Moelis Continues To See Value In BigAir

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 – Solid earnings growth outlook for BigAir
 – Niche markets offer potential
 – Valuation attractive according to Moelis
 – Broker reiterates a Buy rating

By Chris Shaw

Junior telecommunications player BigAir Group ((BGL)) provides high speed fixed wireless broadband in metropolitan areas, while also offering specialist student accommodation wireless services.

Moelis notes much of BigAir's growth in recent years has been in the business division, where revenue has grown from $4.6 million in FY09 to $18.5 million in FY12. Growth has been both organic and via acquisitions.

The growth has seen BigAir expand the coverage footprint of its microwave services, which now cover Australia's seven largest cities. Management is now looking to further roll-out the service to regional areas, where BigAir would compete primarily against Telstra ((TLS)).

The community broadband division is now a leading provider of wireless services to tertiary student accommodation facilities. Moelis points out BigAir now services more than 120 locations housing in excess of 27,000 students. 

Moelis expects this sector of the market is likely to remain small in relation to the total high speed data market. At the same time, the wireless service market offers significant growth potential for BigAir, supporting the expectation of double digit revenue and earnings growth in coming years.

One risk for BigAir going forward in the view of Moelis is the ongoing roll-out of fibre services in office buildings in major metropolitan markets by others in the industry. An offset to this is that microwave offers attractive technology for mitigating risk, something Moelis suggests could drive take-up of BigAir's services. Companies acquire microwave connections as a back-up to street-laid cable.

In earnings per share (EPS) terms Moelis expects BigAir will achieve results of 4.4c this year and 5.4c in FY14. This implies a FY13 earnings multiple of just over 11 times, which Moelis suggests is a 12% discount to the Small Industrials sector.

Investors in BigAir should enjoy reasonable income returns, as Moelis's forecasts suggest the stock should yield 3.1% in FY13, rising to 4.1% in FY14. Dividends are expected to be fully franked from FY13.

Given the forecast earnings multiple is not overly demanding, Moelis retains a Buy rating on BigAir. Supporting the positive view is the expectation of further industry consolidation in the telecommunications sector, with BigAir a potential target given the combination of value and growth on offer.

In contrast to Moelis, RBS Australia rates BigAir as Hold, having downgraded from a Buy rating post the group's profit result last month. The downgrade was a valuation call, as while RBS sees a bright outlook the stock has rallied solidly over the the past year, implying less upside share price potential. 

A market capitalisation of just over $80 million means BigAir receives little broker coverage. RBS is the only broker in the FNArena database to provide research on the stock.

RBS has a target on BigAir of $0.49 based on EPS forecasts of 4.4c for FY13 and 4.9c for FY14, while Moelis has set its target for the stock at $0.60. BigAir shares are currently trading down slightly in a weaker market, the stock 0.5c lower at $0.49 as at 10.55am. Over the past year BigAir has traded in a range of $0.25 to $0.495. 

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