Tag Archives: Telecom/Technology

article 3 months old

Treasure Chest: Significant Upside All On 1-Page

By Eva Brocklehurst

A high growth technology company with strong potential in its home territory, the US, has recently listed on ASX. After recently visiting the company's HQ in San Francisco, Canaccord Genuity believes the growth options for 1-Page ((1PG)) are substantial, in keeping with the scale of the US market in human resources (HR) recruitment.

A ramp-up in revenue is considered imminent and the broker kicks off coverage with a Speculative Buy rating and $6.37 target. This target represents 187% upside to the current share price and is based on a blended valuation. Upside risk to the valuation could come as the company converts stage two contracts, particularly if these contracts are converted on more favourable metrics against the broker's base case.

It appears US enterprises have been quite receptive to the company's products, with 125 paying clients expected by end of 2015 and up to 30 potentially converted into stage 2 contracts this year. The contracts vary in size depending on the employee base. Cash flow is recognised on a monthly pro rata basis.

The broker forecasts revenue to rise to $76.4m in 2016 from $6.7m in 2015. Such growth is predicated on the scalability of the contracts. For example, a sourcing customer with 250,000 staff and 30% staff turnover per annum could grow to US$5.3m in revenue (7.0% share of hiring) over subsequent years from just US$1.5m revenue (2.0% of hiring) in its stage 2 contract.

Significant re-investment in growth initiatives is expected next year but the business is still expected to generate positive free cash flow. Canaccord Genuity does envisage a requirement for additional capital to be raised in the short term.

The company acquired BranchOut in November 2014, a professional networking services with 820m profiles launched in 2010 within the Facebook platform. This formed the basis of a proprietary database that now has over 1.1bn affiliations. The company offers a HR sourcing service, based on this asset which is considered beneficial to HR managers.

The database allows 1-Page to pull out a set of candidates that are affiliated with the customer's employee base. Services to customers include sourcing suitable candidates for jobs, assessing the suitability of candidates for specific jobs and engaging existing staff internally. 1-Page acquired BranchOut last year for US$2.0m and 7.5m shares.

Data from the company suggests that gainfully employed candidates are far less likely to respond to an approach from either recruiters or job listings than to people they know socially. Canaccord Genuity suggests this is a major advantage. 1-Page also uses another publicly available data to cross-reference the people in the database including LinkedIn and Twitter as well as industry-specific platforms

1-Page is based in San Francisco and has substantial experience in US high growth tech companies. The company seeks to monetise its customers immediately, charging a small flee to trial the product and looking to turn that customer into a fully negotiated enterprise contract within 3-5 months.

In a highly fragmented market such as recruitment, the broker believes the company's platform offers a unique service which could capture a meaningful market share over the longer term. The acceptance of the services from some US Fortune 500 companies signals the potential for value adding.

1-Page is not a typical ASX tech stock. For a start, its target continues to be the US market. In this case the fall in the Australian dollar exchange rate will have positive impact on translated revenue and earnings reported to ASX.

The decision to list on ASX is a strategy to avoid potential dilution or restrictions associated with US venture capital investments on offer. The listing also helps the company meet enterprise contract procurement requirements of its major customers, which often cannot deal with start-up companies without access to public capital.

Canaccord Genuity considers the nearest comparable on ASX to be Xero ((XRO)), which has a high growth, scalable business model and a similar revenue trajectory. 1-Page will present at the broker's annual conference in the US this month.
 

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article 3 months old

Stellar Performance Expected From amaysim

-Strong earnings trajectory
-Industry consolidation potential
-Scalable, capital-light business
 

By Eva Brocklehurst

Amaysim Australia ((AYS)) has been around for five years and now has a leading place among mobile virtual network operators (MVNOs). The company sells subscriptions to voice and data plans on the Optus ((SGT)) 3G and 4G networks under a long-term arrangement.

Just listed, the company became earnings positive in the second half of FY14 and is now on track for earnings of $15.9m for FY15 and $31.7m in FY16, based on pro forma forecasts. Amaysim now holds a 2.0% subscriber share in Australia and is the fourth largest independent mobile service provider. There are many MVNOs in Australia. Collectively they hold a 9.0% share of subscribers in the Australian market with amaysim being the largest.

Macquarie highlights this momentum as indicative of the leverage that exists in the operating base. Hence, the catalysts for the stock come down to the company's ability to sustain strong subscriber growth and profit margins in an evolving market.

Macquarie expects cash conversion to remain strong, given the capital needs of the business remain light. The broker acknowledges that setting a benchmark is complicated, given the lack of direct peers. Online and technology stocks share some characteristics such as scalability, high growth and being light on capital but the broker seeks to balance this by also incorporating trading multiples from the lower-growth, broader emerging leaders group.

As a result, the broker's discounted cash flow valuation at $3.14 sits above the primary valuation range and this reflects upside, should amaysim further entrench its stake in the market. Macquarie has an Outperform rating and $2.45 target, which is the mid point of the primary valuation range.

The broker suggests, in the telco sector, that M2 Telecommunications ((MTU)) appears to be its closest peer, given that company's operations are more heavily biased towards leveraging third party networks rather than network ownership. A notable difference is that M2 Telecom is heavily geared whereas amaysim has a net cash position.

The company offers long-term strategic value, in Goldman Sachs' opinion. The broker forecasts compound annual revenue growth of 17% for FY15-18 with earnings up 45%, driven by subscriber growth and despite increased competition. The scalable cost base is also supportive. Goldman Sachs highlights the company's intention to participate in industry consolidation and acquire growth through acquisitions.

Goldman Sachs initiates coverage with a Buy rating and $2.45 target, which implies a 29% potential total return and 4.0% FY16 dividend yield. The stock is well positioned to benefit from strong mobile industry dynamics and is appealing as either a target or as an acquirer, in the broker's view. The company could create value by acquiring existing wholesale brands which could yield additional scale and synergies.

The risks include any event that would mean Optus ceases to provide network services to amaysim, or changes to the competitive landscape that may stymie the company's ability to grow its subscriber base and sustain revenue. Still, the brokers observe the network service agreement with Optus does provide some protection, as amaysim has the option to trigger a price review mechanism to ensure its wholesale pricing remains competitively positioned.

Still, there are low barriers to entry for such MVNOs. For example, Goldman Sachs estimates Aldi has become the third largest player in terms of subscribers since its launch in 2013. The broker observes the MVNO market has become more concentrated recently, with the five largest controlling 60% of share compared with 30% in 2010. Amaysim is the only one offering a mobile-only product of the five. The others are TPG Telecom ((TPM)), Aldi, M2 Telecom and iiNet ((IIN)).

Goldman Sachs suspects many of the smaller mobile-only players are unlikely to be profitable because of a lack of scale and amaysim has increased its share of the MVNO market largely at the expense of these players, several of which have disappeared. The broker also envisages the company taking mobile share from fixed line operators such as TPG Telecom and M2 Telecom.

Amaysim's products are competitively priced and sold on a bring-your-own-device (BYOD) basis, with no lock-in contracts. The company has a long-term network supply agreement with Optus and an established hybrid distribution model that blends its online platform with the reach of a retail distribution network spanning over 12,000 points of presence.

The brokers consider the structural trends are favourable in this BYOD segment. Macquarie notes online "chat" is helping to improve the efficiency of amaysim's call centre operations.

Both brokers were involved in the public offering of securities in the company over the past 12 months.
 

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article 3 months old

SpeedCast Ramps Up Service

-New blue chip clients
-Increased buying power
-Cost synergies too
 

By Eva Brocklehurst

SpeedCast International ((SDA)) has made its eighth acquisition under current management, buying NewSat's ((NWT)) teleport and satellite services business for $12m. The acquisition has excited brokers as it adds multiple positives to the company's service offering, increasing scale and capacity flexibility.

The deal adds two teleports - Adelaide and Perth - to the Australian business which will allow for future traffic consolidation and service expansion. The customer base is similar and should increase SpeedCast's penetration in the energy and government market as these teleports service a number of blue chip resources and government clients. The acquisition also comes with a 24/7 network operations centre.

The company already owns two teleports in these cities but the new infrastructure will add capacity and potentially allow SpeedCast to access new satellites, given each existing teleport can only be linked to one satellite. SpeedCast leases space on 41 satellites and utilises 28 teleports. Underlying service revenue has grown to an estimated US$135.4m this year, Macquarie notes.

The acquisition will be funded by cash and debt reserves and Macquarie considers the company bought the business at the right price. The company's growth strategy is predicated on ever increasing data requirements, targeting market share gains and geographic and customer diversification.

UBS concurs, believing it is an attractive price for strategic assets. Cost savings will also flow from the transactions, as SpeedCast will be able to leverage its scale and buying power to renegotiate existing bandwidth agreements and derive cost benefits from shifting customers to the newly-acquired teleport infrastructure.

 As Macquarie maintains, demand for remote communications and bandwidth can only grow. This situation, plus industry consolidation opportunities, underpins an Outperform rating and $3.60 target for the stock. The acquisition is expected to generate revenue of $22m and earnings of $3.8m in 2015, pre synergies. UBS increases 2015 estimates by 2.0% and 2016 by 11% as a result of the purchase and maintains a Buy rating and $3.65 target.

FNArena's database shows three from three Buy ratings for SpeedCast International. The consensus target is $3.43, which signals 0.4% upside to the last share price. Targets range from $3.05 to $3.60.

See also, Accelerating Demand Lights Up SpeedCast on June 16 2015.
 

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article 3 months old

Urbanise: Growth Potential In Managing Facilities

-Cost effective solution
-Sticky customer base
-US expansion potential
 

By Eva Brocklehurst

Urbanise.com ((UBN)) could be in a building near you. The company has developed a cloud-based platform for facilities management, which enables operators to manage buildings more efficiently. Canaccord Genuity believes the company is preparing for a period of predictable and consistent revenue growth, with earnings margins in excess of 30%.

The broker highlights a highly relevant product, a sticky customer base and a market dominated by expensive legacy systems among the positives for the company. A Buy rating is underpinned by projected earnings on a five-year compound growth rate of 48% to FY18. The broker's price target is $1.54. A large proportion of that revenue is recurring and urbanisation is helping support growth in demand. Existing buildings on the company's customer base which could be migrated onto the platform are in the vicinity of 4,000-6,000.

Mystrata, which Urbanise.com recently acquired, currently has access to 6,000 buildings, providing large opportunities for cross selling. Mystrata is a strata management administration platform with more than 138,000 units under management. Urbanise.com charges a monthly software subscription fee based on platform usage. Canaccord Genuity estimates that in FY18, recurring revenue will be around 96% of the total. Moreover, once the software is embedded in a business the customer is largely locked in, making revenue quite predictable.

First half results show the customer adoption rate is accelerating. Buildings that are connected are forecast to increase more than tenfold this year, to 1,150. Canaccord Genuity expects 7,150 by 2018. The broker met with some companies in Dubai and the UK to obtain feedback on the service. They suggest Urbanise.com is user friendly and helps improve customer service levels and ability to generate new revenue. These companies are looking to innovate with technology to combat pressure on margins and this should bode well for Urbanise.com signing up customers quite rapidly, in the broker's view.

Further potential catalysts for the stock include the upcoming FY15 results, additional contracts garnered from large integrated facilities management companies and entry into new markets, particularly the US. Any weaknesses? Canaccord Genuity considers one of these is the lack of tailoring in the solution. There is also the continuing threat of new technology or competition eroding the company's edge. Still, on the positive side the software is able to integrate with other systems. It is also well priced against traditional systems in terms of initial installation and maintenance.

Facilities management has a range of specific services which need to be organised and coordinated such as cleaning, maintenance, security, electrical & plumbing and heating & cooling and the responsibility lies with either the building owner or property manager. The company calculates that the industry's annual expenditure on building operations and management is around 3-5% of GDP in western markets. However, points of difference between developed and developing markets such as India and China are diminishing. The company is looking to expand in North America which would increase the market opportunity immensely, in the broker's view.

Canaccord Genuity has not factored in any revenue growth into new markets in its estimates. The company listed on ASX last year and Cisco Systems invested in 2009 in order to be at the forefront of developing smart cities and harnessing the next wave of the internet. Cisco has a 10.6% stake in the company. As well has having a strategic stake, Canaccord Genuity considers Cisco could become the natural owner of the company in time. Urbanise obtained its first customer in Dubai in 2011 and has since opened offices in Dublin and Singapore.
 

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article 3 months old

Upside For Telstra


Bottom Line 14/07/15

Daily Trend: Up
Weekly Trend: Up
Monthly Trend: Up
Support Levels: $6.02 - $5.95 / $5.79 - $5.75
Resistance Levels: $6.42 / $6.73

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 six months ending the 31st of December 2014 revenues increased 1% to A$12.72B. Net income before extraordinary items increased 7% to A$2.07B.  The dividend yield is currently 4.7%.  Broker/Analyst consensus is "Hold".

Reasons to retain a bullish stance:
? New investment in the mobile network should reap benefits.
? Strong first half results presented with mobiles being a big contributor.
? Earnings growth is anticipated with potential to see dividend increases as well as capital management.
? In a low interest environment TLS is an alternative to the banks.
? Australian interest rates to remain lower for longer meaning demand for higher yielding stocks will be maintained.

In the U.S the 200 day moving average is used by most analysts and investors which in many ways is a self-fulfilling prophecy; generally speaking when it is tagged and rejected the door suddenly opens for strength to kick back into gear.  On the flip side, when price breaks down through the moving average the alarm bells start to ring.  Over here in Australia it isn't anywhere near as significant although TLS is one of the exceptions.  Since August 2011 the trend line has been tagged and rejected on many occasions which is exactly what transpired a couple of weeks ago. 

During our last review though we were also keeping close tabs on a falling channel which was proving to be equally important.  The upper boundary of the channel has now been penetrated which opens the door for price to head back up toward recovery highs around $6.70.  Whether blue sky territory can be attained we'll just have to wait and see though there's no doubting the strength of the prior trend which has been maintained for several years.  As such there is no reason to try and fight it, at least not until the aforementioned 200 day moving average is penetrated.  Adding weight to the immediate bullish case is Type-B bullish divergence on the weekly time frame (not shown).  This variant of divergence isn't as powerful as Type-A though it should provide a helping hand nonetheless.  As it's on the larger time frame it is going to take several weeks for our oscillator to head back into the overbought position and until that occurs downside should be limited.

Trading Strategy

Whilst we don't tend to use the 200 day moving average as an entry/exit mechanism it can be a useful tool to add to the toolbox on occasions.  If you like the company there is no reason why you can't dip your toes in around current levels whilst keeping the trailing stop just beneath the 200 day M.A.  As suggested above there is a strong case for price heading back up toward recovery highs around $6.70, even within a larger corrective pattern higher which would be our minimum expectation.  Any weakness should be reasonably short-lived which is partly due to the attractiveness of the dividend yield which is still hovering around 5%.
 

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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article 3 months old

Weekly Broker Wrap: Telecoms, Lending And Retail

-Broadband pricing moves higher
-Unlimited data plans unprofitable?
-Opportunities arising in banks
-UBS prefers SUL, BRG in small retail
-Consumers resisting higher TV prices
 

By Eva Brocklehurst

Telecoms

Optus ((SGT)) has moved towards increasing its broadband pricing, having been aggressive over the last six months with an unlimited data plan at $90 per month. This has now increased to $95, and on the NBN plans are now $105 per month. Morgan Stanley expects positive subscriber growth in FY15-16 as a result of Optus' aggressive promotional campaign. Meanwhile, Telstra ((TLS)) is lowering prices on triple play plans by $9/month and raising data allowances by 25% and 100% for medium and large plans respectively. Morgan Stanley suggests these changes will have little impact as its plans remain more expensive than peers. Telstra is expected to lose market share in metro but gain ground in regional markets.

For the NBN, the cost of providing unlimited data plans continues to be an issue. The broker expects, under the current NBN pricing, telecoms could become unprofitable at current price points, or consumers will need to pay more for broadband products. Hence, Morgan Stanley expects the current bandwidth charge will be need to change over time. The broker considers TPG Telecom ((TPM)) one of the best value providers in both ADSL broadband and NBN and expects it will continue taking market share.

Credit Suisse also notes the price increases coming from Optus and concludes there is more rationality emerging in pricing behaviour among the five major providers. Optus has also rationalised entry level plans and ended its free Netflix offer. The broker cites industry feedback which indicates market participants were concerned about how long this promotion would continue. Telstra has also ended its $20/month promotional discount as of June 30 while iiNet ((IIN)) no longer includes Fetch TV in its bundling. Lower promotional activity is considered a positive for the sector and Credit Suisse expects low-cost providers are best positioned to take market share in this environment. The broker's pick in the sector is M2 Telecommunications ((MTU)).

In mobile, competition has increased in the last six months but Morgan Stanley believes value has also increased with more data allowances and entertainment deals. Optus, again, is seen as the most aggressive player, with 3.4% post-paid average revenue per unit (ARPU) growth in the March quarter compared with 1.6% in the December quarter. Telstra reported 4.4% post-paid ARPU growth in the first half but the broker expects this to slow in the second half, while still being positive. There remains significant excess capacity in the mobile network for each operator. Morgan Stanley therefore discounts capacity as a reason for operators to move to a price war from a value war in mobile.

Lending

Major banks have taken further steps to ensure growth in investment property loans will ease below the regulator's 10% threshold. UBS observes new loan-to-value-ratio caps are as low as 80% in some areas. The majority of investment property loans are being originated with a ratio below 80% to avoid onerous mortgage insurance or low-deposit premiums, and to maximise returns. Still cross collateralisation may enable those with multiple properties to avoid the restrictions. Speculative first home buyer investors have been contributing up to 40% of first home buyer demand and 10% of overall demand for new developments and these segments appear, the broker suggests, to be most affected by the restrictions.

A slowing housing market is expected to help the banks as, given the levels of housing debt in Australia, margin is considered a far more important consideration than volume. UBS also suspects banks may have to raise capital sooner rather than later in response to increases in capital requirements. This, and associated re-pricing, is expected to provide opportunities to invest in the banks in order to benefit from the ensuing build-up in returns.

Retail

UBS observes, in the small retail sector, there has been significant variability in returns. The broker's residual income model suggests there is relative value in Pacific Brands ((PBG)), The Reject Shop ((TRS)), Myer ((MYR)), Super Retail ((SUL)) and Breville Group ((BRG)), although there are structural threats to the first three which may not be fully reflected in the model. Separately, the broker increases Premier Investments' ((PMV)) longer-term earnings forecasts by 5-9% based on a higher gross margin forecast as a result of the company's increased focus on direct sourcing. Still, based on forecast shareholder returns, UBS rates the stock Neutral. UBS prefers Breville, believing its obstacles in North America are now behind it, and Super Retail, where there is upside risk to sales margins.

Credit Suisse takes a closer look at electrical retailers and finds the introduction of new TV models at the end of April and into May has resulted in a lift in the average selling price but also higher-than-expected promotional activity has followed soon after. This suggests some consumer resistance to higher price points and downside risk to volumes. A discounting of new models soon after introduction would be consistent with some consumer resistance to prices. The broker's survey signals price is becoming more important as a determinant of electrical retail sales than was the case in 2014. A reliance on price to drive sales revenue is therefore likely to test the resilience of retailers.

The TV category comprises 25%, 20% and 20% of sales revenue at JB Hi-Fi ((JBH)), Harvey Norman ((HVN)) and Dick Smith ((DSH)) respectively. A shift to higher average priced products and a more inflationary environment would be more favourable for Harvey Norman, in the broker's opinion. This is Credit Suisse's preferred retail exposure because of the strength in household goods and a number of system improvements, which should reduce labour costs and inventory through 2016 and 2017.
 

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article 3 months old

Significant Expansion Underway At Aconex

-Unique mobile features
-Large global clientele developing
-Ability to reinvest in network
 

By Eva Brocklehurst

The information management company Aconex ((ACX)) has established a short but impressive track record since its listing last year, winning several major contracts across its key area of focus, the construction and engineering industry.

Recent agreements with Lend Lease ((LLC)) and John Holland are expected to significantly expand its position in both the domestic and international markets. Paper based systems are still the norm in most cases and Aconex allows for greater collaboration across building and engineering projects in digital form. The company's technology boasts strong mobile features which differentiate it from competitors and domestic software comparables.

Morgan Stanley has added the stock to its coverage and expects Aconex will become a global leader in this large market as its platform is strong and there are structural tailwinds which remain supportive. The company is also envisaged as having a differentiated ability to reinvest where network and scale matter. Given the collaborative nature of the product, Morgan Stanley expects only a small number of operators, perhaps 1-3, will come to dominate the segment.

The value proposition is strong. The broker believes that in servicing a vertical market such as construction, within a few years every major developer, engineer and architect will have used Aconex. The broker forecasts the company will grow its sales at a 24% compound rate until FY23, reinvesting along the way to build more functionality, sales and support. Despite reinvestment costs, Morgan Stanley also envisages earnings margins reaching the high 30% levels. The company's growth profile appears similar to other verticals in this segment which trade at a premium to Aconex but often do not have the same competitive advantage.

Both Macquarie and UBS consider the company now has the scale to grow earnings significantly. Macquarie believes the contracts with Lend Lease and John Holland consolidate the company's position as the "industry standard" in Australia. Australian users are more similar with the platform and require less training and support. The deal with John Holland will also allow an opportunity to partner with a subsidiary of China Communications Construction, currently ranked as the world's fourth largest global contractor. 

Bechtel, the largest civil engineer in the US, first started using Aconex during construction of the Antapaccay copper mine in Peru and the Salalah Airport in Oman. Macquarie expects Bechtel will become one of the company's largest and most influential clients. Morgan Stanley is still unsure whether the rest of the global industry will follow suit and urges caution with regard to assumptions. The industry is only lightly penetrated at present, at around 4.0%.

Aconex intends to capitalise on longer-term growth opportunities with increased investment in sales and marketing. Macquarie recently reduced FY16 and FY17 estimates to allow for this investment but upgraded assumptions longer term, noting future growth will be driven by a networking effect. UBS notes the company's revenue is tracking ahead of prospectus, reflecting the recent contract wins. The first half accounted for the majority of the increase on prospectus forecasts, with the broker noting increased sales costs and development expenditure in the second half. UBS still expects revenue growth to accelerate and recently increased forecasts for FY16-18 by 6-9%.

On FNArena's database there are three Buy ratings. The consensus target is $3.78 which suggests 3.2% downside to the last share price. Targets range from $3.41 (Macquarie) to $4.40 (Morgan Stanley).

See also, Aconex Puts Early Runs On The Board on February 23 2015.
 

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article 3 months old

Weekly Broker Wrap: Oz Housing, Jobs, Wagering, Telecoms And Utilities

-Is Oz house construction peaking?
-RBA's cash rate key to housing
-Strong jobs, weak wages
-Wagering set for solid growth
-Accelerating mobile revenues
-GS prefers SKI, DUE for yield
 

By Eva Brocklehurst

Australian Housing

Housing is one of the few bright spots in the economy but this is set to change. Much attention has been given to price rises in Sydney but construction, too, is in a sizeable upswing. Dwelling construction has added half a percentage point to GDP growth over the past year, offsetting part of the percentage point drag from weaker business investment. Alliance Bernstein suspects this might be as good as it gets. Underlying demand for new housing to meet population growth has slowed to 120,000 per annum from 180,000. While there was a prolonged period of under-building this has now swung to over-building. At the end of the year it is likely that housing construction will be running above 6.0% of GDP, a level not seen since the early 2000's.

Rental growth has slowed to just 2.0% now from mid to high single digits in 2008/09. House price growth outside Sydney has slowed too. Growth in Perth and Brisbane is now negative. Alliance Bernstein also believes there is a technical "wild card" to consider. An historically disproportionate share of the upswing is multi-storey apartments and a lot of this activity is driven by foreign investors. With greater scrutiny of the rules there is potential for a change in this area. Alliance Bernstein is not suggesting a housing collapse, particularly as the upswing has not been accompanied by rampant growth in credit. Still, it is considered inevitable that there will be a downturn by mid next year.

UBS also grapples the issue of whether housing is in a bubble. In the broker's opinion the main driver of a stronger-for-longer home building boom is the Reserve Bank's cash rate staying at current levels for another year. It remains at a record low 2.0%. This is the key catalyst for housing approvals, not supply or unemployment, UBS maintains. UBS expects record commencements in 2015 and 2016, which should allow supply to catch up to demand but only making a small dent in the under-building which has accumulated over some years.

UBS agrees that the record high investor/medium-density share of the upswing is a risk but believes this is suppressing rents rather than prices, as unemployment is not spiking. Regulation is also not seen as a material dampener of demand in the months ahead. Moreover, amid record low interest rates, the mortgage repayment share of income is around average. Hence, while there are bubble-like features in the current cycle, UBS does not observe any trigger that will pop them in the near term.

Employment

UBS asks the question whether the latest data on employment from the Australian Bureau of Statistics can be believed. As this is a survey covering only 0.32% of the population the 95% confidence interval range on jobs is large at 166,000 month on month. In May, jobs growth doubled and unemployment fell to a one-year low of 6.0%. Hours worked were flat and strong growth in Western Australia meant its unemployment rate fell back to the lowest among the major states, which does not fit with the mining downturn. Gains have also been unusually concentrated by industry.

UBS suspects, amid the negative income shock from the terms of trade, labour market flexibility is allowing for much of the necessary adjustment via wages rather than job numbers. Wage rates are growing at a record low rate, GDP-based employee compensation is below 2.0% and company profits are flat, which indicates a large degree of labour market slack. However, it suggests unemployment should be rising not falling. The broker suspects the reality is somewhere in between. The US experience after the GFC revealed there an be a prolonged period of job retention coinciding with weak wages.

Wagering

Morgan Stanley lifts medium-term wagering growth assumptions. The broker believes the market is underestimating the positive changes occurring in the industry. This include mobile usage, competitor consolidation, race field fees and fixed odds betting, with operators intent on innovation instead of price wars. The broker expects the industry to grow at 7.0% for 2016 and 2017 versus a rate over previous years more like 3-4%.

Product innovation and advertising spending should drive both penetration and spending frequency. Morgan Stanley's survey also suggest younger players are more likely to bet online on sports. Tabcorp ((TAH)) and Sportsbet will be the main beneficiaries of improved industry economics, in the broker's opinion. 

The introduction of "in-play" betting via the internet should grow total turnover and revenue in Australia's wagering market, in Macquarie's opinion, given evidence from European operators that it can generate increases in sports wagering. Macquarie believes online corporate bookmakers have been gradually eroding the retail advantage of Tabcorp and Tatts ((TTS)). While a relaxation of the rules is considered inevitable, Macquarie does not factor this into forecasts at this stage. Still the whole industry is well positioned for the uplift from online and this underpins the broker's Outperform ratings on the latter two stocks.

Mobile Services

After some years of low returns the Australian mobile industry is delivering returns approaching the cost of capital. All operators appear to be participating in accelerating revenues. Capital intensity has continue to rise but the industry has benefitted from cost cutting and improved pricing power following consolidation.Goldman Sachs expects operators to retain their price discipline. The broker's analysis provides greater confidence in continued multi-year mobile industry growth. Telstra's ((TLS)) service revenue forecasts are retained and this is expected to underpin low single digit group earnings growth over FY15-16.

Utilities

Goldman Sachs recently met management from five Sydney-based utilities.The broker notes Origin Energy ((ORG)) has been volatile with an increased focus on the potential for LNG oversupply. The company is upbeat about its retail margin outlook and increased pricing power in NSW. The broker continues to believe oil prices and the start of Sinopec deliveries will be key for the company. AGL Energy ((AGL)) is optimistic on electricity pool prices as Gladstone LNG will ramp up exports through FY16. Goldman notes there is too much regulatory uncertainty for the company to confidently invest in more wind capacity.

APA Group ((APA)) is considered well positioned to take advantage of its opportunities, although growth appears priced in. Spark Infrastructure ((SKI)) plans to bid on the three NSW network utilities and any transaction here would be highly material to growth, although Goldman Sachs emphasises the multiples paid will be important. DUET Group ((DUE)), meanwhile, has been short listed for the NT link project and could be in a position to buy Chevron's Gorgon domestic gas pipeline if sold. The broker prefers the latter two stocks because of the superior near-term yield.
 

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article 3 months old

NextDC Riding The Wave

-Contract a sign of strong demand
-Full earnings flow from FY17
-Plenty of funds for options
 

By Eva Brocklehurst

NextDC ((NXT)) has received an endorsement from a major corporate customer, with a repeat sale of capacity. While the customer's identity is undisclosed - press speculation previously suggested Microsoft - it signals the corporate is happy with the value NextDC is offering.

The systems integrator and data centre provider has announced an additional 4MW contract from an existing customer in the "white space" arena. The agreement covers 2MW in each of its Melbourne and Sydney data centres, contracted for a term of five years, with an option to extend for a further five years. This adds to the 6MW the customer previously contracted. A senior secured debt facility for $50m will replace NextDC's current $20m facility while a second senior unsecured note will be issued to raise around $70m.

The deal validates NextDC's business model and strategy, in Citi's view. Macquarie also considers the company well positioned to benefit from high demand for capacity in data centres, driven by the substantial growth in internet traffic and a trend towards hybrid solutions.

The contract will only have a material earnings contribution from FY17 but Moelis maintains it is a sign that demand is strong. The broker also highlights the fact that "white space" customers bring in additional cross-connect revenue, not otherwise accounted for in contracted revenue. Cross-connects are high margin, recurring revenues that can make a material contribution over the longer term.

It may take another eighteen months before the platform goes live and the customer starts paying NextDC in full, but Morgans is pleased with the refinancing, which provides plenty of funds, given the win on this contract will accelerate capex by much less than the debt acquired. The new deal requires fast-tracking of capex, as it will exhaust some of the current inventory in Sydney and Melbourne which will need to be replaced. Still, the amount of funds available creates options for NextDC. Maybe in Brisbane? Morgans emphasises the company makes no comment on why it needs so much capital but there are two possible conclusions that can be drawn.

One is that NextDC is expecting sales to accelerate strongly and, secondly, there is the possibility of a second Brisbane centre (B2). On Morgans' forecasts, the B1 centre is about 80% full now and, generating strong returns, likely to be full within 18-24 months. Should the company decide it needed a second centre in Brisbane it would need to start construction soon. Either way, there is room for further large deals, in Morgans' view, should the right opportunity present.

As of June 30 2015 the broker estimates NextDC has sold 20MW in power, taking contracted utilisation to 55% and actively utilisation to 37% of its total 42MW. Morgans believes the deal underpins second half FY16 and FY17 forecasts and believes there is is upside risk for guidance and market expectations at the FY15 results.

Citi estimates that NextDC will have $160m in capital following the note offering, out of the $196m required to reach targeted capacity. Future operating cash flows could also be used for funding, which suggests to the broker that the company is now less reliant on equity to meet growth targets. There are some potentially negative considerations in Citi's view: client concentration risk increases and white space clients are, on average, lower earners than rack space clients. They are also difficult to displace should the need arise. Still, this contract provides considerable revenue visibility and, in turn, reduces future investment risk.

FNArena's database has four Buy ratings. The consensus target is $3.00, suggesting 25.8% upside to the last share price. Moelis, which is not included in this list, maintains a Buy rating and $3.00 target.
 

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article 3 months old

Blue Sky Potential For Skyfii

-Existing contracts validate model
-First mover advantage in its territories
-Upside in monetising Wi-Fi networks
 

By Eva Brocklehurst

The sky is the limit for Skyfii ((SKF)), which is in a high-growth phase, expanding its subscriber base as it aspires to capitalise on its software-as-a-service offering. Moelis considers the investment a compelling opportunity.

The broker's upside considerations are based on the growth potential. Valuation is limited to a number of listed retail shopping centres with a free option implied for expansion across other vertical markets and geographies. The company has existing contracts which validate its service offering and de-risk the business. There is also limited competition in the markets in which the company operates and such an environment provides a first mover advantage. The actual market potential is difficult to quantify, so Moelis makes a base case valuation at 17c which, it acknowledges, deems the stock significantly undervalued with significant upside.

Moelis expects a strong weighting of earnings to analytics in the near term, and a longer-term opportunity to expand revenue once the technology is embedded. Broadening the existing client base is considered a start, particularly in retail. The broker commences coverage of Skyfii with a Buy rating and 35c target, a 94% total return on the last closing price of the stock, noting there is a potential for earnings dilution from the issue of shares associated with the 2016 revenue earn-out. The earn-out is capped at 82.5m shares and scaled as a function of performance. In the first half the company recognised a loss of $3.5m. Employee costs remain the largest expense but the company anticipates break even within 18 months.

Skyfii operates across Australasia, South Africa and Brazil. Moelis acknowledges there is a risk a number of international players begin to compete and this is made more plausible by the fact there is limited intellectual property protecting the service. Changes to privacy legislation could also have a significant impact on the service offerings, particularly with the use of personal information in advertising.

So what is the company actually about? Skyfii is an Australian-based technology company that captures and analyses customer behaviour data, providing retailers with insights they can act on to drive decisions and deliver targeted content. It listed on ASX in November 2014. The company's software sits over existing Wi-Fi infrastructure and uses the network to track individuals via a unique identifier in their mobile devices, building up a profile of the individual's behaviour.

The platform is not influenced by hardware infrastructure and, as a result, offers maximum application potential. Hence, Skyfii not being a hardware provider does not carry the cost, even if services are partnered. The company plans to partner with telcos, mobile and internet service providers. Re-sellers receive a percentage share based on the monthly revenue while wholesale partners pre-purchase services from Skyfii at a discount and on-sell to the end customer.

Once embedded, an ongoing monthly fee is charged for network management and a Skyfii subscription fee. Over time, additional revenue is expected through data services and advertising. Currently Skyfii targets shopping centres and retailers but expects to capitalise on other segments of the market in due course, particularly in the areas of transport, events and municipalities. The goal is to track individuals across multiple points of interaction to derive consumer insights and enhance marketing and advertising campaigns.

Moelis notes each segment of the market is essentially a territory in which Skyfii can imbed its technology. Traditionally, free Wi-Fi networks were implemented by venue operators to attract customers. Now these networks are being commercialised and monetised and it is in this arena that Moelis expects Skyfii will make its presence felt.
 

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