Double-Digit Earnings Growth For Amcom

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 – Amcom offers solid earnings growth outlook
 – An enhanced cloud offering one earnings driver
 – High margins and low customer churn additional positives
 – Macquarie initiates with an Outperform rating

By Chris Shaw

Amcom Telecommunications ((AMM)) provides fibre-based services to government, large corporate and wholesale customers via 2,200km of higher speed fibre-optic networks in Perth, Adelaide, Darwin and Alice Springs. The company also has the capacity to offer data connectivity nationwide.

Macquarie has initiated coverage on Amcom with an Outperform rating, attracted to the expectation Amcom can deliver double-digit earnings growth over the next few years. This growth should come from new fibre sales and increased demand for cloud services.

One advantage identified by Macquarie is that Amcom faces less competitive markets for its core fibre business, as aside from Telstra ((TLS)) the likes of Pipe Networks are more exposed to markets on the east coast of Australia. Amcom benefits when competing against market leader Telstra by being able to offer more tailored and managed connection solutions.

A further advantage is that given significant capex has already been spent on establishing Amcom's fibre network, operations now generate strong levels of cash. With customers signing long-term contracts, revenues are annuity-style in nature.

Given relatively limited customer churn of around 10% annually, Macquarie estimates Amcom generates around $1.6 million annualised per month in new fibre revenues, with around $90 million in recurring revenues secured at the end of FY12 across all annuity product lines.

Given relatively flat costs, margins are attractive, with gross profit margins standing at around 84% on Macquarie's numbers. With the network extending past a number of established buildings, incremental capex for new contract wins is also falling, Macquarie noting capex to connect $1 in fibre revenue has declined from $1 in FY10 to $0.59 in FY12.

This adds support to Macquarie's earnings growth expectations, which in earnings per share (EPS) terms stand at 8.8c in FY13 and 11.1% in FY14. What should help drive this growth is increasing demand for cloud services.

The company's recent L7 acquisition will assist in this regard, as Macquarie notes the deal will allow Amcom to offer bolt-on IT services operations to existing cloud computing offerings, meaning increased cross-selling opportunities. A full year contribution from L7 should boost earnings in FY13 relative to the seven month contribution in FY12.

As well as boosting earnings the expanded cloud offering should deliver more consistent revenues and earnings to Amcom, as Macquarie points out general IT equipment sales can be lumpy but with an associated cloud offering clients can benefit from ongoing refreshment of their IT environment.

Amcom has a strong balance sheet, Macquarie estimating net debt to equity stands at around 7% at present. With around $40 million in bank facilities not maturing until December of 2014 current dividend payout levels should be maintained, proving a solid income component to investor returns. Amcom paid 5c in dividends in FY12 and Macquarie forecasts increases to 6.2c in FY13 and 7.1c in FY14, which implies respective fully franked yields of 5.5% and 6.3%. 

Macquarie has set a price target for Amcom of $1.31, which implies solid upside of around 17% relative to a current share price of less than $1.15. Macquarie's target is in line with the $1.30 price target of RBS Australia, which is the only other broker in the FNArena database to cover Amcom. RBS also rates the stock as a Buy.

In a slightly stronger market shares in Amcom today are down, trading 1c lower at $1.115 as at 12.00pm. This compares to a range over the past year of $0.75 to $1.23. 

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