Small Caps | Feb 22 2016
-NBN/Ericsson contract volumes to accelerate
-US rural broadband volumes larger than expected
-Potential catalysts from global opportunities
By Eva Brocklehurst
Netcomm Wireless ((NTC)) has been underpinned by a better-than-expected contribution from the NBN/Ericsson fixed wireless contract in the first half and management expects volumes from this contract will further accelerate in FY17.
Netcomm provides, in Canaccord Genuity's view, a small but important means to leverage the global theme of connecting the world's devices. The broker suggests the current share price offers a compelling risk/reward proposition and retains a Buy rating with a $3.84 target.
Operating cash flow was weak in the half, primarily due to a $7m build in working capital associated with a change from air to sea freighting product to Australia. This change is expected to result in a $14 per unit cost saving which the broker estimates will add 2-3% to gross profit margins. Revenue grew 54% and earnings 126% in the first half, on the back of the company's machine-to-machine (M2M) division.
For the first time the company provided some qualitative comments around the US rural broadband opportunity. Guidance suggests volumes expected from this contract are much larger than those under the Ericsson/NBN contract, and should flow over an extended number of years.
Canaccord Genuity's valuation incorporates increases in operating expenditure, without the associated earnings of future contract tenders. This suggests meaningful upside exists around global fixed wireless opportunities and any involvement in Australia's National Broadband Network (NBN) fibre roll out.
The broker makes some refinements to assumptions regarding the ramp-up in NBN connections in FY16 and FY17 and increases operating cost assumptions as the company prepares to tender for a range of contracts.
Nevertheless, Canaccord Genuity remains comfortable with the company allocating available cash flow to invest in global fixed wireless and the NBN in Australia. Capital management may need to be considered, the broker suspects, should the company win a meaningful contract where a customer does not qualify for the receivable sales facility.
The base broadband business contracted in the half year, with revenue down 9.0% as the business continues to focus on M2M opportunities, Moelis observes. There was a significant increase in inventory because of a decision to increase the order volume of NBN contract manufacturing and shift to the cheaper sea freight.
For Moelis, the value in the stock lies with its contracts, which detail the long-term earnings profile. Further opportunities are expected to provide the catalysts for the share price. In particular, rural broadband across US and Europe and the NBN contracts.
Significant value, in the broker's view, should be apportioned to the contracts already won, particularly the recent US telco rural broadband opportunity, which the broker assumes to be with AT&T. Revenues associated with this contract likely to be 18 months away.
Moelis understands the timing of a decision for the NBN's FTTdp tender is for the middle of this year The broker retains a Buy rating as well, and a $4.00 target.
See also, Netcomm Wireless Taps US Potential on December 1 2015.
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