Tag Archives: Telecom/Technology

article 3 months old

Weekly Broker Wrap: Oz Equities, Building, Telcos, Grocers, Aussie And Oil

-Headwinds stronger in some sectors
-Benefit of infra spend more so in FY16
-Focus on telco pay-outs, stable earnings
-Risk to Woolworths' guidance
-Another cut to cash rates likely?
-Negative wealth offsets to lower oil
 

By Eva Brocklehurst

Equity Strategy

As earnings season gets underway Citi notes expectations are being tempered and becoming more realistic. The broker expects large moves in global markets over the past three to six months will continue to impact earnings estimates, with downside risks to resources earnings from commodity prices and upside risk to offshore industrial earnings from the Australian dollar.

Domestically, the outlook is mixed. The improvement in the economy outside of resources is still concentrated in housing, which has been good for developers, construction materials and, less directly, retailers. It has not yet buoyed areas such as logistics or advertising. In Citi's view, some of the larger sectors now seem to be facing stronger headwinds. These include the banks, insurers and food retailers.

A reluctance to invest and a preference for distributing profits to shareholders does appear entrenched at this juncture and the broker considers it still too early for management to be talking much about FY16, so the main outcome from reporting season could be just the continued erosion of FY15 earnings, for which growth forecasts were already downgraded late last year. If so, the broker suspects this may stymie the recent gains in the market.

Building

JP Morgan believes the construction sector is emerging into a smoother period which should underpin reasonable growth over the next five years. Residential construction remains the bright spot, with an ongoing high level of approvals supporting the stronger-for-longer theme. The non-residential and engineering construction outlook looks bleaker. The broker finds some evidence to suggest road infrastructure will go a way to offsetting the headwinds from a declining spend in resources and energy, but the benefit of these projects is unlikely to be felt until well into FY16.

Telcos

Macquarie finds two themes for the telecoms sector over 2015, including the impact of the digital dividend amid the shifting dynamics of fixed line competition. Digital spectrum is now online and the broker expects it will have the greatest positive impact on Optus as it covers a prior deficiency in the company's low-frequency spectrum holdings. Both Telstra ((TLS)) and Optus are placed to benefit from improved coverage and capacity in the spectrum.

Macquarie expects a positive impact on financial for mobile players form consumer data consumption and a more competitive fixed line segment, reflecting a more aggressive Optus and rising customer acquisition cost in NBN areas. M&A is expected to remain on the agenda. The focus on liquid, cash generating businesses with high pay-out ratios, franking credits and stable earnings will continue to attract investors to Telstra. Optus will also be an important driver of growth for SingTel ((SGT)), should it succeed in reinvigorating its brand and customer growth trends.

Supermarkets

Recent reports from Australian real estate investment trusts have highlighted slowing growth in supermarket sales. The landlords, SCA Property ((SCP)), Novion ((NVN)) and Federation Centres ((FDC)) collectively control of 10% of Woolworths ((WOW)) and Coles ((WES)), stores. Morgan Stanley believes the trends are relevant for these two and risk of a soft sales performance in supermarkets is growing.

Tobacco accounts for 7-8% of supermarket category sales, so given the timing of excise increases in December 2013 and September 2014, this should have contributed to a net acceleration in growth in the second quarter versus the first quarter of FY15. According to Australian Bureau of Statistics data however, supermarket category growth slowed in the second quarter to 5.9% from 6.3%, highlighting for the broker the underlying weakness and the risk to Woolworth's 4-7% profit growth guidance.

Australian Dollar

Australia's economy is struggling to gain traction and the central bank is easing official rates. High yield advantage is becoming negligible and volatility is rising. Thus, ANZ analysts expect further erosion of investor confidence in the Australian dollar. High net worth individuals are reportedly shying away from AUD instruments The downgrading of iron ore price forecasts by the ANZ commodity team only adds to this story. To the analysts, it means pressure remains not only on the AUD's risk premium but on the valuation level as well.

The analysts expect another downshift in the Australian currency is coming. The US dollar is starting to look more resilient while, technically, numerous tests in the AUD above US78c recently have all been rejected. Moreover, US dollar strength is broadening into emerging market currencies and its break-out against the yen has set a direction which will be important for the AUD. A weaker yen will reduce the appetite of Japanese investors to buy yielding assets in Australia, by keeping the AUD above 90 yen.

As Chinese New Year approaches the analysts also expect Australian bond issuance is likely to lighten, as major centres of demand close, and this will take away some of the marginal support for the currency. A final reason for the prospect of a mark down in the AUD is that it would be unusual for the Reserve Bank not to following up its February cash rate reduction with another cut in March. On this note, ANZ analysts expect a cut next month, while observing the market is only factoring in a 40% probability.

Oil In Australia

In the short term, falling oil prices are likely to mean lower inflation and lower interest rates in Australia, in the view of National Australia Bank analysts. The impact will also be contingent on the degree to which second round price effects are passed through to consumers and, ultimately, household spending. The analysts suspect that the windfall opportunity is limited, reflecting the offsets to higher disposable income from negative wealth effects in terms of lower equity prices (energy) and greater contraction in business investment, namely mining, that will weigh on the labour market.

Moreover, less inflationary pressures along with lower global interest suggest lower official domestic rates. The NAB analysts also expect the RBA to move again in coming months. Lower rates will be instrumental in the anticipated recovery in consumption and dwelling investment into 2016.

NAB analysts have revised the profile of their oil price forecasts lower through 2015-16, but expect a recovery to pick up pace later this year. The oil futures curve has moved into contango - where forward prices are higher than spot prices - since last October. This typically indicates excessive downward adjustments to prices in a short time frame alongside the lowering of longer-term expectations. Still, the analysts note contangos in commodity markets tend to be short-lived.
 

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Weekly Broker Wrap: Queensland Election, Cooper Basin, AUD, Oil Price And Telcos

-QLD building investment a concern
-What is Seven Group up to with Beach?
-AUD impact underestimated?
-More savings opportunities exist
-Relief over Foxtel's new bundle
 

By Eva Brocklehurst

Queensland Election

Several outcomes are still at play after the Queensland election. The most conceivable on the current count is a minority Labor government, although it is possible the incumbent Liberal National coalition could retain government with a minority position. ANZ economists observe the most significant policy difference between the two major parties is the privatisation of public infrastructure. The LNP's proposal to sell or lease electricity, port and water assets will not occur if Labor achieves government but is also considered unlikely if the LNG governs in a minority government. The majority of these funds were intended for paying down debt not new infrastructure. Labor's proposal is to quarantine two third of the returns from the income-earning assets for sale in a trust from 2018-19.

Economists point out that fulfilling exact promises rarely occur given the negotiations necessary if there is minority government, and are most concerned about the building industry in Queensland as investment has been quite weak in that state outside of the mining sector. They consider it is likely that some Labor policies, such as the delay in the payroll tax threshold increase and loss of Commonwealth asset recycling funds, may also have negative impact on the economy relative to the LNP's policies.

The economists draw limited implications for the upcoming NSW election. The NSW coalition government has a better budget position and higher credit rating than Queensland, which means it can devote most of the funds from its privatisation plans to new infrastructure. NSW also stands to benefit form a larger share of the Commonwealth asset recycling fund if Queensland is no longer a part of it.

Cooper Basin Producers

Seven Group's ((SVW))  take up of a stake in Beach Energy ((BPT)) has caused investors to wonder if this is a prelude to something larger, or just a value play. What is on offer at Beach is cheap oil and a lot of gas. If consolidation in the Cooper Basin is on the cards, Credit Suisse observes there is also Drillsearch's ((DLS)) wet gas or the large resources of Senex Energy ((SXY)). The broker considers the list of potential buyers into this market is long, as there are plenty of oil, gas and unconventional gas resources available.

However, the list of obvious buyers is very short. Santos ((STO)) and Origin Energy ((ORG)) have little cash to spare and AGL Energy ((AGL)) would need to raise equity to buy a volatile business it has little experience with. The majors could afford to buy a company like Beach Energy, given it is net cash, but the broker suspects it would be hard to convince shareholders that now is the time to spend money on a desert in the middle of Australia, unless CSG reserves at GLNG or QCLNG are of lower quality than the market believes.

The broker suspects Seven Group is too small to swallow Beach Energy. If the stake is just a value play, Credit Suisse believes Drillsearch would offer better value and, if there is truly a buyer looking for an acquisition, it would make sense to grab this company as well. Credit Suisse speculates a really aggressive buyer might take Santos' share of the SACB JV. On that note the broker decides enough is enough and pulls in the speculation horns.

Australian Dollar Impact

The impact of the Australian dollar's fall on balance sheets may have been overlooked heading into the earnings season, analysts at Morgans reason. Stocks reporting in AUD with predominantly unhedged US dollar debt are at risk. The broker cites Newcrest Mining ((NCM)), Sonic Healthcare ((SHL)) and Transfield ((TSE)) among these. Stocks reporting in US dollars with debt in other currencies will find their debt falls and equity rises. This creates upside risk for the likes of Amcor ((AMC)).

The analysts observe several resource stocks recently reported lower cash costs, in part because of the weaker currency. This could mean the downgrade cycle is near maturity, particularly where the US dollar commodity price has stabilised. In this instance Morgans notes iron ore, copper and oil are still under downward pressure but coal has been relatively stable. While a protracted upgrade cycle is unlikely, a reduction in the size of price downgrades can be enough to allow stocks to re-rate.

The broker highlights those upgraded recently such as Oz Minerals ((OZL)), Alumina ((AWC), Perseus Mining ((PRU)), OceanaGold ((OGC)), Newcrest and Whitehaven Coal ((WHC)). Downgrade momentum is also seen easing for Rio Tinto ((RIO)), Iluka Resources ((ILU)), Atlas Iron ((AGO)), Sandfire Resources ((SFR)) and Mount Gibson Iron ((MGX)).

Small Caps and High Conviction Stocks

The Small Industrial and Resources Accumulation indices on ASX have posted gains over the first two months of this year for the first time since July 2014, in Citi's observation. The broker highlights the impact of lower oil prices on capital and operating expenditure for exploration and production companies, estimating a 15% savings opportunity exists on both fronts. Marginal producers are expected to benefit most from this opportunity. The broker believes the market has been quick to price in current spot oil weakness but is yet to consider the secondary benefits of a low oil price.The broker believes cost cutting opportunities will feature in corporate strategies over the next 12 months.

Morgans observes market sentiment is lukewarm and investors will need to exercise a cautious approach in 2014, in the light of such events as the oil price collapse that threatens the re-priicing of risk. The broker expects Australian shares to surprise on the upside in 2015 with strong opportunities for highly selective investors. New additions to Morgans' high conviction lists are Macquarie Group ((MQG)) and ResMed ((RMD)) as both enjoy a currency tailwind. ANZ Bank (ANZ)) is expected to benefit from rate cuts, while Corporate Travel ((CTD)) is expected to upgrade earnings forecasts.

The broker removes Brambles ((BXB)) and CSL ((CSL)) from the Buy list after strong share price appreciation and identifies strong contrarian opportunities in Woodside Petroleum ((WPL)), Origin Energy and Oil Search ((OSH)). However, conviction in the timing of a turnaround in oil has diminished and Origin and Oil Search have been removed from the list.

Telco Sector

Bell Potter's key picks for stocks in this sector are Altium ((ALU)), Empired ((EPD)) and PS&C ((PSZ)). The common theme for each is strong earnings growth and positive outlook statements. There are also other catalysts over the next few months. As well, the broker experts good results from My Net Fone ((MNF)), nearmap ((NEA)) and Melbourne IT ((MLB)) but, for company-specific reasons, envisages less potential for a short-term re-rating in these share prices.

Citi has drawn implications for the industry from Foxtel's new triple pay offer - payTV plus broadband plus phone. The bundles underwhelmed the broker, with no material discounting or attractive broadband pricing. Citi envisages little disruption to the broadband market from Foxtel's plans. Citi expects the managements of iiNet ((IIN)), TPG Telecom ((TPM)) and M2 Telecommunications ((MTU)) will be relieved, because of the conservative pricing Foxtel has used. There was a risk Foxtel would come to the market with an aggressive strategy on broadband to lift the penetration of payTV subscriptions and increase average revenue per unit, but this has not happened.
 

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article 3 months old

iSentia Offers Solid Growth Prospects

-At discount to online providers
-Asian growth potential
-Low cost options a risk
 

By Eva Brocklehurst

With a new analyst covering iSentia ((ISD)), Moelis takes the opportunity to review the company's prospects. The broker expects the company will grow strongly, with a strategy to increase customer spending domestically and raise customer penetration of Asian markets. The company's media intelligence covers traditional, online and social media, providing data and analytics.

Yet the company trades at a discount to comparable Australian and international information services/online providers. While elements of the company's service offering can be found in this sector, Moelis notes there are no true listed domestic comparables in the Australian market.

Moelis envisages multiple short to medium term catalysts, such as growth in its under-penetrated Asian segment where there is a trend to outsource media intelligence. The broker expects more customers will adopt a value-added service over time, driven by a need to adapt to more complex and faster communication campaigns. Moreover, the incremental margin on social media is higher than traditional media as there is no associated copyright fee for social media and data acquisition costs are lower.

The company appears sound to Moelis, offering investors exposure to a high margin, high growth market with a sticky product offering. Moelis rates the stock a Buy with a $3.03 target price, representing around a 15% total return over the next 12 months, with a 12% capital return and 2.0% dividend yield. The company has a competitive advantage in terms of its breadth of services. Moreover, it has long-term relationships with corporate and government clients. Client retention rates are high, with an average tenure of six years and no client represents more than 2.0% of sales.

The company leads the market in media monitoring and analytics in the Asia-Pacific region. Barriers to entry include sizeable up-front capital investment and access to content via copyright agreements. ISentia has dealt with some recent issues on that front, revealing at its AGM that paywall negotiations have been finalised. Macquarie noted late last year that online access should become available this month from major Australian publishers, which should accelerate the take up of online services.

Where are the company's competitors? ISentia is nearly five times larger than its nearest competitor in the region, US-based Meltwater. Globally, UBM is the market leader with 15% market share and iSentia is ranked sixth with a 5.0% global market share. 

What are the risks? Low-cost options offered by Google Alerts, Facebook and Twitter, which provide accessible means to monitor key words, provide some risk, if clients increasingly adopt these options. If the volume of print content continues to decline and iSentia is unable to offset this with new services then future earnings may be affected. Traditional geographical barriers and regional monopolies are diminishing. This ratchets up the competitive landscape in terms of opportunities for international players.
 

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article 3 months old

NextDC Ups The Ante

-Significant contract win
-Valuation upside likely
-Sale of founder's stake
 

By Eva Brocklehurst

Systems integrator and data centre provider NextDC ((NXT)) has signalled a potential change in its sales strategy, having won a significant contract recently with a global customer. The deal features initial contracted capacity of 1.0MW over a three-year term which may expand to over 1.4MW. To Moelis this suggests the company may accelerate data centre utilisation with contracts that exceed its cost of capital.

Previously NextDC indicated that slow sign-up rates were due to a conscious decision to focus on high-return deals in order to maximise revenue. Now, with a perceived push to increase utilisation, and given the company's fixed-cost model, bringing sales forward should enhance earnings over a shorter timeframe. Moelis has revamped its view of the stock on this basis and assumes the existing data centres will fill in four years, rather than five as previously estimated. The broker calculates a blended sales price in FY16 of $4.2m per MW, growing at the rate of inflation. This is still considered a conservative outlook, given industry growth rates of around 15% are likely to support price increases. Hence, the broker is confident of upside to valuation through price.

Moelis retains a Buy rating, noting the company has reached a point where it is moving to profitable growth this year. Positive aspects of the stock include defensive earnings, operational leverage and favourable industry trends. Moreover, the sale of Bevan Slattery's 10% share in November eliminates the overhang and speculation about the future selling down of the founder's stake.

The broker's valuation reflects NextDC developing and selling the maximum capacity of 35.35MW and assumes balanced revenue growth and capex spending over the four-year period. Moelis maintains the use of an EBITDA (earnings before interest, tax, depreciation and amortisation) multiple understates the stock's valuation, as it does not capture the earnings uplift that is anticipated. Hence, a discounted cash flow valuation is considered a better representation of the value to equity holders. The broker's target price of $2.50 is derived from the average of the DCF and enterprise value/EBITDA multiple.

Other brokers were also upbeat after the company's AGM in November, as the company upgraded its outlook and said interconnections were growing rapidly. NextDC has four Buy ratings on the FNArena database. The consensus target is $2.59, suggesting 44.8% upside to the last share price. Targets range from $2.20 to $3.23.

See also NextDC Outperforming Expectations on November 17 2014.
 

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article 3 months old

Bulletproof At The Fore In The Cloud

-Significant growth profile
-Earnings margins to improve
-Risk in high client concentration
 

By Eva Brocklehurst

In the booming cloud services sector, Bulletproof ((BPF)) is at the fore as recurring revenue accounts for 85% of the total and provides a high level of predictability to broker forecasts.The company is a consulting partner with Amazon Web Services (AWS) and this provides significant new client referrals and potential for large enterprise customer accounts. Industry research suggests the cloud services market will grow at 25-30% per annum for the foreseeable future. The industry is moving out of the early adopter phase as businesses look to significantly increase their cloud services spending and move a larger part of their IT infrastructure to the cloud.

Micro Equities expects significant growth in the AWS division and for this to account for 42% of FY15 recurring revenue. Bulletproof has had consecutive years of positive operating profit and the broker has initiated coverage with a Strong Buy recommendation and 33c price target. Bulletproof is considered one of the few options in a pure play, ASX cloud exposure for Australian investors. The company has developed a recognised domain expertise, with sophisticated consulting and automated processes across an array of cloud-based offerings. Compound annual growth in revenue for the next two financial years is forecast at 50%, with 24% forecast over the next five years. The broker expects earnings margins will improve to around 20% in the medium term from the current 15%.

Risks which the broker has identified include a concentration of revenue within top clients. November accounted for around 15% of FY14 revenue and the second largest customer accounts for 5.5% of revenue. Dependence on Amazon Web Services is also a risk factor. Customers on this hosting service are typically on month-to-month, pay-as-you-go contracts as opposed to the multi-year traditional managed hosting services. Shorter duration contracts could lead to increased customer churn. Increased competition and a reliance on key personnel also add to the risk factors.

Bulletproof provides traditional managed hosting and cloud hosting services to business and government customers. It was founded in 2000. The company is one of just four premier consulting partners with AWS in the Asia Pacific and was an early innovator, announcing Australia's first VMware public cloud service in 2006 and launching the AWS partnership in 2012. Bulletproof has a core business in managed web hosting, VMware, and an AWS-managed service offering. VMware has been growing at mid single digits whilst the AWS managed service is growing aggressively and Micro Equities expects it will exceed VMware revenue by FY16.

There are three segments of the cloud computing market. Platform-as-a-service provides computational and data storage capacity, such as AWS. Software-as-a-service provides enterprise software, cloud hosted. Infrastructure-as-a service allows the client to load all applications onto the infrastructure owned by the cloud provider such as Bulletproof. This is similar to another ASX-listed company UXC ((UXC)) The supplier manages the service layer all the way to the hardware, thus negating the need for the customer to purchase physical IT hardware.
 

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article 3 months old

Technology One Cloud Impact Unclear

-Surprise special dividend
-UK growth a challenge
-Stock considered expensive
 

By Eva Brocklehurst

Technology One ((TNE)) offers strong earnings growth and exposure to the potential of cloud technology. Special dividends, which brokers suspected would be introduced in FY15, have been initiated. Still, many are not persuaded that the stock has a strong buy case, as questions remain over the impact on the company's revenue model of migrating customers to the cloud.

FY14 results were solid, with revenue up 8%. A final dividend of 4.21c and a special dividend of 2.0c bring the total for the year to 8.16c, fully franked, up 46% on the prior year. To Morgans, Technology One is a stock which consistently delivers above-market profit growth. The broker expects similar offerings in FY15 and considers the business is in a strong position, applying a 10% premium to valuation on the basis of market optimism. Still, the price/earnings ratio of 27 times looks expensive. Hence, a Hold rating is maintained.

The company has a suite of eight main products. For Morgans, the most interesting aspect of the results was that 80% of the FY14 profit was generated from two of these products, and 95% from three. Technology One expects to increase profit by around 50% over the next five years and the other six products will move from a small impact to being material contributors. Macquarie expects further leverage can be realised as these products make their contribution felt. As products become more mature they reach a point where profit exceeds licence fees. As at FY14, CPM, Financials & Supply Chain and Student Management have reached this point.

Profit margins are accelerating and the company aims to lift these back towards 25% over the next five years. To do this it will need to manage its cost base and achieve scale in cloud operations. Macquarie observes there are risks in moving to the cloud and the full financial impact is yet to be confirmed. The company's traditional solutions have involved a large proportion of revenue up front in the form of licence fees and the broker observes that using a SaaS (software as a service) licence means this payment may be spread over a longer period of time. Macquarie, therefore, reserves judgment on the full ramifications. Nevertheless, considerable leverage can be realised once new products are contributing to the bottom line and the broker retains an Outperform rating.

The company's growth strategy is on track, in UBS' opinion, despite a rather flat macro environment. The broker trims forecasts after the FY15 result to reflect the uncertainty around the medium-term impact of the cloud model pricing transition and consulting/implementation service revenue. This is offset by lower expense forecasts from ongoing R&D and tight control of costs. The main questions for UBS centre on the impact of the cloud/SaaS financial impacts. The impacts can be managed by recognising long-term contract revenue up front and controlling costs well, but the net drag on operating cash flow when moving to the SaaS model is harder to avoid, in the broker's opinion.

Technology One remains a relatively new entrant in the UK market and Macquarie observes it is yet to make headway in this geography. Making this all the more challenging is the fact the company is viewed as a higher risk by its customers because of its size versus global peers such as SAP, Oracle and Microsoft. Macquarie notes the company is well capitalised to invest further in the region but does not expect any acquisition to fast track growth is likely.

Bell Potter had flagged the special dividend as a possibility and was surprised it was delivered in FY14. The company did not provide specific FY15 guidance but tends not to do so until the first half result. Technology One has stated its current sales pipeline is weighted strongly to the second half, so first half results may be not indicative of the full year. Bell Potter makes changes in special dividend forecasts, increasing these to 2.5c for both FY15 and FY16. The broker retains a Sell rating because, with a price target of $3.00 the expected total return remains negative, even including the forecast FY15 dividend yield.

FNArena's database has one Buy and two Hold ratings. The consensus target is $3.21, suggesting 9.7% upside to the last share price. Targets range from $3.14 to $3.25.
 

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article 3 months old

NextDC Outperforming Expectations

-Upgrade cycle approaches
-Interconnections grow rapidly
-Several positive trends converging
 

By Eva Brocklehurst

NextDC ((NXT)) is moving from strength to strength. The systems integrator and data centre provider now expects to be earnings positive in the first half of FY15, six months ahead of schedule.

The small upgrade to the outlook represents a critical turning point for Morgans. The broker expects NextDC to reveal a $250,000 profit in the first half. Sales for FY15 to November 12 were 1.2MW and the company has sold 13.1MW for the year to date, of a 35.25MW total. Sales guidance has not been upgraded but looks very achievable to Morgans. The broker is confident the stock is entering an upgrade cycle as sales accelerate, with the cloud computing platform from a major customer recently going live. A profit will signal the company can generate capital and also broadens the potential investor base.

Over the first four months of the current financial year the company added 55 new customers, an 18% increase on the prior corresponding period while interconnections grew rapidly too, up 41%. Interconnections are a high margin source of additional revenue. Macquarie expects a strong contribution from the Telstra ((TLS)) channel agreement in the second half and further upside from the recent launch of Microsoft Azure The broker also hails attainment of the profitability milestone and retains an Outperform rating.

Moelis rates the stock a Buy as well, with a $2.30 target. The broker believes the update and confirmation of revenue guidance, between $51m and $55m, supports the long-term value proposition. This is also underpinned by a defensive quality to earnings and operational leverage that can be achieved from a fixed cost base.

Management may have left FY15 guidance for revenue and fixed costs unchanged at the AGM update, but UBS suspects this is a conservative tack. The broker recognises it may be early in the year but is confident enough to lift FY15 its revenue forecast to $55.3m, at the high end of guidance, and raise its earnings forecast to $4m from $1.8m. UBS continues to model profitability by FY17 and positive equity free cash flow by FY18. Support for investing in data centres is driven by a number of trends that the broker envisages will continue. These include growth in data centre-based IP traffic, outsourcing and consolidation of smaller legacy centres and increasing power and cooling requirements that are difficult to maintain in-house. Moreover, cloud technology is maturing and the importance of interconnectivity, which can be established within neutral data centres, is growing.

NextDC's strength lies in it being one of the largest neutral data centre operators in Australia and the only one with a national footprint. FNArena's database contains four Buy ratings. The consensus target is $2.58, suggesting 23.4% upside to the last share price. Targets range from $2.20 to $3.23.
 

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article 3 months old

Covata’s Upside Is Secure

- Data collection growing exponentially
- Cloud adoption still in its infancy
- Security breaches ever more rampant
 

By Greg Peel

Big Data, it would seem, is just getting bigger. Even the Australian government is now embracing Big Data, despite apparently only one member of cabinet having a clue what Big Data actually is. Suffice to say Big Data refers to the overwhelming avalanche of data now being collected through increasingly intrusive channels, including rapidly growing social media platforms. This data is met by ever more powerful, and faster, computing capacity that can crunch numbers within a realistic timeframe, providing valuable information for commercial and non-commercial activities alike, including sovereign security.

Coincident with the rise in Big Data has been the evolution and rapid adoption of cloud computing, even on sunny days. Not only is data now bigger, more powerful and more valuable, it lives somewhere in “the cloud”, being the internet ether, rather than safely tucked away in some terrestrial super computer.

And as sure as night follows day, more valuable data stored in more ethereal filing cabinets is a red rag to the bull of cyber criminals. As data collection and storage has grown in importance, so have the incidences of information theft and business disruption. Episodes of corporate and government “hacking” have grown exponentially. The technology evolution has moved so fast that legacy internet security providers such as Oracle and SAP have been struggling to keep up. They are now being challenged by more nimble, smaller companies who have moved swiftly to tailor their bespoke products.

The information technology security market is currently estimated to be worth US$68bn globally. In Australia, the cloud computing industry is expected to grow at a pace of 19-25%, reaching an estimated $2.7bn by 2017. Further estimates suggest global growth in cloud computing from a value of $47bn in 2013 to $107bn by 2017.

Just when you thought the twenty-first century technology revolution must surely be reaching a pinnacle, it’s as if mankind has just now invented the wheel. Or at least the second wheel.

It is of no surprise the shift towards cloud-based solutions has spawned a wave of new investment in internet security. Australian company Covata ((CVT)) provides a data-centric solution to security through its proprietary platform technology, based on securing data at the data level from the point of origin to provide outward-facing security. We might consider Covata’s cyber soldiers as bodyguards to the data, who move as a detail with that data wherever it may go, such as into a cloud.

Moelis & Co IT analyst Kyle Twomey believes Covata offers a compelling solution at the right time and across an industry with favourable thematics. The structural shift towards cloud-based solutions is in its infancy, with significant growth expected into the future.

Industry thematics support the adoption of Covata’s data-centric platform technology, says Twomey, and the company offers a leveraged business model targeting OEM (original equipment manufacturer) and distribution partnerships and an application-based solution. Partnering with leading organisations that can off scale and distribution will amplify growth potential and limit overhead costs.

Covata is now at the point of commercialisation. It has validated technology and a marketable product and has signed a distribution partnership agreement with NSC Global. Covata has made impressive inroads for a company fresh to commercialisation, suggests Twomey, and boasts an impressive board of directors with a depth of experience across the industry.

“With pent up news flow, a favourable thematic and a leveraged business model, in our view, the risk reward is to the upside.”

Moelis has initiated coverage of Covata with a Buy rating and 27c twelve-month price target. The stock last traded at 20c.


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Treasure Chest: Has Amcom Killed Off A Vocus Merger?

By Greg Peel

Amcom Telecommunications ((AMM)) operates telco, cloud, and IT services and data and network solutions including fibre optic point-to-point connectivity. Amcom is headquartered in Perth and to date management has established a track record of delivering high returns on a predominantly West Coast fibre network.

Amcom shares enjoyed a strong re-rating from early 2012 as the market began to become interested in anything to do with fibre, “the cloud” or data centres in the twenty-first century world of internet-based services. But having priced in potential, the market had gone quiet on the stock in 2014 ahead of any new growth drivers. Amcom raised fresh capital in June, but posted a rather subdued, albeit not unexpected, FY14 result in August. At the time, brokers looked forward to whatever acquisition Amcom had in mind for its new capital. The shares were nevertheless sold off with the rest of the market in the September-October correction.

Vocus Communications ((VOC)) offers telco, data centre and high bandwith connectivity solutions to ISPs and telco markets in Australia and New Zealand and connects to the global internet backbone in the US. Vocus is headquartered in Sydney. Late last month Vocus acquired 10% of Amcom and approached the company with a merger proposal.

The news sparked sharp rallies in the share prices of both companies. For analysts it would be an obvious marriage of like-minded companies, merging not only businesses but also West Coast and East Coast penetration. But analysts believe Vocus is not the only company which would benefit from a tie-up with Amcom. In particular, CIMB has offered up TPG Telecommunications ((TPM)) as another obvious candidate, along with iiNet ((IIN)) and possibly NextGen (not listed).

In other words, Amcom is “in play”, at least from a possible merger if not full takeover perspective. But while talks with Vocus are ongoing, Amcom has continued to pursue its own agenda. The company had flagged recently that it might acquire an East Coast-based Cisco reseller to fast track growth on its telephony platform, but yesterday management came out with news of another, completely different deal.

Amcom has acquired 180km of fibre assets in Sydney, Melbourne and Brisbane from Megaport for $15m. This will form the backbone of Amcom’s East Coast fibre network, delivering accessibility to 17,000 buildings in the three CBDs. The network connects 30 data centres, with an additional 18 to be added and around 30 NBN Points of Interconnect (POI). The company has also signed a 15-year strategic fibre access agreement with infrastructure owner FirstPath, a Sydney based wholesale-only carrier which is building a fibre network in Australia. The Firstpath network will add over 200 buildings to Amcom's East Coast market via 50km of fibre.

And finally, the company will rollout Ethernet in the First Mile (EFM) infrastructure in the east coast capitals, with customer connections to commence from the March quarter next year. 

Macquarie believes this alternate acquisition makes more strategic sense, building upon Amcom’s West Coast assets. On-net customer migration is also an attractive proposition that will create synergies post acquisition. CIMB sees this development as a positive use of the $40m cash that was raised in June, significantly expanding Amcom’s market reach as a proven provider of fibre access. Although this does overshadow the company’s lack of success from hosted voice service, which CIMB believes is key to FY15 targets, this is less of a valuation issue than expanding the reach of high-margin fibre access, the broker suggests.

The market also liked the announcement, pushing Amcom shares higher still. But the question now becomes one of what of the Vocus merger? Given this new deal, is it off?

Macquarie suggests there is some asset and synergy overlap between tie-ups with Megaport and Vocus. However, Megaport’s assets and operations are still highly complementary to both Amcom and Vocus. This would suggest Macquarie does not see the Megaport deal as killing off a Vocus merger, and management discussions are still preliminary at this stage.

CIMB believes this deal changes the balance of Amcom’s bargaining power in negotiations with Vocus. On balance, the broker still views the merger positively, but notes the new deal announcement raises Amcom’s valuation in such a merger.

Macquarie believes Amcom is an attractive business with a strong medium term growth outlook. But the shares are now carrying a merger premium (be it with Vocus or someone else) thus at an FY15 PE of 23.4x, the broker sees the stock as well-priced, hence a Neutral rating. CIMB and Citi both carry Buy-equivalent ratings while Credit Suisse is sitting on Underperform but yet to update since the FY14 result release. The brokers’ consensus target price is $2.19, below the current trading price.
 

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article 3 months old

Telstra Resumes Uptrend




Bottom Line 28/10/14

Daily Trend: Neutral
Weekly Trend: Up
Monthly Trend: Up
Support Levels: $5.23 / $5.16 / $4.92
Resistance Levels: $5.57 / $5.70

Technical Discussion

Telstra Corporation ((TLS)) is a telecommunications and information services company providing services for domestic and international customers. It is Australia's most prominent telecommunications company with brand recognition across all segments of the industry.  On January 21st 2014 it acquired O2 Networks, a developer of data networking and network security software. In May 2014 the Company completed the sale of its Hong Kong based mobiles business CSL to HKT Limited. In July 2014, Telstra acquired an undisclosed minority stake in Telesign Corp. For the year ending the 30th June 2014 revenues increased 3% to A$25.32B. Net income before extraordinary items increased 25% to A$4.48B.  The dividend yield is currently 5.3%.  Broker/Analyst consensus is “Sell”.

Reasons to retain a bullish stance:
→ In a low interest environment TLS is an alternative to the banks.
→ The dividend has been increased with the company also announcing a one billion off-market buy-back.
→ Telstra continues to gain market share across mobile and fixed broadband as voice revenue declines.
→ Completion of the CSL sale which will free up $4b in cash that can be deployed for various projects, including acquisitions.
→ Australian interest rates to remain lower for longer meaning demand for higher yielding stocks will be maintained.

The decline down to the recent pivot low was significant which came in just short of 10%.  The last time a decline greater than that was witnessed was back in June 2013 which just emphasises how strong the trend has been.  Not that Telstra tends to head higher in a straight line movement although the trait of seeing higher highs and higher lows is clear to see on the chart shown here.  The other interesting facet about this chart is the 200 day moving average which continues to attract buyers as its tagged.  In fact it’s been tagged and rejected on no fewer than eight occasions since June of last year which just reiterates how important the trend line has been.  More recent price action has also been positive with a good rally unfolding over the past three weeks.  The diagonal line of resistance has once again been exceeded which is another hurdle that’s been overcome.  We tend to concentrate more on horizontal resistance though there will undoubtedly be many traders and investors taking a look at the diagonal variety.  It’s difficult to see too many negatives on this particular chart although if we are searching there is still bearish divergence evident on the monthly time frame.  However, although it’s been in position since December of last year it hasn’t triggered meaning it’s something to watch only at this stage and is not major reason for concern.  The bottom line is that the trend is up (albeit price action is choppy and messy) with no indication that a more significant retracement is going to suddenly take hold right here and now.  All we can do here is go with the flow and not fight the trend.

Trading Strategy

If you’re looking to be involved in a blue chip company providing an attractive dividend yield there’s still reason to want to be involved; especially if you are looking for an alternative to the banks.  In a low interest rate environment demand for Telstra should remain high, with no indication that the dividend is going to come under pressure anytime soon.  From a pure trading point of view a low risk entry isn’t presenting itself at this stage although a small micro consolidation pattern forming over the next week or two would provide a set up for those wanting to jump aboard.
 

Re-published with permission of the publisher. www.thechartist.com.au All copyright remains with the publisher. The above views expressed are not by association FNArena's (see our disclaimer).

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