 OF 5

4 Positive Neutral Negative Speculative Buy Suspended Not Rated Stock is expected to outperform the S&P/ASX 200 over the coming 24 months Stock expected to perform in line with the S&P/ASX 200 over the coming 24 months Stock is expected to underperform the S&P/ASX 200 over the coming 24 months Stock has limited history from which to derive a fundamental investment view or its prospects are highly dependent on event risk, eg. Successful exploration, scientific breakthrough, high commodity prices, regulatory change, etc. Stock is temporarily suspended due to compliance with applicable regulatory and/or Evans & Partners policies in circumstances where Evans & Partners is acting in an advisory capacity. Stock is not included in our investment research universe. Research Criteria Definitions Recommendations are primarily determined with reference to how a stock ranks relative to the S&P/ASX 200 on the following criteria: Valuation Earnings Outlook Earnings Momentum Shareholder Returns Rolling 12 month prospective multiples (composite of Price-to-Earnings Ratio, Dividend Yield and EV/EBITDA), or long-term NPV for resource stocks. Forecast 2 year EPS growth. Percentage change in the current consensus EPS estimate for the stock (rolling 1 year forward basis) over the consensus EPS estimate for the stock 3 months ago. Composite of forecast ROE (rolling 1 year forward basis) and the percentage change in ROE over 2 years. Debt Servicing Capacity Rolling 12 month EBIT Interest Cover ratio. Cyclical Risk Industry Quality Qualitative assessment of the 2 year outlook for a stock/industry s profit cycle. Qualitative assessment of an industry s growth/returns potential and company specific management capability. Financial Transparency If we don t understand it, we won t recommend it. For stocks where Evans & Partners does not generate its own forecasts, Bloomberg consensus data is used. Analysts can introduce other factors when determining their recommendation, with any material factors stated in the written research where appropriate. PAGE 4 OF 5

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