Netcomm Achieves Scale, Enhancing Potential

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-Attractive buying opportunity
-Potential for large contracts
-Expanding geographies, industries
 

By Eva Brocklehurst

Netcomm Wireless ((NTC)) is a technology provider in the high growth global M2M segment. That is, machines talking to machines. The company reached profitability in FY14, driven by a strong contribution from the AusNet Services' ((SPN)) smart metering contract. Cash flow conversion was around 100%. Netcomm has provided no financial guidance for FY15, other than it expects a substantial increase in NBN volume.

Moelis believes the company provides an attractive risk/reward opportunity. FY14 results were ahead of expectations and revenue grew 51%. Earnings, which increased to $5.2m from $800,000 in FY13, signal the scale benefits that are now accruing. M2M now represents 51% of group revenue, up from 20% in FY13, with the balance coming from the legacy business that supplies a range of wireless telecommunications products. Where Netcomm differentiates is that its software is open platform and therefore more versatile than that of its rivals. Moelis retains a 95c target and a Buy rating.

A number of large contracts have been secured which will deliver an increasing contribution from FY15. Vertical applications are being actively pursued in a number of industries which, even if only a couple translate into orders, offer significant potential to transform revenue and earnings over time. This potential provides significant upside to Moelis' assumptions from FY17. The company is a supplier of M2M IP modems to Vodafone ((HTA)) and, outside of NBN Co and the Cubic transportation project for Opal Card in NSW, has a stated goal of adding another three strategic partners over FY15.

Netcomm provided a little detail regarding where some of the opportunities are coming from. Smart metering deals are being pursued in Europe, the Middle East, Australia and the US. The average contract size is 1m units, which compares with the AusNet contract of 140,000 units. Netcomm requires at least 100,000 units for a project to be economic.

WilsonHTM likes the company for its exclusive agreements with strategic partners such as Vodafone and the NBN. The AusNet and Vodafone contracts exceeded the broker's expectations in FY14. Gross margin was less than expected affected by higher M2M sales volume. The costs of doing business were lower than expected, as some R&D costs were capitalised. NBN volume is expected to ramp up in FY15. The contracts ares sizeable and should help win similar projects elsewhere. Rural broadband opportunities are also being pursued in Europe and the US and the company intends to leverage off its involvement with the NBN.

The company expanded its engineering team to 45 at the end of FY14, adding two more development teams to the current four. The two teams will focus on different areas of product development. Given Netcomm's existing expertise in smart metering and broadband, WilsonHTM expects the new teams will assist in product development for other industries. The broker retains a Buy rating and 87c target.

AusNet – which changed its name from SP AusNet this month – will be liable for customer rebates of up to $37.5m if faulty smart meters are not replaced by March next year. At this point in time only 400,000 of the 700,000 smart meters are functional. AusNet will not replace its core system and this is a positive for Netcomm, as WilsonHTM believes it makes using the existing 3G technology more likely, given the short timeframe until the rebates fall due. AusNet's network uses both WiMAX and 3G and it is the instability of the WiMAX component that is at the heart of the fault.

See also, Netcomm Aims For High Growth M2M on August 4 2014.
 

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