Small Caps | Dec 01 2015
-Major US telco signed
-Additional Oz opportunities
-Positioned to win global contracts
By Eva Brocklehurst
Netcomm Wireless ((NTC)) has become a specialist supplier of communications hardware in machine-to-machine (M2M) markets, moving away from the traditional broadband business.
Canaccord Genuity makes this observation while initiating coverage on the stock with a Buy rating and expects significant earnings growth over FY16-17 as sales to the fixed wireless National Broadband Network roll out.
The company has hardware which is required at the premises where the NBN connection is made as part of the regional/rural fixed wireless broadband network. Take up rates are expected to rise substantially.
Netcomm has also signed up a major telco in the US to its fixed wireless technology. Canaccord Genuity presumes this is AT&T. Winning this business is important and has potential, in the broker's view, to transform the company.
Up to 13 million homes in the US could be installed with the company's hardware, as suggested in the AT&T submission as part of its takeover proposal for Direct TV. Canaccord Genuity takes a more conservative position and assumes 11 million homes with an eventual take up rate of 42% by 2023.
A number of the details are still unclear but the broker attempts to model the opportunity, resulting in a $3.96 valuation and target for Netcomm. On this basis Netcomm is expected to generate cumulative revenue of $1.04bn and gross profit of $144m by 2022. This goes a substantial part of the way to underscore the importance of Netcomm's business and positions it to win further contracts globally, in the broker's view.
Canaccord Genuity maintains that the process to establish communications between machines/devices and remote systems is a long-term development and the stock offers the leverage in a small way to this process.
The broker considers investors receive a free option on current valuation if the company scores additional contracts in the M2M market. Canaccord Genuity expects gross profit of $9.9m in FY16 and $20.1m in FY17.
A number of additional opportunities are potentially accessible in Australia, include servicing regional towns that fall win the range of fixed wireless coverage but are scheduled to be covered by fixed line, and the ability to service 80-150,000 homes on the urban fringe, potentially accessible after NBN Co acquires the 3.5GHz spectrum.
The broker does acknowledge it is easy to view the earnings profile as one-off but, as with most technology hardware, there is a natural replacement and upgrade cycle. Canaccord Genuity believes Netcomm is well placed to capture a proportion of this business and this justifies capitalising the sustainable earnings of the business. Risks include variations and delays in the take up of hardware.
Netcomm commenced business in communications hardware with its first products relating to dial-up modems. More recently it has evolved to cellular devices. The company no longer sells consumer products directly but instead supplies to telcos. The types of devices which use the company's M2M hardware include security cameras, vending machines and ATMs.
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