Small Caps | Mar 11 2013
By Shuo Yang and Carlos Gil of Microequities Asset Management
Investing is about looking ahead, it is about looking at how a business will evolve in the future, but how much into the future should investors be looking into? The answer is that a year ahead is not far enough. Some investors overact to short term earnings and lose sight of the bigger long term picture. They tend to overact and trade profit announcements before they delve into the detail and understand what is actually happening in the business itself.
This was the case when microwave broadband provider BigAir Group ((BGL)) recently reported its first half numbers. The share price fell from a high of $0.61 before the announcement to a low of $0.455 in the ensuing days, despite the company reporting a 36% rise in revenue and 20% increase in operating profit (EBITDA) for the half compared to the previous period. Admittedly we were disappointed by the slowing organic growth, which we estimate was around 9.6% for the first half. This is short of the double digit organic growth rates we had come to expect from BigAir. The market reacted negatively to this, and to the lower headline EPS figure, which was due to the timing of shares issued for the two most recent acquisitions and timing of revenue and cost synergies which are yet to be gained from those two acquired businesses. Although we thought the result was poor, it did not warrant such a severe reaction in the share price and we are not about to sever our relationship with BigAir.
So looking behind the set of numbers, we felt organic growth was below par in the fixed wireless division with some wholesale channel partners reporting patchy results and potentially increased competition in metro regions. The student broadband side of the business continues to show solid organic growth despite pressures from the high Australian Dollar. Going forward, we are watching for signs of improved organic growth levels in both divisions. Underpinning this will be a higher proportion of direct corporate customers following the Link and Allegro acquisitions, leverage into the regional growth centres in Queensland and New South Wales, increased penetration into existing BigAir student sites and rollout into new sites.
What interests us more are the two most recent acquisitions made by BigAir, Allegro and Link. On the surface it would appear BigAir paid too much for Allegro, if you just look at the short term financial metrics and the dilutive effect it has to overall group margins. But FY14 is when Allegro will really hit its straps. Transition off third party networks onto BigAir’s own backhaul takes time and will continue to progress as these contracts expire. Allegro also adds an additional 8,000 beds serviceable under the student broadband division with penetration rates half that of BigAir’s existing sites. We think improved marketing and customer service should see penetration rates improve dramatically over the next 12-24 months. Another key benefit of the acquisition is the exclusive agreements with Student Housing Australia and Unilodge who are looking to rollout new sites.
The Link acquisition, whilst it also dilutes margins in the short term, provides BigAir with access to faster growth regional centres and increased direct corporate relationships. We think investors need to look past the headline numbers for FY13 and see that the acquisitions will make a meaningful contribution in FY14.
At Microequities, we are long term business partners with our invested companies and we tend to look beyond the short term financial results. We are more interested in whether the company will continue to grow its profits and free cash flows over five year plus horizon, instead of reacting to half year and yearly profit reports. Only when the investment case significantly deviates from when we first invested in the company, or when the market places an overly optimistic view on the company’s prospects, do we consider reducing our position. With BigAir, we are looking for a pickup in organic growth and expect that FY14 will see the full benefits of the Allegro and Link businesses. Good things, sometimes take time.
Disclosure: Microequities Asset Management is a substantial shareholder in BigAir Group Ltd.
Microequities Asset Management is a value investor specialised in Australian microcaps. Its flagship fund –the Deep Value Microcap Fund– has a 5 star Morningstar rating. For further information visit microequities.com.au. Content included in this article is not by association necessarily the view of FNArena (see our disclaimer).
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