Tag Archives: Telecom/Technology

article 3 months old

Netcomm Still Attractive Despite Price Rise

-Profits rising sharply
-Global agreements continue
 

By Eva Brocklehurst

Netcomm Wireless ((NTC)) offers an attractive opportunity, in Moelis view, despite the fact its share price has more than doubled over the past year. The company is enjoying positive momentum in the high growth global M2M industry - machine to machine communications. Netcomm has announced its latest distribution agreement is with Arrow Electronics, an enterprise computing solutions provider. Arrow will distribute Netcomm's M2M product in North America with markets including telecommunications, medical, transport and industrial sectors.

The company reported a profit of $1.0 million in FY14, double the prior year. Moelis believes this marks an important milestone, as the majority of revenue is now from high growth M2M business. M2M now accounts for 51% of revenue compared with 20% in FY13. The balance comes from Netcomm's legacy business of wireless telecommunications. Moelis expects Netcomm's profits will rise to $3.3m in FY15 and to $7.9m in FY16.

Management has established global supply agreements, or partnerships, with three of the top 20 M2M telecommunications networks - Vodafone, Verizon and Etisalat. The company's goal is to add another three tier one partners over FY15. Netcomm recently obtained a distribution agreement with Wyless, a tier two distributor with a strong presence in the US and Europe. Other vertical opportunities are being actively pursued in utilities, health, transport, business services and building automation.

The company will hold its AGM on November 26 and Moelis expects it to further highlight the potential of the M2M industry. Positive momentum has been already observed in FY15, supported by contracts which, while secured in FY14 made minimal contributions to that year's results. Moelis finds an FY16 price/earnings ratio of 10x undemanding in the context of a robust growth profile and retains a Buy rating and 85c target.

See also, Netcomm Achieves Scale, Enhancing Potential on August 28 2014.
 

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article 3 months old

Buying Opportunity In Telstra

By Michael Gable 

The local market once again appears to be trying to establish a short-term low, but still failing to follow through on any rallies. Once we have a positive day, we tend to spend the next day in the red. We’ll need to string together a few positive days in a row for confidence to come back. We have noticed the buying starting to come back into the banks. As suspected, the ex-dividend dates in early November will prove to act like a magnet and should ensure that share prices have a bit of a floor for the rest of October. Our strategy for bank shareholders remains finding an opportunity to write a covered call on a rally, before the stock goes ex dividend.

Today we discuss an opportunity in Telstra Corporation ((TLS)).
 


Our previous look at TLS was on 1 July where we suggested a rally from the bottom of the range leading into the ex dividend date in August. So from $5.21, TLS rallied higher and closed at $5.74 before going ex dividend. Once again, the stock is at the bottom of its range. There appears to be some support here and we may now get a bounce in TLS towards $5.50. However, the next dividend isn’t due until February, so we do not have the prospect of an upcoming dividend to keep the share price well supported. So, after bouncing here in the short term, we could see TLS then dip down to support in the $5.10 - $5.20 range. That would be an even stronger buying opportunity, putting TLS on a yield of about 6.0% plus franking.


Content included in this article is not by association the view of FNArena (see our disclaimer).
 
Michael Gable is managing Director of  Fairmont Equities (www.fairmontequities.com)

Michael assists investors to achieve their goals by providing advice ranging from short term trading to longer term portfolio management, deals in all ASX listed securities and specialises in covered call writing to help long term investors protect their share portfolios and generate additional income.

Michael is RG146 Accredited and holds the following formal qualifications:

• Bachelor of Engineering, Hons. (University of Sydney) 
• Bachelor of Commerce (University of Sydney) 
• Diploma of Mortgage Lending (Finsia) 
• Diploma of Financial Services [Financial Planning] (Finsia) 
• Completion of ASX Accredited Derivatives Adviser Levels 1 & 2

Disclaimer

Michael Gable is an Authorised Representative (No. 376892) and Fairmont Equities Pty Ltd is a Corporate Authorised Representative (No. 444397) of Novus Capital Limited (AFS Licence No. 238168). The information contained in this report is general information only and is copy write to Fairmont Equities. Fairmont Equities reserves all intellectual property rights. This report should not be interpreted as one that provides personal financial or investment advice. Any examples presented are for illustration purposes only. Past performance is not a reliable indicator of future performance. No person, persons or organisation should invest monies or take action on the reliance of the material contained in this report, but instead should satisfy themselves independently (whether by expert advice or others) of the appropriateness of any such action. Fairmont Equities, it directors and/or officers accept no responsibility for the accuracy, completeness or timeliness of the information contained in the report.

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article 3 months old

Weekly Broker Wrap: Insurance, Telecoms And Supermarkets

-Positive outlook for Medibank Private
-IAG and SUN losing market share
-Interest may switch to telco access providers
-IIN may be vulnerable to access reform
-MTS likely the biggest loser to discounters
 

By Eva Brocklehurst

Morningstar believes Medibank Private, Australia's largest provider of health insurance and owned by the government, will be attractive to investors. The business is to be sold via an initial public offer (IPO). Pricing is yet to be determined but, given the government's eagerness to sell the asset, it should be keen. Assuming a realistic issue price and no negative surprises in the prospectus the researcher believes demand for the stock should be healthy, given successful recent floats and a dearth of attractively priced, high quality defensive investment opportunities. Based on the long-term outlook for the private health insurance industry and research on listed competitor, nib Holdings ((NHF)), Morningstar is positive about the industry. Government regulated pricing and risk sharing across the industry limits earnings upside but also create a floor for minimum profitability.

***

Insurance Australia ((IAG)) and Suncorp ((SUN)) are likely to sustain a period of flat top line growth, in Morgan Stanley's view. The two are being tested by challengers. IAG's personal lines franchise is likely to prove more durable than Suncorp's, the broker suspects. Challengers to the major's franchises are growing their market share in motor and home insurance, building consumer brand awareness. Youi is now number three in motor insurance, with a 4% share. it has a 5% share of home insurance.

The challengers are seemingly more intent on making Suncorp customers switch brands. The price is less of a factor for IAG customers, in the broker's analysis, as they shop around less and it takes a bigger discount for them to switch. Suncorp customers tend to shop around more. Both insurers have been growing below system in the home and motor insurance markets over the past three years. Morgan Stanley suggests customer retention is the key for IAG while Suncorp needs volume.

UBS is cautious about the general insurance sector as the major insurers attempt to address market share losses. The market shares of Suncorp and IAG have slipped again over the second half of FY14. Both lost 1.0% in motor insurance share and almost that amount in home. UBS acknowledges the success in the general insurers over recent years in widening underlying margins is commendable, as margin usually wins over growth on the day. Still, market share losses are mounting and are now at odds with another mantra to "at least hold share and manage margins". The broker observes, had the majors maintained the market share in motor and home they held four years ago when the challengers started to make inroads, their collective premia base would be almost $700m higher - Suncorp at $390m and IAG at $285m. 

***

Draft recommendations from the Harper Competition Policy Review have significant implications for the telecommunications sector, in Morgans' view. One is the onus on those seeking access to infrastructure - resellers - to show proof of a public benefit. There is also the recommendation of a specialist access and pricing regulator separate from the ACCC. Morgans believes the proposals are likely to have a significant impact on shaping investment returns and improving productivity across the fixed line telco sector. Moreover, the recommendations are part of a set of developments that are likely to swing investor interest back towards access providers and return the purpose of access regulation to supporting an appropriate balance between efficient infrastructure and competition.

Reform of the access regime may come too late to preserve much of the value in Telstra's ((TLS)) copper network, in the analysts' view. TPG Telecom's ((TPM)) competitive advantage may be underpinned by the reintroduction of infrastructure competition but substantial changes are not expected before 2016. Of the providers, iiNet ((IIN)) has the most commitment, perhaps over-commitment Morgans suspects, to the existing NBN model, and it would need to regroup substantially to remain a viable carrier in a more competitive framework. The other main player, M2 Telecommunications ((MTU)), is the purest reseller but has other areas that may help it manage changes in the way value is created.

***

The grocery discounters, Aldi and Costco, are becoming more of a threat to the sales and margins of the major supermarket chains in Australia. UBS takes a look at whether Australia will go down the path of the UK, where traditional chains have been negatively affected by new entrants, with the growth in the discounters accelerating in the past four years and now occupying a market share of 9%. A high penetration of private labels and a willingness to try new channels aided acceptance of the new brands in the UK and the broker suspects Australia will be no different. The discounters are also winning a share in UK fresh food and are no longer viewed as cheap alternatives.

How relevant is this to Australia's supermarkets? UBS notes Aldi already has more market share in Australia, at 6%, than it does in the UK, at 5%. Given higher margins in Australia versus offshore peers, Aldi Australia may have even greater opportunity. UBS believes the margins of Australia's major supermarkets are under greater risk than their sales volumes, based on the UK experience, and they need to regain shopper trust to moderate the Aldi threat. The independents, such as the IGAs, supplied by Metcash ((MTS)), are a more significant part of the Australian landscape, in both fresh and full supermarket channels compared with the UK, where independents are virtually extinct.

UBS suspects IGAs will be the main casualties of the newcomers and insulate the threat to Coles ((WES)) and Woolworths ((WOW)) in the near term. The broker has downgraded forecasts for Metcash as a result, reducing its recommendation to Sell from Neutral.
 

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article 3 months old

TPG Delivers, But Longer Term Concerns Arise

-Strong subscriber growth
-Impressive AAPT synergies
-Valuation full, upside questioned
 

By Eva Brocklehurst

TPG Telecom ((TPM)) had a lot of promises to fulfill with its FY14 results, and did. Not only did the headline beat forecasts but FY15 estimates have been raised, stemming from accelerated subscriber growth and further synergies from the recent acquisition of AAPT. Looking further ahead, several brokers question the sustainability of the company's growth rates and the implications inherent in the current share price.

Macquarie found the result hard to fault. Organic subscriber growth is robust in broadband, while margins expanded in the corporate segment and the company made earlier-than-expected synergy gains from the AAPT acquisition. The broker likes the company's unique position, given its infrastructure assets and cost base, and believes this should underpin further earnings growth from both the consumer and corporate segments. Credit Suisse was impressed with the synergies from AAPT, as a result of head count reductions, given the business has only been owned for five months. More gains are expected in FY15. That said, the broker believes the stock is fair value and retains a Neutral rating, looking to take a more positive view with any pullback in the share price.

Moreover, Credit Suisse continues to believe that TPG's roll out of FTTB - fibre-to-the-basement - will ultimately be stopped by a change to legislation, or a prohibitive cross subsidy tariff being imposed on superfast broadband networks that compete with NBN.

CIMB observes TPG is now adding 500-600 new NBN re-sale subscribers per week, around 13-15% of NBN's current activations, although there may be an initial "opening the floodgates" effect which will likely moderate. The stock appears to boast the best growth prospects in the fixed telco market on a three-year view, in the broker's opinion. Moreover, the company has stated that its extensive infrastructure holding allows it scope to leverage that which is profitable and focus on high market, on-net traffic. This strategy deserves praise, in CIMB's view, but longer term the outlook is not so buoyant.

As an indication, CIMB's valuation of TPG is $5.00, which includes a number of factors coming into play beyond FY17. TPG's share price of $7.00 is well beyond this figure and any extra value the broker can ascribe to the FTTB build-up. CIMB also suspects expectations for FTTB are unlikely to be realised in full, while the market appears to have overly optimistic assumptions about the potential for full service carrier consolidation. CIMB concedes the stock's small free float - relatively fewer shares available for public investment - tends to magnify the share price impact of key developments and operating performance.

Citi expects subscriber growth will accelerate amid further synergies from AAPT and this should drive earnings growth rates of over 22% for the next three years. Citi forecasts TPG to hit 1m subscribers in FY17 and move to a 15% share of fixed retail broadband. Nevertheless, the broker believes the share price already reflects option value from FTTB and NBN. To BA-Merrill Lynch subscriber growth seems to be the main driver of revenue while mobile growth has been lacklustre, raising concerns about whether the company will be willing to sacrifice margins to win subscribers in an NBN environment. The broker is not convinced. An Underperform rating is retained.

JP Morgan also has doubts. The business is good, but the valuation is a concern. The broker cannot argue with the trajectory of earnings but has a problem with calculating a fair price to pay for it. Half of the revenue comes from the corporate sector and it is harder for the market to establish where the company has the edge. Moreover, corporate pricing is competitive. Meanwhile, retail fixed line is mature and the incumbents, of which TPG is one, earn high returns, although entry barriers are being lowered by the NBN. Current multiples imply that high margins continue indefinitely, while JP Morgan assumes they fade.

Morgan Stanley looks at the stock's price from the perspective that TPG and AAPT currently control 7% market share in the Australian corporate telco market and every percentage point gain represents up to 26c per TPG unit. Hence, any market share gain delivers pure upside to the broker's forecasts and valuation. The company's competitive advantage in the retail broadband market is its lean cost structure and with the recent acquisition of AAPT this means TPG is a fully vertically integrated telco for corporates. It all ads up to market share, earnings and valuation upside for Morgan Stanley. The broker also believes TPG's pricing strategies are sustainable.

FNArena's database contains one Buy, two Hold and three Sell ratings for TPG. The consensus target price is $6.22, signalling 11.5% downside to the last share price. This compares with $5.32 ahead of the results. Targets range from $4.90 to $7.60.
 

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article 3 months old

Weekly Broker Wrap: Portfolio Strategy, Indices, Financials And Oil

-Credit Suisse long on IIN
-More index weight on IT, energy
-Less weight materials, miners
-Business credit growth improves
-Upside to oil prices likely
 

By Eva Brocklehurst

Credit Suisse has reviewed its portfolio strategy and placed iiNet ((IIN)) into the Long portfolio. The company's recent earnings result confirmed the stock should benefit from many of the investment themes that prevail at present. Cash flow is strong and double digit dividend growth is expected. Debt financed accretive acquisitions remain a potential driver. To make room for iiNet the broker is removing Fortescue Metals ((FMG)). That stock has lost 21% ex dividends since November last year and, while management has stated that credit investors still like the company, it is clear to Credit Suisse that equity investors do not. The stock is cheap vis-a-vis commodity price forecasts but further sluggish activity in China suggests its price may be capped in the shorter term.

Credit Suisse acknowledges a value and growth bias exists in its portfolio. The average valuation of stocks in the Long portfolio is cheaper than those in the Short portfolio. Despite this, growth out to FY16 is expected to be stronger for the Long portfolio.

***

WilsonHTM forecasts three additions to the ASX 200 and 14 for the ASX 300 at the September quarterly re-balancing of the indices. Higher weights for IT and energy sectors compare with lower weights in materials and the removal of several miners from the Small Ordinaries. Potential changes include a removal of Insurance Australia Group ((IAG)) or Westfield Corp ((WFD)) from the ASX20/50. JP Morgan concurs, considering it likely that one of these two will be dropped.

Both JP Morgan and WilsonHTM expect the three stocks removed from the ASX 200 will be The Reject Shop ((TRS)), Buru Energy ((BRU)) and NRW Holdings ((NWH)). Liquefied Natural Gas ((LNG)), Asaleo Care ((AHY)) and Technology One ((TNE)) are likely additions in WilsonHTM's view while JP Morgan includes APN News & Media ((APN)), nib Holdings ((NHF)) and Amcom ((AMM)) as well.

WilsonHTM's potential additions to the ASX 300 include LNG, AHY, TNE, Growthpoint ((GOZ)), Equity Trustees ((EQT)), Prime Media ((PRT)), iSentia ((ISD)) Austal ((ASB)), MyNetFone ((MYF)), Burson Group ((BAP)), Mantra Group ((MTR)), Metals X ((MLX)) and Infomedia ((IFM)). To this list JP Morgan adds nib, 3P Learning ((3PL)), Ashley Services ((ASH)), Speedcast ((SDA)) and Donaco International ((DNA)).

JP Morgan lists Bathurst Resources ((BRL)), Red Fork Energy ((RFE)), Ausenco ((AAX)), Codan ((CDA)), St Barbara ((SBM)), Mighty River Power ((MYT)), Boart Longyear ((BLY)), Aspen Group ((APZ)), OrotonGroup ((ORL)) and Maverick Drilling ((MAD)) as likely to be dropped.

BHP Billiton's ((BHP)) de-merger proposal for selected assets, targeted for mid 2015, has an estimated market cap around $13-16bn which Wilson HTM considers easily large enough to qualify for ASX 20 selection.

JP Morgan's market timing model continues to favour the financials ex A-REITs over resources, both currently and over the longer-term, as economic survey data suggest credit growth is likely to expand a further 5.1%. The model's back tests showed a return of 20.1% per annum over the last 20 years with annualised volatility of 20%, outperforming buy-and-hold strategies in either resources or financials.

***

Credit Suisse observes domestic business credit growth is starting to tick up. From the latest major bank disclosures the broker deduces credit exposure growth was relatively stronger for Westpac ((WBC)), with an apparent spike in liquid assets. The Reserve Bank stated that business credit growth picked up in the June quarter, but part of the increase was accounted for by the number of banks providing bridging finance for the Westfield restructure.

The broker notes commercial bank net interest margins are holding up well, driven by consumer banking. Asset quality continues to improve but stress remains evident in agri-business portfolios. Corporate and institutional revenue appears to be struggling, notably from financial market income and funds management margins. The broker also believes the decline in bad debt charges may have now run its course, with problem single exposures more visibly affecting headline outcomes at these low levels.

***

What is wrong with oil? Prices fell to a 20-month low in August as the recent conflicts in Ukraine and Iraq resulted in Saudi Arabia increasing production to head off a perceived shortfall, which did not happen. As a result the market is out balance. Morgans expects prices will improve once the Saudi Arabian production levels are cut in the second half of the year. The analysts forecast 17% upside to current prices. Those companies with increasing oil-linked production should continue to outperform. The broker lists Santos ((STO)), which has maintained full year guidance, Oil Search ((OSH)), which has ramped up PNG LNG to full production, and Woodside Petroleum ((WPL)) for its near-term yield, as stocks which should benefit. Beach Energy ((BPT)) and Senex Energy ((SXY)) are considered solid plays on the back of production and news flow in FY15.
 

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article 3 months old

Netcomm Achieves Scale, Enhancing Potential

-Attractive buying opportunity
-Potential for large contracts
-Expanding geographies, industries
 

By Eva Brocklehurst

Netcomm Wireless ((NTC)) is a technology provider in the high growth global M2M segment. That is, machines talking to machines. The company reached profitability in FY14, driven by a strong contribution from the AusNet Services' ((SPN)) smart metering contract. Cash flow conversion was around 100%. Netcomm has provided no financial guidance for FY15, other than it expects a substantial increase in NBN volume.

Moelis believes the company provides an attractive risk/reward opportunity. FY14 results were ahead of expectations and revenue grew 51%. Earnings, which increased to $5.2m from $800,000 in FY13, signal the scale benefits that are now accruing. M2M now represents 51% of group revenue, up from 20% in FY13, with the balance coming from the legacy business that supplies a range of wireless telecommunications products. Where Netcomm differentiates is that its software is open platform and therefore more versatile than that of its rivals. Moelis retains a 95c target and a Buy rating.

A number of large contracts have been secured which will deliver an increasing contribution from FY15. Vertical applications are being actively pursued in a number of industries which, even if only a couple translate into orders, offer significant potential to transform revenue and earnings over time. This potential provides significant upside to Moelis' assumptions from FY17. The company is a supplier of M2M IP modems to Vodafone ((HTA)) and, outside of NBN Co and the Cubic transportation project for Opal Card in NSW, has a stated goal of adding another three strategic partners over FY15.

Netcomm provided a little detail regarding where some of the opportunities are coming from. Smart metering deals are being pursued in Europe, the Middle East, Australia and the US. The average contract size is 1m units, which compares with the AusNet contract of 140,000 units. Netcomm requires at least 100,000 units for a project to be economic.

WilsonHTM likes the company for its exclusive agreements with strategic partners such as Vodafone and the NBN. The AusNet and Vodafone contracts exceeded the broker's expectations in FY14. Gross margin was less than expected affected by higher M2M sales volume. The costs of doing business were lower than expected, as some R&D costs were capitalised. NBN volume is expected to ramp up in FY15. The contracts ares sizeable and should help win similar projects elsewhere. Rural broadband opportunities are also being pursued in Europe and the US and the company intends to leverage off its involvement with the NBN.

The company expanded its engineering team to 45 at the end of FY14, adding two more development teams to the current four. The two teams will focus on different areas of product development. Given Netcomm's existing expertise in smart metering and broadband, WilsonHTM expects the new teams will assist in product development for other industries. The broker retains a Buy rating and 87c target.

AusNet - which changed its name from SP AusNet this month - will be liable for customer rebates of up to $37.5m if faulty smart meters are not replaced by March next year. At this point in time only 400,000 of the 700,000 smart meters are functional. AusNet will not replace its core system and this is a positive for Netcomm, as WilsonHTM believes it makes using the existing 3G technology more likely, given the short timeframe until the rebates fall due. AusNet's network uses both WiMAX and 3G and it is the instability of the WiMAX component that is at the heart of the fault.

See also, Netcomm Aims For High Growth M2M on August 4 2014.
 

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article 3 months old

NEXTDC Poised For Strong Revenue Growth

-Client uptake bodes well
-Capital intensity tapering
-Risk of surpassing targets
 

By Eva Brocklehurst

Systems integrator and data centre provider, NEXTDC ((NXT)), is maturing as a business. The company now has five data centres and revenue grew substantially in FY14. FY15 revenue guidance is set at $51-55m, which signals 68-81% growth.

While the path to profitability is taking a little longer than Citi expected, the broker remains a supporter of the stock. FY15 should be a significant year as the company flexes its operating leverage. There are no oversupply issues in the data centre segment, while the company has the financial headroom to execute on its $35m capital expenditure plans. The company offers good visibility on recurring revenue, which underpins the broker's confidence. Citi does not envisage the company generating any material profit for a number of years, but client interest and uptake at its initial Brisbane asset, together with the foundation partners of its second centre in Melbourne, bodes well.

The proliferation of smart phones, tablets and associated data usage and storage underscores a robust outlook for NEXTDC. Citi retains a Buy rating, High Risk - with the High Risk maintained because of the infancy of the company's business model and the lack of profitability. The broker's price target is $3.23.

Growth in internet traffic is exponential and this augurs well for the stock, in Macquarie's opinion. The current share price represents a discount to the broker's valuation of the assets, which are assumed to take four years to reach full capacity. Specific milestones achieved in FY14 included the signing of over 300 unique customers and 722 service orders. Contracted customer utilisation has increased by 2.12MW. Data centre utilisation is at 30%. Macquarie notes annualised contracted recurring revenue is $41.7m. Based on the data and these contracts the broker forecasts break even for earnings as early as the first half FY15.

The broker observes that based on US experience, mature data centres generate very strong cash flow and high operating margins as initial capex requirements ease. The next step is new national agreements to build confidence, in order to support further expansion. This could be a slow process but provide a meaningful catalyst. Macquarie retains an Outperform rating and $2.20 target.

FY14 results were weaker than both Citi and Macquarie expected, largely because NEXTDC recapitalised its balance sheet with the sale of securities held in APDC, the raising of new equity and a five-year unsecured note offering. Capital intensity is tapering off and the company now has cash of $70m. Fitting out a data centre is capital intensive and requires significant expertise. Macquarie observes it can require more than twice the amount of investment compared with combined land and building value. The major cost for the company is power, which was around 13% of revenue in FY14. Based on a typical design, Macquarie observes the supply of 1MW of IT load to a data centre requires an average investment of $8-10m. Initial capacity in a data centre may cost around 20% over and above this figure.

Telstra ((TLS)) is a key partner, enabling customers to move critical IT into the data centres. Space is tailored to customers who want to complement Telstra's cloud access with equipment co-located in the a data centre in their region. Macquarie suspects NEXTDC is looking for a "white space" partner over FY15 to drive cross-connections and accelerate fit out. The broker's forecast of $60m revenue in FY15 takes into account a strong contribution from the Telstra agreement and a white space deal.

Morgans liked the news the company expects to be earnings positive in FY15. Moreover, sales momentum continues to improve and the first quarter of FY15 suggests guidance is conservative. NEXTDC has a relatively simple financial model and is at a key inflection point, with Morgans noting 75c of every $1 in new sales now contributes directly to earnings and cash flow. From here, the key issue is how long it will take the company to fill its footprint. Guidance is for new sales of 2.4-3.0MW in FY15, excluding any potential white space/wholesale deals. Given the momentum in FY14 this target is at risk of being surpassed. The numbers equate to a bullish outlook and Morgans retains an Add rating and $2.39 target.
 

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article 3 months old

Dodo Delivers For M2 Telecom

-Energy connections grow strongly
-Commander turning around
-Main uncertainty in NBN
 

By Eva Brocklehurst

M2 Telecommunications ((MTU)) has reached the $1bn revenue mark for the first time. FY14 guidance was easily met. Indeed, it was provided 12 months earlier when Dodo/Eftel had only contributed two months of profit. Such confidence is meaningful for brokers given a considerable amount of  FY14 and future earnings growth is being generated by Dodo.

This underscores a Buy rating for Citi. Earnings margins remained comparable with the prior year at 15.6% while services grew and costs were reduced. The company is now focused on operational improvements and integrating its acquisitions as well as accelerating the roll-out of the Dodo kiosks beyond the current 20. Following three notable transactions, Primus, Dodo & Eftel, Citi believes FY14 was the year of consolidation and FY15 should be the year of organic growth. The company is differentiating its offering from a sales organisation in the telco space and this diversification remains paramount to the investment thesis.

Energy connections grew 66% in the year and are proving to be a core product for the Dodo Connect kiosks, offering customers a lower price point. Kiosks are a low-cost alternative which target high-traffic regions and do not need the capital outlay associated with store fit-out. Macquarie observes energy connections were also a key driver and are proving to be a core product in the kiosks. Another aspect is the company has traditionally low capex commitments, given it has minimal ownership of the network infrastructure. The company has guided that capex will be 2.5% of revenue in FY15. Borrowings remain manageable with a debt to earnings ratio of 1.6 times expected in FY15. Macquarie is also encouraged by the initial response from Dodo's NBN product. This is still relatively small but management notes a high take up from existing customers.

Credit Suisse considers M2 Telecom is a mispriced emerging organic growth story. Acquisitions clouded the page last year and first half cash flow was weak. Nevertheless, the broker has witnessed Dodo driving a significant transformation in cost discipline and customer acquisition approach. The broker expects growth of 15% per annum. Moreover, if M2 can maintain, or accelerate, subscriber growth this could mean further upside to Credit Suisse's forecasts. The broker retains an Outperform rating.

For Morgan Stanley there is also a potential turnaround story in the Commander business. The broker was concerned that this segment would not be able to generate organic growth because of uncompetitive prices and a weak product mix but the company has addressed these issues by reducing prices and introducing a hosted voice phone product. Consequently, Morgan Stanley has upgraded FY15-18 earnings forecasts by 3-16%. The broker has an Equal Weight rating, believing the appropriate discount to peers is reflected in the current stock price. Morgan Stanley prefers iiNet ((IIN)) and TPG Telecom ((TPM)), with Overweight ratings on both.

CIMB also accepts the company has demonstrated, via its performance and outlook, that it justifies a higher market valuation. Hence, an upgrade to Hold from Reduce. CIMB expects acquisitions to be an ongoing theme but other catalysts are likely to have significant implications in coming weeks. Given the company's relative size, it becomes more difficult for acquisitions to add meaningfully to value. This is likely to swing the focus back to investment in long-term infrastructure. Much of the company's potential derives from the impact of the current regulated access model on network investment and the economic outlook for the NBN. Given the mismatch of risk and return in the sector between services and infrastructure telcos, it seems likely that the regulatory changes will tend to favour network investments over services, in CIMB's view. This all adds to the uncertainty regarding actual outcomes.

On FNArena's database there are two Buy and two Hold ratings. The consensus price target is $7.45, suggesting 4.1% upside to the last share price. The dividend yield is 4.1% and 4.7% on FY15 and FY16 forecasts respectively.
 

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article 3 months old

Weekly Broker Wrap: LNG Strikes, Telcos, Banks And Iron Ore M&A

-Industrial debate over shorter rosters
-Tensions as LNG projects reach start up
-ISPs subscriber growth rates slow
-Citi downshifts on Oz banks
-Morgans likes a BCI merger with IOH
 

By Eva Brocklehurst

Risk of industrial action on the Curtis Island LNG terminal at Gladstone, QLD, have diminished, with the majority of workers voting for the enterprise bargaining agreement (EBA), the third attempt to approve a new EBA. This majority was only 54%, with more than 3,100 workers voting no and raising a question about productivity. Credit Suisse is curious that 474 more workers voted last week compared with the initial vote in May. Employer Bechtel stated back in February that the labour force had peaked and the broker observes the construction work on train one at BG's QCLNG is effectively completed. So why the extra staff? QCLNG is seven months late so the broker speculates pressure might be increasing regarding getting the job done.

There may be more action to come. Productivity is an issue that will not dissipate and Credit Suisse observes Chevron's Gorgon project is next in line for EBA renewal in December. Other project managers may not get away as lightly as Bechtel has done. There is a campaign among workers for a roster of 20 days on, 10 days off. This compares with the four weeks on, one week off in Gorgon's current agreement. Wheatstone (Chevron) and Ichthys (Total) project EBA renewals are also due down the track. There is debate as to the financial impact of shorter rosters on new projects, as higher productivity could offset higher associated costs from more staff, but Credit Suisse believes changing mid project would be a disaster. The broker suspects Big Oil needs to be sure that Australian EBAs will run for the entire construction phase of the project.

UBS attributes some of the recent price weakness in Santos ((STO)) and Origin Energy ((ORG)) to the EBA unrest. Overall, the strike had minimal impact on construction and the broker estimates 2-3 days of lost productivity. The market was concerned that extended strike action could impact on completion of the three big Gladstone LNG projects. QCLNG, viewed as a setting a benchmark, is on track for first production at the end of the year, while GLNG and APLNG are looking to be starting up mid 2015.

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Citi has reviewed the implications for internet service providers (ISPs) such as iiNet ((IIN)) and TPG Telecom ((TPM)) based on Telstra's ((TLS)) reporting of subscriber numbers. Telstra's wholesale broadband subscriber base rose in the second half, implying continued growth among ISPs. Netting out the latest Optus ((SGT)) figures and M2 Communications' ((MTU)) recent update leaves subscriber growth distributed amongst IIN, TPM and smaller ISPs suggesting the slowest net growth rate in two years. Citi notes as background that a major portion of on-net growth - areas where ISPs have their own infrastructure - is going to TPM and IIN. MTU appears to be dominating off-net growth - where ISPs do not have infrastructure - that is mainly in regional areas. The broker takes comfort in the implication that no ISP has gone backwards. Telstra also continues to gain market share in copper broadband connections, now back above 50%.

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Citi suggests the bull run in Australian banks is coming to an end. The broker has downgraded Commonwealth Bank ((CBA)) to Neutral from Buy, leaving Macquarie Group ((MQG)) as the only Buy rated bank in the broker's coverage. As competition re-emerges, pricing for risk is re-established and credit cost improvement slows, the major banks are likely to face significant challenges to maintain returns. Major bank average return on equity (ROE) is expected to decline to 12% from the the current 25-year peak levels of 16%. This is still well above the banks' current 10% cost of capital. Over the longer term, Citi expects to encounter different ROE outcomes from the major banks, as their differences are revealed and heightened in terms of geographic mix, products and relative starting capital positions.

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BC Iron's ((BCI)) plan to acquire Iron Ore Holdings ((IOH)) is making more sense to Morgans the longer the broker dwells on the idea. If the company can gain access to additional infrastructure through Fortescue Metals ((FMG)) for Iron Valley and via Aquila Resources ((AQA)) for West Pilbara, BC Iron could become a significant player in Western Australia's iron ore sector. The broker's interest in the stock is driven by its potential production growth, rather than iron ore markets. Within 12 months the company will ramp up to 11mtpa, which about equals that of Atlas Iron ((AGO)), and could be over 20mtpa within the next few years if a joint venture deal with Aquila eventuates. This would make BC Iron the fourth largest producer after Fortescue. The broker suggests this represents formidable upside if investors have the patience for the events to play out.
 

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article 3 months old

Telstra: Mind The Gap


Bottom Line 19/08/14

Daily Trend: Up
Weekly Trend: Up
Monthly Trend: Up
Support Levels: $5.39 / $5.16 / $4.96 - $4.92
Resistance Levels: $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:
→ 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.
→ Technically, the recent broad consolidation has the potential to be a foundation for a continuation of the longer term trend higher.

Results announced last Thursday were well received by the market which resulted in a gap higher though more importantly the close was on the highs of the session.  Results showed fundamental growth of almost 5%.  There was also strong cash generation which fuelled an increase in the final dividend.  There is also talk of a 31c fully franked dividend in FY15 which equates to a yield of around 8%.  That’s the fundamentals out of the way so let’s take a look at the technicals.  Price had just broken up through a diagonal line of resistance during our last look at the company which was a big step in the right direction.  Recent strong price action has now taken TLS to the upper boundary of a solid zone of horizontal resistance which if breached portends another decent leg higher.  Despite the strong trend that commenced in late 2010 price has still not clawed back 50% of the movement down from the all-time highs set in 1998.  Although this highlights the technical damage that has been inflicted on the stock it also offers further upside – even in regard to a larger bounce only.  As long as investors remain focused on strong companies providing good yield there is no reason to expect anything other than a small retracement should some profit taking take hold.  The trend is strong and as such we simply go with the flow.

Trading Strategy

“…Momentum traders could even jump on right here and now…”  If you’re holding positions then place the trailing stop beneath the prior pivot low at $5.38.  A push beneath that level will result in diagonal support once again becoming resistance which would be less than ideal.  Should you be looking for an opportunity there is a gap that was left last week which eventuated on the back of results.  Generally the stock doesn’t tend to leave gaps so a low volume meander down to fill it would present a low risk entry.  Should this be the way forward I’ll be making a formal recommendation at those slightly lower levels.
 

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).

Risk Disclosure Statement

THE RISK OF LOSS IN TRADING SECURITIES AND LEVERAGED INSTRUMENTS I.E. DERIVATIVES, SUCH AS FUTURES, OPTIONS AND CONTRACTS FOR DIFFERENCE CAN BE SUBSTANTIAL. YOU SHOULD THEREFORE CAREFULLY CONSIDER YOUR OBJECTIVES, FINANCIAL SITUATION, NEEDS AND ANY OTHER RELEVANT PERSONAL CIRCUMSTANCES TO DETERMINE WHETHER SUCH TRADING IS SUITABLE FOR YOU. THE HIGH DEGREE OF LEVERAGE THAT IS OFTEN OBTAINABLE IN FUTURES, OPTIONS AND CONTRACTS FOR DIFFERENCE TRADING CAN WORK AGAINST YOU AS WELL AS FOR YOU. THE USE OF LEVERAGE CAN LEAD TO LARGE LOSSES AS WELL AS GAINS. THIS BRIEF STATEMENT CANNOT DISCLOSE ALL OF THE RISKS AND OTHER SIGNIFICANT ASPECTS OF SECURITIES AND DERIVATIVES MARKETS. THEREFORE, YOU SHOULD CONSULT YOUR FINANCIAL ADVISOR OR ACCOUNTANT TO DETERMINE WHETHER TRADING IN SECURITES AND DERIVATIVES PRODUCTS IS APPROPRIATE FOR YOU IN LIGHT OF YOUR FINANCIAL CIRCUMSTANCES.

Technical limitations If you are reading this story through a third party distribution channel and you cannot see charts included, we apologise, but technical limitations are to blame.

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