Brokers Welcome BigAir’s Transformation

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-Timing of synergies uncertain
-More clarity on segment trends
-Acquisition opportunities abound
 

By Eva Brocklehurst

BigAir Group ((BGL)) has laid strong foundations for FY16, as it continues to transform into an integrated managed service provider. The FY15 results may have been messy but the company has been busy, investing in, and building, its management team.

Strictly speaking, profits were down in FY15 but trends are heading in the right direction, brokers maintain. The earn-out from an acquisition that was performing better than expected delivered the surprise reduction to profits. That aside, Morgans was impressed with growth in cash flows.

Any downside risk comes from realising the value inherent in acquisitions and Morgans accepts uncertainty about timing creates volatility in the short term. The broker assumes a mild lift in profitability in the near future, and notes it often takes 18-24 months for synergies to ultimately flow through to the bottom line. The broker also lowers the dividend pay-out ratio, assuming the company will progressively increase the dividend over coming years rather than stick to a specific pay-out ratio.

Cloud and managed services delivered an impressive 185% in underlying earnings growth, largely through acquisitions. Morgans believes the company is well placed, basing forecasts off annualised second half FY15 earnings, to gain a starting point of $21m for FY16. The broker has an Add rating and $1.02 target.

Moelis remains cautious on the level of organic growth and cross-selling opportunities, as long-term success depends on continued synergy benefits from acquisitions, particularly when growth ebbs in the fixed wireless business.

As there is limited growth available in fixed wireless the broker believes the intention to integrate as a technology provider is an appropriate long-term strategy. BigAir is targeting niche markets which larger competitors do not service effectively. Opportunities abound on the acquisition front too. The broker does not find the current valuation demanding and upgrades to Buy with a target of 92c.

Credit Suisse upgrades profit forecasts for FY16 by 9.1% to reflect the latest IT contributions. The turnaround in revenue growth in fixed wireless is considered a major positive.

The broker suspects the first half result will demonstrate the extent of revenue and margin upside in the company’s cloud and managed service strategy. This is a driver of Credit Suisse’s above-market forecast and the stock is expected to re-rate over the next 6-12 months. Other catalysts include further acquisitions, which are considered highly likely.

Having built successful franchises in fixed wireless and community broadband the broker believes the company is well able to build scale in its third sector, the cloud and managed services. Five businesses in this area have been acquired over the past 18 months in order to provide scale and product capability.

Extra disclosure around divisions has been helpful. Understanding the trends previously has been difficult and the extra clarity should bring new investors to the stock, Credit Suisse maintains. The broker has an Outperform rating and 97c target. 
 

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