Netcomm Wireless Signals Substantial Potential

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-M2M option in several verticals
-NBN a re-rating catalyst
-Oz success can translate globally

By Eva Brocklehurst

Netcomm Wireless ((NTC)) continues to signal its strength to Moelis. The broker has changed analyst and reviews the investment thesis on the technology stock, with Australia's NBN roll-out potentially validating a global opportunity.

Netcomm is at a pivotal point in its development, ready to take on the global market in the M2M – machine to machine – arena. Moelis attempts to quantify the base case valuation scenario and highlight the upside potential. Essentially, the broker considers the stock is undervalued at current prices. A number of milestones need to be passed to validate the investment upside but the stock is considered relatively de-risked at current prices, given the operating leverage from a mostly fixed cost base.

Moelis has identified a floor in the valuation based on the traditional business, Netcomm's NBN  – national broadband network – contract and the upside in a number of vertical industries via the M2M option. Base case valuation is 48c, an 8.0% discount to the current share price. This case ignores any upside from M2M revenues outside of the NBN contract. Risks lie with the lack of control Netcomm has over timing and when deals are wrapped up. As a result, this can affect the timeframe for earnings and cash flow. Hence, Moelis uses relatively conservative assumptions in modelling its base case. The broker retains a Buy rating and 80c target.

The NBN contract is the major catalyst for a re-rating. The NBN guarantees broadband service nationally, with urban locations receiving fibre and remote regions a satellite connection. The NBN strategic review has suggested the "grey" zone between these two regions can be covered by fixed wireless. Netcomm provides the outdoor routers which attach to individual premises. The application of fixed wireless to the NBN roll-out suggests that the market size for Netcomm is larger than initially planned for.

The NBN may act as a proof of concept for the roll-out of rural fixed wireless globally, in Moelis' view. The broker quotes Boston Consulting which estimates the global rural broadband opportunity is US$80bn, with the top 20 countries representing US$50bn. Noting the statistics, which reveal 22% of developed nation populations and 54% of undeveloped reside in rural areas, highlights the potential. Moelis believes the US market offers substantial expansion possibilities for Netcomm. US rural areas with no access to broadband represent a US$2bn opportunity alone and the company is already in discussions with US-based telecommunication companies.

Netcomm is ramping up its global M2M presence. The company designs and manufactures M2M devices and remains neutral on software to enhance the reach of its skill set. The number of M2M verticals may be broad, Moelis' contends, but Netcomm is concentrating on specific sectors where it can specialise over time. Currently, Netcomm has partnership agreements with Verizon, Vodafone and Telstra ((TLS)) plus a large number of smaller providers. Moelis refers to Sierra Wireless, the leading global M2M player, which saw 2013 sales of US$440m that represented only 1.1% of the 2013 market size.
 

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