Micro Cap Rising Stars – BigAir

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

This story was originally published on July 08, 2010. It has now been re-published to make it available to non-paying members at FNArena and readers elsewhere.

Microequities is an Australian financial adviser specialising in in-depth research of listed "micro caps" – those companies of low capitalisation too small to register on ASX indices or to attract research coverage from leading stockbrokers. In June Microequities hosted its Rising Stars conference, at which selected companies presented their stories. FNArena was invited to attend, and over a period of time will provide conference highlights. This is the second in the series.

It is important to note that Microequities invites selected companies to present at the conference. Companies do not simply pay Microequities for the opportunity.

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By Greg Peel

A few years ago I knew I was going to be moving house and this led to a decision to stop worrying about a fixed line internet connection and go with the new microwave service instead. The idea of being able to just set up my computer wherever I wanted with a guaranteed connection through my wireless modem seemed appealing to someone whose understanding of such technology could fit on a postage stamp.

So it was I dumped Optus and went with Unwired as my ISP. Despite the flexibility afforded by a wireless connection, I soon realised it was a big mistake. I was constantly pointing the modem in different directions to find a signal, my data speed was always much slower than the service had claimed, and drop-outs were commonplace. For an e-zine journalist it was not good enough, and I heard similar bad reports from friends. I soon returned to cable.

Unwired began to falter and was snapped up by new technology player BigAir ((BGL)). Big Air listed on the stock exchange in 2006 with plans to take on the big boys with its microwave internet and mobile phone services. Then along came Telstra ((TLS)) 3G. In the words of the company's co-CEO Jason Ashton, 3G slaughtered BigAir's retail services.

In retrospect, Ashton pointed out, the microwave technology was too new, too raw, and too underdeveloped at that stage. Realistically it was not yet viable. This explained my pioneering Unwired problems. Today, however, the technology is much better developed and far more sophisticated, providing faster download speeds through increasingly cheaper infrastructure, says Ashton. Now it is viable.

What is not, however, reliably viable is trying to play games with the big boys in the whole retail telecommunications space, with mobile now looking at 4G and with Telstra now on board for the big copper-fibre replacement ahead to create the National Broadband Network. In itself, the NBN and its intended FTTP (fibre-to-the-premises) rollout does provide other, far more viable opportunities. These lie in the business and wholesale markets.

BigAir has now finally extricated itself from its iBurst, as it was called, retail business. While iBurst contributed $1.5m in revenues and $0.5m in gross profit in FY09, it was costly to maintain. Without it, BigAir is expecting to deliver higher revenue and gross profit numbers in FY10 than in total in FY09 from the remaining business. The remaining business revolves around the establishment of CBD infrastructure to deliver high-speed wireless broadband within a city range.

The obvious thought here is why would CBD businesses be interested in paying for microwave technology when the rapid speed of fibre will soon be delivered by the NBN and while some fibre cables have already been laid?

The answer comes in three parts: speed of set-up, risk diversification and temporary installation.

In regard to the first part, for most an FTTP connection is still a long way off. Even concepts of a short way off mean streets being dug up and cable being laid, whether freshly or in replacement of copper. In the meantime, with its established network of microwave transmitters and receivers atop city buildings, and the simple process with which BigAir can either link in a new customer either using its existing network or by erecting a new dish where appropriate, BigAir can have city businesses operating on a dedicated high-speed broadband network in a matter of hours.

BigAir owns and operates the infrastructure end to end. There is no being held hostage by having to lease space on someone else's copper or fibre network. As for the actual internet service provision side of things, BigAir is now a wholesaler for 80% of its business. In this way it can let other ISP's worry about spending money on sales and marketing teams and by so doing keep the cost of the infrastructure, and the connection, highly competitive.

So that's the first part of the answer – businesses within a CBD can be set up with high speed microwave broadband in no time at all. Right now.

That's all well and good, but the next obvious thought is that while a microwave connection might suit in the interim, what happens when a business eventually has access to an FFTP network? Doesn't Big Air then risk being told thanks but see you later?

The answer here lies in one of risk diversification. Given Telstra had already begun replacing some of its copper with fibre in areas close to major exchanges before agreeing to join the NBN, some city businesses already have a much faster connection. But that has not stopped them also becoming BigAir customers and establishing complimentary microwave connections.

Sydneysiders will have not forgotten several episodes in the past couple of years which have caused the NSW State government much heartache. Those episodes have mostly involved some idiot with a back-hoe and a city map published in 1950 indiscriminately digging up city streets to service electricity/gas/phone lines and plunging entire sections of the CBD into darkness and/or cutting off phone lines and internet connections through severing a cable that wasn't meant to be there. Such indiscretions have then taken several hours to rectify, and for that time many businesses have been simply cut off from the outside world. It can amount to millions of prospective dollars being lost.

While one does not expect an idiot to be out there with a back-hoe every day, such episodes do serve to highlight a business's vital reliance in this day and age on its internet connection. Back-hoes are not the only potential cause of accidental disconnection (albeit one shudders to contemplate what the actual FFTP rollout period might bring), and it makes perfect business sense to have a back-up system just as a building might have a back-up generator for when the electricity is cut off.

A microwave connection can provide such a back-up, operating, as it does, in the vacant airspace above the skyscrapers. Recognising that some clients were opting for a Big Air connection as a compliment to another service, rather than just relying solely on BigAir for the internet, the company has since been aggressively targeting this growing market through its Back-up and Disaster Recovery services.

So that's the second answer. The third answer is one that may not immediately leap to mind.

One day a major listed construction company decided it needed to solve a problem. On every building site, the company would first establish a site office. While once upon a time such site offices might have contained little more than a table upon which to spread out blueprints and a kettle to make the tea, in this day and age site offices are sophisticated “offices away from the office” with computers a default requirement. And with a computer comes the need for an internet connection.

But a site office will only be in place for a finite amount of time until project completion. The actual structure might even have to be shifted about a bit on the site as construction rolls on. Clearly a fixed line broadband connection is neither practical in such a circumstance, nor cost effective. But it's little trouble and not particularly costly for Big Air to give the site a temporary dish and point it at an appropriate microwave transmitter.

And so was born another segment of Big Air's business – the temporary fast broadband connection. And it's not just limited to the construction industry. In recent times Big Air has provided temporary connections for the Sydney Fashion Week, the Australian Open Golf, and for the ambulance service at the Melbourne Cup, just to name a few.

Big Air spent FY07 losing money before it begun to wind down its original retail mobile services. Once those were on the way out the earnings graph turned positive. A comparison of the first half FY10 accounts to the first half FY09 accounts shows revenue up 40% to $3.3m, EBITDA up 68% to $1.45m and after tax profit up 122% to $625,000.

BigAir began establishing its rooftop infrastructure in the CBDs of NSW and three years ago was still NSW-bound. Rapid expansion into Victorian and South-East Queensland CBDs and Perth have since meant non-NSW revenues now exceed NSW revenues with more upside to come. The more than $1m required in capital investment has been fully funded from internal cashflows. BigAir has no debt on its balance sheet and as at June was holding $2.1m in cash.

The company is now the largest infrastructure-based Fixed Wireless business in Australia. On a half-year basis, the company's current revenue run-rate is $6.7m. Big Air estimates the addressable market size in the country is something like $1bn, so there's plenty of scope for upside. CEO Jason Ashton suggested BigAir's service is “quite” unique. Yes – bad English from a journalist's point of view but his point is that BigAir does have competitors in the space – maybe six – but they are not quite the same and they are not up to speed compared with BigAir.

Nevertheless, it is BigAir's desire to consolidate its position as the dominant player. It intends to take out its competitors.

In the past year BigAir has acquired six additional microwave base stations in Sydney, Melbourne and Brisbane, retained new wholesale channel partners and acquired additional resources and skills in the high-end licensed microwave market. The company has also appointed a new National Sales Manager with a solid 20-year track record in telecommunications.

The company has 88.5m listed shares outstanding which at 16.5cps suggest a market cap of $14.6m. At the time of writing the shares are trading at 17.5c. They were offered at 25c in 2006 and aside from its retail woes BigAir did not avoid an inevitable clobbering in the GFC, seeing its shares trade at under 5c at their nadir in early 2009.

For those with an interest in telecommunication investment, BigAir offers an opportunity outside the realm of the usual suspects, NBN rollout issues and fights over infrastructure leasing and pricing. Indeed, it offers a complimentary or diversified investment.

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