BigAir A Strong Buy, Says Microequities

This story features BELLEVUE GOLD LIMITED, and other companies. For more info SHARE ANALYSIS: BGL

By Chris Shaw

BigAir ((BGL)) is not a well known name among investors in the Australian share market, but the telecommunications carrier is the owner and operator of Australia’s largest metropolitan fixed WiMax broadband network, offering coverage across Sydney, Melbourne, Brisbane, Adelaide, Perth and the Gold Coast.

The company’s business involves direct sales to other businesses and governments and partnerships with other IT resellers and internet service providers. In the view of micro-cap specialist Microequities, the shares offer very good value at current levels.

What helps is a renewed focus on the company’s fixed wireless business as in FY09 Microequities notes the group closed iBurst, its resale business. While this impacted on revenues it also meant a reduction in operating expenses, the end result being EBITDA (earnings before interest, tax, depreciation and amortisation) rose 203% to $2.1 million for the year. Pre-tax profit for FY09 rose by 703% to $1.3 million while net profit came in at $1 million.

The strong growth in earnings achieved in FY09 vindicated management’s strategy, says Microequities. Another positive is the change in business mix has left BigAir with a sound balance sheet given no debt and with around $2 million in cash.

For FY10 BigAir is concentrating on expanding its network further in Melbourne and Queensland, while also building its newly established presence in the Canberra market. Driving the expansion is customer take-up, which Microequities notes means it is both low risk and offers a quick investment return.

One advantage the researcher sees for BigAir is that the company fully owns its network, meaning it doesn’t need to rely on Telstra’s ((TLS)) copper network. This means BigAir can install business grade broadband services while offering better customer service via offerings such as rapid connection deployment and direct management of technical support, something Microequities sees as helping the group grow in the small to medium-sized business end of the market.

Currently, BigAir generates around 80% of revenues via channel partners and this trend is seen as likely to continue, though there is a small sales force that sells directly into the market. While this sector is competitive, Microequities sees the extensive network footprint as a comparative advantage, especially as BigAir continues to grow the scope of its network in markets where demand for such services is also growing strongly.

With the current network operating with significant excess capacity, Microequities suggests profit margins should improve as additional customers are signed up, as no additional equipment is needed to expand the customer base to twice its current size.

Operating as a “last mile†carrier, BigAir has an average gross margin of 75-80% and in the view of Microequities this is sustainable, especially given the reduction in operating expenses achieved by closing iBurst.

The National Broadband Network (NBN) is obviously a risk for all companies in the telecommunications industry, but the uncertainty of the structure and impact of the NBN as it develops in coming years means it is difficult to predict exactly what impact it will have on industry players.

Regardless, Microequities expects solid growth in the broadband sector in coming years, though the rate of growth may slow slightly from the levels seen more recently. What will also impact on earnings for BigAir in its view, is the state of the economy overall, as will price competition in the industry and how this translates with respect to revenue growth rates.

On Microequities’ numbers, BigAir should deliver net profit of $1.2 million in FY10 and $2.0 million in FY11, which equates to earnings per share (EPS) of 1.3c and 2.3c respectively. This implies the stock is trading on an earnings multiple of 8.2x in FY10 and just 4.7 times in FY11. Microequities’ average valuation is $0.21.

With a market capitalisation of only around $10 million, BigAir receives little coverage in the Australian market, as evidenced by the fact none of the brokers in the FNArena database research the company.

Shares in BigAir today are slightly weaker and as at 1.10pm the stock was down 0.5c at 11c, in an overall weaker market. This compares to a range over the past year of 4.1c to 18c.

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