Blue Sky Potential For Skyfii

This story features SKYFII LIMITED. For more info SHARE ANALYSIS: SKF

-Existing contracts validate model
-First mover advantage in its territories
-Upside in monetising Wi-Fi networks
 

By Eva Brocklehurst

The sky is the limit for Skyfii ((SKF)), which is in a high-growth phase, expanding its subscriber base as it aspires to capitalise on its software-as-a-service offering. Moelis considers the investment a compelling opportunity.

The broker's upside considerations are based on the growth potential. Valuation is limited to a number of listed retail shopping centres with a free option implied for expansion across other vertical markets and geographies. The company has existing contracts which validate its service offering and de-risk the business. There is also limited competition in the markets in which the company operates and such an environment provides a first mover advantage. The actual market potential is difficult to quantify, so Moelis makes a base case valuation at 17c which, it acknowledges, deems the stock significantly undervalued with significant upside.

Moelis expects a strong weighting of earnings to analytics in the near term, and a longer-term opportunity to expand revenue once the technology is embedded. Broadening the existing client base is considered a start, particularly in retail. The broker commences coverage of Skyfii with a Buy rating and 35c target, a 94% total return on the last closing price of the stock, noting there is a potential for earnings dilution from the issue of shares associated with the 2016 revenue earn-out. The earn-out is capped at 82.5m shares and scaled as a function of performance. In the first half the company recognised a loss of $3.5m. Employee costs remain the largest expense but the company anticipates break even within 18 months.

Skyfii operates across Australasia, South Africa and Brazil. Moelis acknowledges there is a risk a number of international players begin to compete and this is made more plausible by the fact there is limited intellectual property protecting the service. Changes to privacy legislation could also have a significant impact on the service offerings, particularly with the use of personal information in advertising.

So what is the company actually about? Skyfii is an Australian-based technology company that captures and analyses customer behaviour data, providing retailers with insights they can act on to drive decisions and deliver targeted content. It listed on ASX in November 2014. The company's software sits over existing Wi-Fi infrastructure and uses the network to track individuals via a unique identifier in their mobile devices, building up a profile of the individual's behaviour.

The platform is not influenced by hardware infrastructure and, as a result, offers maximum application potential. Hence, Skyfii not being a hardware provider does not carry the cost, even if services are partnered. The company plans to partner with telcos, mobile and internet service providers. Re-sellers receive a percentage share based on the monthly revenue while wholesale partners pre-purchase services from Skyfii at a discount and on-sell to the end customer.

Once embedded, an ongoing monthly fee is charged for network management and a Skyfii subscription fee. Over time, additional revenue is expected through data services and advertising. Currently Skyfii targets shopping centres and retailers but expects to capitalise on other segments of the market in due course, particularly in the areas of transport, events and municipalities. The goal is to track individuals across multiple points of interaction to derive consumer insights and enhance marketing and advertising campaigns.

Moelis notes each segment of the market is essentially a territory in which Skyfii can imbed its technology. Traditionally, free Wi-Fi networks were implemented by venue operators to attract customers. Now these networks are being commercialised and monetised and it is in this arena that Moelis expects Skyfii will make its presence felt.
 

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