Tag Archives: Telecom/Technology

article 3 months old

Buying Opportunity In Telstra

By Michael Gable 

Markets overnight have bounced back on news of China cutting the Reserve Requirement Ratio by 1 per cent, the largest cut since the GFC. They have nearly clawed back the losses from Friday night which were arguably blamed on the Chinese freeing up more shares that could be shorted. Greece also played its part again, as the IMF indicated that finance negotiations are likely to drag out longer than expected. This week, we have RBA governor Glenn Stevens giving a speech in New York, along with the release of minutes from RBA’s April meeting and consumer confidence data. In today’s report, we spot a positive opportunity in Telstra ((TLS)).
 


Telstra was trading in a well defined channel before breaking out of that at the end of last year and heading to new levels. What we have noticed now is that TLS is pulling back in five waves. The 5th wave is almost complete and that would bring TLS right back to the top end of its previous range. It is likely to hold there in the absence of any bad news and continued interest in its yield which has now gone up to 5.2% due to the recent share price weakness. We would expect to see TLS come back to about $6.00 - $6.10 at which point that would be the next buying opportunity.


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.

Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" - Warning this story contains unashamedly positive feedback on the service provided.

article 3 months old

M2 Crosses The Ditch

-Provides second growth stream
-Potential to add product to CallPlus
-Is the valuation now stretched?
 

By Eva Brocklehurst

M2 Telecommunications ((MTU)) is expanding its New Zealand operations with the proposed acquisition of CallPlus and related entity, 2Talk, for $245m. The transaction is subject to approval from the NZ Overseas Investment Office.

CallPlus is the number three fixed internet service provider in New Zealand and Goldman Sachs observes it provides a good opportunity to increase market share, given M2 Telecom's backing and the roll-out of New Zealand's Ultra Fast Broadband (UFB) network. CallPlus is expected to contribute around NZ$270m in revenue in FY16 and expected to be 15% earnings accretive in FY16. M2 will fund the transaction via debt and expects pro forma leverage to be around 2.0 times net debt/FY16 earnings. The broker notes the company's net debt peaked at 2.6 times in FY13, following the acquisitions of iPrimus and Dodo/Eftel.

The company has made a good purchase, in Credit Suisse's view, for a business with reasonable organic growth and a strong management team. The acquisitions also deploy excess balance sheet capacity and provide a solid return to shareholders. In addition, the broker notes M2 has the potential to add strategic value by expanding products to CallPlus where it has expertise, such as in electricity and mobile, as well via bolt-on acquisitions in the NZ market. The one uncertainty Credit Suisse observes is centred on FY16 earnings for CallPlus, with a final decision expected from the authorities on wholesale copper pricing towards the end of 2015.

CallPlus operates five brands - Slingshot, Orcon and Flip, which target the consumer segment, and CallPlus Business and 2Talk, which target small-medium enterprises. With this acquisition M2 will become the third largest ISP in New Zealand with 18% market share in broadband, behind Spark and Vodafone. Citi believes the CallPlus business is similar to the M2 business in Australia as it is light on infrastructure and covers the same residential and SME segments. M2 also knows the business, as CallPlus was a wholesale supplier in NZ to M2's Black and White.

Nevertheless, there are acquisition risks. Citi notes this acquisition will reduce the focus on the larger Australian business and increase the foreign exchange risk. Also, the increased internal competition for capital needs to be acknowledged, as M2 continues to expand both organically and acquisitively and each business now faces incremental challenges in winning its share of growth capex.

Macquarie observes the expansion provides a two-pronged growth strategy for M2 over the next couple of years. Outperformance will be reliant on M2's ability to sustain meaningful organic growth from both domestic and NZ operations. Longer term, the broker believes the trans Tasman expansion could increase M2's appeal with fibre-heavy operators like TPG Telecom ((TPM)), and Vocus ((VOC))/Amcom ((AMM)) where a merger deal is pending.

Morgans welcomes the deal as after a period of growing organically, M2 has acquired a peer that fits well culturally. The broker also notes that New Zealand is a number of years ahead of Australia with respect to its national broadband network and the acquisition gives M2 operational insight into the migration from copper to fibre and the complexities and opportunities that come with the migration. Given a larger portion of CallPlus revenue comes from data - 58% versus 34% -- Morgans envisages a significant opportunity to up-sell voice services to the customer base.

The acquisition may be accretive but Morgan Stanley considers the valuation of the stock already reflects this. The broker takes the view that, as the NZ broadband market is more mature and consolidated than Australia's, it reduces scope for further consolidation. On this point, the broker highlights the fact that the NZ UFB project - similar to Australia's NBN - provides a reduced catalyst for the consumer to change internet providers. In Australia, the NBN will turn off a consumer's connection if they have not moved across to the NBN in 18 months. This is not the case in New Zealand. Consequently, this reduces the ability to take market share. Morgan Stanley retains an Equal-weight rating.

UBS believes the growth premium to telco peers is more than priced into the stock. Acknowledging the market share wins, new products and sales channels the broker still considers the valuation is stretched and moves to a Sell rating from Neutral. The size of further M&A would now need to be much larger to deliver meaningful accretion, in UBS' view, and such opportunities among Australian telcos are now reduced.

FNArena's database has two Buy, three Hold and one Sell rating. The consensus target is $11.06, suggesting 2.2% downside to the last share price. Targets range from $9.51 to $13.00.
 

Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" - Warning this story contains unashamedly positive feedback on the service provided.

article 3 months old

Weekly Broker Wrap: Media, A-REITs, Life Insurance, Tourism And Food

-Digital media to outperform
-Bell Potter upgrades My Net Fone
-Impact of closing some MYR stores
-Implications from Trowbridge report
-Inbound tourists staying longer
-Oz food companies perform strongly
 

By Eva Brocklehurst

Media

Morgan Stanley acknowledges a conundrum in its media coverage. The broker has never been more bearish on the medium term outlook for newspaper, TV and radio earnings and asset values yet it is upgrading the industry view to Attractive from Cautious. The reason is the composition of the stocks under cover have changed dramatically. In 2008 traditional media accounted for 90% of the value in the broker's coverage. Today, that has declined to 40% and internet and digital assets account for 60%. Looking forward, in aggregate, the broker expects the sector will outgrow and outperform the broader Australian market. Hence the relative Attractive rating.

Morgan Stanley's order of preference in internet/digital media is Seek ((SEK)), REA Group ((REA)) and Carsales.com ((CAR)). Among traditional media the broker's highest conviction Overweight stocks are market share winners such as Nine Entertainment ((NEC)) and APN Outdoor ((APO)) and those with undervalued turnaround potential such as Fairfax Media ((FXJ)) and APN News & Media ((APN)).

My Net Fone

My Net Fone ((MNF)) has acquired the global wholesale voice business of Telecom NZ ((TEL)) for consideration of NZ$22.4m to be initially funded with a $25m bank facility. The acquisition is forecast to generate revenue in FY16 of $90-100m and earnings of $3.5m before synergies. Revenue synergies are largely expected from providing wholesale managed services and software products to Telecom NZ International customers.

Included in the revenue forecast is a 3-year exclusive trading agreement with Spark New Zealand for international minutes, which the company estimates will generate annual revenue of around $10m. Bell Potter upgrades FY16 and FY17 estimates by 4.0% and 11% respectively on the back of the acquisitions but downgrades FY15 by 2.0%, largely because of acquisition costs. The broker increases the MNF price target to $4.00 from $3.00 and upgrades its recommendation to Buy from Hold.

Myer and A-REITs

Macquarie has looked at the implications for Australian Real Estate Investment Trusts (A-REITs) of closing underperforming Myer ((MYR)) stores. To date Myer has typically been handing back space at lower quality malls at the expiry of leases, rather than breaking leases early. Macquarie suspects, with a weighted average lease expiry of 15 years or so for the network, this will likely remain a slow burn for retail A-REITs. International retailers may spur a forecast 215,000 square metres in incremental demand in Australia but this will be centred on CBDs and high quality regional malls, which makes the redevelopment of lower quality centres post any Myer departure problematic, in the broker's view.

Any departure by Myer may be positive on the rent front but the capex outlay required to refit the space is more often value destructive for the retail landlords, Macquarie contends. An example is Dandenong, where JB Hi-Fi ((JBH)), Aldi, Daiso and Trade Secret took part of the old Myer space but factoring the $30m development cost, it was destructive to net present value. The broker considers the impact of any Myer departure on the existing discretionary retailers in the centres is negative as well. Hence, coupled with a general expectation for modest earnings and distribution growth for certain retail landlords, Macquarie remains Underweight on the retail A-REIT segment.

Life Insurance

The government is ramping up the pressure on the life insurance industry to adopt the recommendations of the Trowbridge report. The federal assistant treasurer, Josh Frydenberg, has said the extent to which government intervention is required will depend ultimately on the industry's own actions. The most significant concern is the upfront commission model which has misaligned the interests of insurers, advisers and clients, creating significant churn. JP Morgan considers the assistant treasurer's words a threat to the planning industry and life insurers. 

JP Morgan expects that if the remuneration measures outlined in the report are adopted, it would likely release capital in the industry and lead to improving returns if margins were not competed away. The broker also observes there has not been any strong response from the Financial Services Council, a co-sponsor of the report, although it appears to tacitly support the report. The Association of Financial Advisors, which also co-sponsored, has not supported the findings in the current form. JP Morgan believes there is still some way to go but addressing churn in the industry would be a positive for listed life insurers such as AMP ((AMP)) and Clearview Wealth ((CVW)).

Tourism

Are tourists responding to the weaker Australia dollar? That's the question ANZ analysts ask as the mining boom peters out. The analysts note statistics which show a weaker Australian dollar is encouraging more overseas visitors and they are staying longer and spending more. There were record visitor numbers from 15 key markets last year with China leading the way. Despite the increased cost of international holidays, the number of Australians travelling abroad remains strong. Domestic tourism is also robust, but underpinned by business travel and visits to family and friends. Hence, the analysts suggest the economy will gain most from incoming tourist arrivals and these should continue to strengthen, assisted by further falls in the currency and stronger economic growth in key offshore markets.

Food

Canaccord Genuity Australia has reviewed a number of factors which are driving the strong performance of ASX-listed food and agricultural companies. Domestic and global population growth, specifically the expansion of the Asian middle classes, and a subsequent increase in demand from Asia for Australian agricultural exports are supportive. The lower Australian dollar will also drive increased competitiveness in exports. Australia has a reliable history in the sector and strong "clean and green" credentials, which should continue to play out favourably, in the analysts' view. There is also increased focus and fund allocation to these stocks from investment managers.

The five companies covered by Canaccord Genuity within this area have delivered mean returns of 104.5% from the time of the broker's initiation on the stock (three years or less). Coverage to date includes dairy companies such as Bega Cheese (BGA)) and Warrnambool Cheese & Butter ((WCB)), sandalwood oil producer TFS Corp ((TFC)), almond producer Select Harvests ((SHV)) and honey producer Capilano ((CZZ)).
 

Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" - Warning this story contains unashamedly positive feedback on the service provided.

article 3 months old

Weekly Broker Wrap: General Insurers, Mobile Plans And Equity Strategies

-GI margins peak, modest premium growth
-Telstra counters mobile pricing with data
-Outperformance of bond proxies ending
-Super funds, households re-focus on equities
-Morgans warns against complacency
-Goldman re-evaluates high yielders
 

by Eva Brocklehurst

General Insurance

In reviewing the competitive environment facing the general insurance sector, Macquarie believes a focus on the premium rate cycle over-simplifies the changes that are occurring. The broker notes traditional supports are moderating, given a peak in margins and reduced reserve releases. Domestically, the broker expects insurers will focus on cost efficiencies. The competitive environment is also ramping up with new entrants amid moderate premium growth and claims inflation.

Macquarie observes the increase in competition reflects high industry profitability, controlled by a few rational players. Such an environment attracts new capital. Long term, the broker forecasts a margin of 11.5% for Insurance Australia Group ((IAG)) with a return on equity (ROE) of around 15%, a 11.0% margin for Suncorp ((SUN)) with ROE of 10%, and a margin of 10.0% for QBE Insurance ((QBE)) with ROE of 10%.

Telecoms

SingTel's ((SGT)) Optus has been aggressive in its pricing of mobile plans over the past month and competitors Telstra ((TLS)) and Vodafone Australia ((HTA)) have responded with increased data allowances. Morgan Stanley observes Telstra's increased data allowance appears to be a direct response to competition from Optus. This may help defend market share but the broker suspects it  will also limit future data monetisation, reducing top line revenue growth for Telstra mobile.

As well as data increases, Telstra has increased its handset repayment fees by an average of 13% in March versus February. This is important, in Morgan Stanley's opinion, because it decreases the subsidies Telstra absorbs and allows for margin expansion. The increase in these handset fees, the broker surmises, stems from Apple's increased iPhone prices because of the fall in the Australian dollar. Consequently, Telstra is passing the price increase onto the consumer.

Strategies

Morgan Stanley believes the focus on yield remains relevant for Australian equities but there is a shift in market leadership, with growth yield outperforming blue chip yield. The broker also envisages the outperformance of bond proxies is coming to an end, while the underperformance of high-risk yield and low yield stocks should continue. Morgan Stanley believes bond proxies have been compressed to levels where valuations in a normal environment appear extreme and therefore remains Underweight on this group. The broker is still exposed to low-risk, blue chip yield but avoids stocks with expectation risks.

The sweet spot is where there is both above-market earnings growth and an attractive yield.  Five stocks the broker has in its sights which enjoy the best of both worlds are AMP ((AMP)), Macquarie Group ((MQG)), Perpetual ((PPT)), Super Retail ((SUL)) and Tabcorp ((TAH)).

Deutsche Bank believes the superannuation funds may be starting to rotate out of low-yielding deposits and bonds and into equities. Purchases of domestic equities have averaged around $10bn per quarter over the past nine months after there was no net purchasing in the preceding two years. The broker observes a large share of financial assets still sit in deposits earning minimal returns and expects the support from flows will keep market valuations above fair value for some time.

Households have been content to add to deposits and build savings through compulsory superannuation. Minimal purchase of equities have been made for some years now and discretionary super contributions have only been moderate. However, sentiment towards the equity market may improve, in Deutsche Bank's opinion, with increased realisation of both the market gains and the limited real return that deposits offer. Foreign investors, meanwhile, remain steady buyers of Australian equities.

Morgans has become increasingly cautious, rationalising recent market strength against very low interest rates and worrying levels of growth. The broker's high conviction ideas are selected carefully, as the broker awaits the market to normalise. Profits have been booked in NextDC ((NXT)) while Villa World ((VLW)) is added to the high conviction lists. The broker advises investors to tread cautiously this year and not become complacent about capital value as it is still possible to suffer capital losses on "yield" stocks, pointing out that the market will adjust when the abundant liquidity and ultra low rates inevitably come to an end.

Investors are also warned to expect higher levels of volatility when global interest rates start to normalise. Morgans recommends holding higher levels of cash to enable the flexibility to capitalise on any bouts of volatility.

Morningstar's best stock ideas for the month, which feature highest quality investment ideas trading at attractive prices, include ANZ Bank ((ANZ)). The bank is considered the best placed of the majors to capitalise on strong growth in trade and investment flows in Asia. Goodman Group ((GMG)) also joins the list, with its geographically diversified and vertically integrated model.

Woodside Petroleum ((WPL)) was removed from the best stock ideas, as the analysts believe the stock's fair value has declined meaningfully and the price discount has disappeared. QBE is also removed from the best stock ideas. The environment may be turning around for the insurer but the market has pushed the price into the broker's "hold" zone.

Goldman Sachs has been increasing its underweight positioning in high yield stocks as yields continue to compress, even with the start of a US rate hike cycle looming. Adding complexity is the prospect of further easing from the Reserve Bank of Australia, which should help mitigate some valuation stress from higher US rates. The broker recommends avoiding the names that have been "manufacturing yield" i.e. by relying on leverage, asset sales or under-investing.

Stocks that can fund dividends or buy-backs from organic growth will fair better, in Goldman's view, particularly as higher rates put pressure on firms which have borrowed to fund these dividends and buy-backs, or to acquire growth.
 

Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" - Warning this story contains unashamedly positive feedback on the service provided.

article 3 months old

TPG’s Offer For iiNet: Just The Beginning?

-Network savings, lower overheads
-Outright ACCC opposition unlikely
-Potential for higher or rival bid
 

By Eva Brocklehurst

Suspicions regarding heightened M&A activity in the months ahead have been borne out by the announcement by TPG Telecom ((TPM)) of a bid at $8.60 a share for rival iiNet ((IIN)). The all-cash offer represents a 25% premium to iiNet's volume weighted average price (VWAP) but just 3.6% to its December 2014 high of $8.40 a share. The acquisition is viewed by brokers as highly synergistic, with opportunity for reduced network and corporate costs.

The iiNet board has unanimously recommended the offer and flagged it may pay a fully franked special dividend, subject to a favourable tax ruling and dependent on the level of retained earnings and franking balance. UBS estimates up to 90c is possible. The broker also envisages material benefits from network savings and, assuming $50m of synergies versus iiNet's cost base of $900m, this would deliver an earnings uplift of around 20% to TPG.

Most brokers consider that, ultimately, the Australian competition regulator, the ACCC, is unlikely to oppose the bid. TPG already owns 6.25% of iiNet and will fund the takeover of the remainder with debt. Credit Suisse notes the broadband market is highly concentrated and the ACCC's decision will depend on how it defines the market. Still there are a number of reasons why approval is likely to be granted, including a complementary geographical split, as the merged entity will not have significant concentration in any specific city.

Furthermore, Telstra ((TLS)) has a significant market share lead and an argument could be made that a larger number two rival would be better positioned to compete. JP Morgan suspects the deal may not pass the ACCC's market concentration test but that the ACCC will also consider the impact of the NBN on future competition, which should increase through lower barriers to entry. This may provide the ACCC with enough comfort to approve the deal.

Credit Suisse considers the offer is, intuitively, too low given the substantial synergies available. The increase in TPG's market cap in response to the $1.4bn takeover offer implies a market view that TPG is getting a bargain. Hence, Credit Suisse believes TPG could pay substantially more, given the synergies, and estimates that an increase in the offer price to $10 a share would only result in a drop of 4.0% in accretion.

Interest from a rival bidder, such as M2 Telecommunications ((MTU)) could mean a competitive process plays out. Moreover, if the ACCC chose to flag competition issues then M2 Telecom might not have the same problem as TPG, given its smaller market share and, in that sense, Credit Suisse suspects it makes a rival bid for iiNet more attractive. The offer appears to be fair value, in Citi's view. The broker also contemplates scope for a counter offer from Singapore Telecommunication's ((SGT)) Optus, given the strategic importance of the iiNet customer base.

JP Morgan believes the reaction in TPG's stock price implies an overly optimistic assessment of synergies and maintains an Underweight rating on both stocks. The broker believes a counter bid is unlikely. However, to UBS, either SingTel or M2 Telecom could be a counter bidder. Strategic benefits to SingTel include scale, operating leverage and bundling. M2 has proved acquisitive in the past but the broker questions whether it could extract the same amount of synergies as TPG, given its lack of infrastructure assets.

 All up, Credit Suisse considers there is substantial benefit for Australian investors in the TPG deal and upgrades iiNet to Outperform from Neutral. The broker increases TPG's target price to $9.67 from $7.42 but maintains a Neutral rating on the stock, given the deal accretion has now been priced in.

Morgan Stanley also upgrades iiNet to Equal-weight from Underweight, noting the merged group would have a 27% retail broadband share, still well behind the leader Telstra, with 45%. Optus, current number two, maintains a 17% share. Morgan Stanley assumes that, with the share price of iiNet near the bid price, there will not be a higher competing bid while no unsurmountable regulatory hurdles will be posed to completing the deal. Should the bid fail, the broker envisages 29% downside to its bear case valuation of $6.00.

While it may be argued that iiNet's 2014 earnings were negatively affected by expansion costs, Deutsche Bank estimates the TPG offer is still attractive when evaluated on FY16 earnings and assumed cost savings. The broker does not expect much change in the competitive landscape in the short term, as TPG intends to retain both brands, and therefore expects most of the synergies will come from savings rather than revenue benefits.

TPG is known for its leadership on costs while iiNet offers a different service proposition. The latest deal caps off two years of consolidation in the telecom sector with TPG acquiring AAPT in December 2013 and M2 Telecom acquiring Dodo in May of that year.

Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" - Warning this story contains unashamedly positive feedback on the service provided.

article 3 months old

Netcomm Wireless Signals Substantial Potential

-M2M option in several verticals
-NBN a re-rating catalyst
-Oz success can translate globally


By Eva Brocklehurst

Netcomm Wireless ((NTC)) continues to signal its strength to Moelis. The broker has changed analyst and reviews the investment thesis on the technology stock, with Australia's NBN roll-out potentially validating a global opportunity.

Netcomm is at a pivotal point in its development, ready to take on the global market in the M2M - machine to machine - arena. Moelis attempts to quantify the base case valuation scenario and highlight the upside potential. Essentially, the broker considers the stock is undervalued at current prices. A number of milestones need to be passed to validate the investment upside but the stock is considered relatively de-risked at current prices, given the operating leverage from a mostly fixed cost base.

Moelis has identified a floor in the valuation based on the traditional business, Netcomm's NBN  - national broadband network - contract and the upside in a number of vertical industries via the M2M option. Base case valuation is 48c, an 8.0% discount to the current share price. This case ignores any upside from M2M revenues outside of the NBN contract. Risks lie with the lack of control Netcomm has over timing and when deals are wrapped up. As a result, this can affect the timeframe for earnings and cash flow. Hence, Moelis uses relatively conservative assumptions in modelling its base case. The broker retains a Buy rating and 80c target.

The NBN contract is the major catalyst for a re-rating. The NBN guarantees broadband service nationally, with urban locations receiving fibre and remote regions a satellite connection. The NBN strategic review has suggested the "grey" zone between these two regions can be covered by fixed wireless. Netcomm provides the outdoor routers which attach to individual premises. The application of fixed wireless to the NBN roll-out suggests that the market size for Netcomm is larger than initially planned for.

The NBN may act as a proof of concept for the roll-out of rural fixed wireless globally, in Moelis' view. The broker quotes Boston Consulting which estimates the global rural broadband opportunity is US$80bn, with the top 20 countries representing US$50bn. Noting the statistics, which reveal 22% of developed nation populations and 54% of undeveloped reside in rural areas, highlights the potential. Moelis believes the US market offers substantial expansion possibilities for Netcomm. US rural areas with no access to broadband represent a US$2bn opportunity alone and the company is already in discussions with US-based telecommunication companies.

Netcomm is ramping up its global M2M presence. The company designs and manufactures M2M devices and remains neutral on software to enhance the reach of its skill set. The number of M2M verticals may be broad, Moelis' contends, but Netcomm is concentrating on specific sectors where it can specialise over time. Currently, Netcomm has partnership agreements with Verizon, Vodafone and Telstra ((TLS)) plus a large number of smaller providers. Moelis refers to Sierra Wireless, the leading global M2M player, which saw 2013 sales of US$440m that represented only 1.1% of the 2013 market size.
 

Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" - Warning this story contains unashamedly positive feedback on the service provided.

article 3 months old

Treasure Chest: Only The Beginning For iiNet De-rating?

The situation thus far

Former market darling iiNet ((IIN)) has been on the nose with investors after releasing an interim report that failed to meet expectations. In response, stockbroking analysts have reduced forecasts and in many cases price targets too, while investors have exerted negative pressure on the share price.

The new forecast

Today, analysts at Morgan Stanley have released the outcome of further in-depth analysis and their conclusion is unequivocal: iiNet is too pricey in metro areas while competition is heating up. This means management has the choice to either reduce service prices, or allow market share to shrink.

It's a bit of a lose-lose situation, suggest the analysts, and they have thus sharply reduced expectations for the years ahead. This has resulted in a target price fall to $6.00 from $8.70 and a recommendation downgrade (double whammy) to Underweight (equivalent of Sell) from Overweight (equivalent of Buy).

Broader views

Out of the eight regular stockbrokers covered by FNArena, Citi remains the positive stand-out with an undeterred, non-consensus Buy rating in combination with a target of $9.06, more than 46% above today's share price. Citi's view stands in sharp contrast with Morgan Stanley's whose latest research outcome have led MS analysts to the conclusion that iiNet shares are facing continued de-rating on the back of a continued negative trend in profit forecasts.

Following the disappointing interim report, most stockbroking analysts have stuck to a neutral view, while most price targets now begin with a 6, suggesting investors better not expect to see a swift return to the $8.50 the shares were trading at as recently as in December. FNArena's consensus price target currently sits at $7.01, suggesting double digit upside from where the share price sits, but investors should note the consensus might be artificially high because of Citi's high mark target.
 

Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" - Warning this story contains unashamedly positive feedback on the service provided.

article 3 months old

Aconex Puts Early Runs On The Board

-Project wins globally
-Capacity for acquisitions
-Market share gains likely

 

By Eva Brocklehurst

 Aconex ((ACX)) hit the boards on ASX late in 2014 and has impressed brokers by reaching earnings break-even six months ahead of prospectus forecasts.

The software-as-a-service company won key contracts in its maiden first half with North West Rail Link and the Wheatstone LNG project. Aconex has also delivered on projects across the construction industry in diverse areas such as health & education, mining and residential & commercial building. Its subscription model provides highly visible recurring revenue. International revenue is also gaining scale and should become a key driver of longer term earnings growth, in Macquarie's view.

Meanwhile, Australian operations are providing strong contributions and margins. UBS suggests achieving 63% market share in Australia provides tangible evidence of the company's ability to successfully penetrate and dominate a regional market. From a product, sales and services perspective UBS believes Aconex is well positioned to garner market share globally.

The company has the financial capacity for acquisitions in what is a highly fragmented market, in Macquarie's opinion, and as the Americas become more significant in proportion a weakening Australian dollar should assist. In this region the company won key contracts with New Mexico International Airport and the Silver State Solar Park as well as an enterprise agreement with with Metro De Santiago. Recent Asian projects wins included Lakhta Centre Russia and in oil & gas in Singapore. Europe/Middle East provided key project success with Qatar Rail and an enterprise agreement with Westfield Corp ((WFD)).

Macquarie believes the company has reached a point where it has the scale necessary to expand margins and grow earnings, with significant upside if it continues to deliver on growth forecasts. A key feature of the company's enterprise-wide contracts is reflected in renewal rates. Over the past three years renewals for projects have run at 87% and for enterprise contracts at 90%.

The broker believes operations are on track to reach the next target - a net profit. Macquarie retains a target price of $2.30 and an Outperform rating. UBS also believes reaching profitability ahead of forecasts could present a tipping point for the share price, as the market begins to price in higher levels of profitability based on tangible results. UBS values Aconex using discounted cash flow and peer multiples and retains a $2.53 price target and Buy rating. The broker's high case estimates generate a DCF valuation of $4.83 which would lift its target to $3.45.

Aconex was founded in 2000 and provides a cloud collaboration platform for the construction industry, centralising document & data management and communications for project participants. The company estimates its global market share at 22.4%. First half results revealed earnings at the EBITDA line of $500,000 against prospectus estimates of a $1.4m loss. At the end of 2014 the company had 95% of its FY15 forecast revenue under contract. Aconex operates in over 25 countries.
 

Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" - Warning this story contains unashamedly positive feedback on the service provided.

article 3 months old

CSG’s Outlook Buoys Brokers

-Earnings stability increasing
-Key venture with Samsung
-Potential for re-rating
 

By Eva Brocklehurst

There was little to fault in technology provider CSG Ltd's ((CSV)) strong first half. Organic growth initiatives have made a significant impact on earnings and brokers are excited about the scope for a much bigger business.

JP Morgan analysts believe the market is not accounting for the company's target to sustain a 90% pay-out ratio at 9c per share. The company's revenue is a split between transactions, mainly equipment, and annuity, which comprises service contracts and leasing. At the operating level, annuity comprises 76% of profit. The growing proportion of annuity revenue is a positive in JP Morgan's view, as it indicates increased stability in earnings. 

The business solutions division, which sells and services long-term contracts to a range of print and non-print devices, gained new customers in Australia at a rate of 26% of equipment revenue growth in the half. New Zealand generated particularly strong revenue growth of 83%.

CSG Ltd has been selling Samsung products in a bundled offering with printer devices in Australia for the past nine months and, thus far, this has averaged around $30,000 per customer, well above the company's expected per-customer value of $12,000. This large difference reflects the higher prices paid for items such as interactive whiteboards and large screen TVs. Non-print equipment sales are now more than 5.0% of the total and Macquarie expects this will increase as the sales team becomes more knowledgeable about new products.The Samsung venture should launch in New Zealand this month.

Macquarie is more confident now, noting clarity has improved around opportunities and future earnings. Enterprise sales now account for 10% of revenue, from minimal levels three years ago. The enterprise solutions division recently won major contracts with Victoria University, Auckland District Health and Fonterra. While this division is yet to be a meaningful contributor to group earnings, management expects the Australian potential is $420m in total contract value from FY15 onwards. Macquarie forecasts around $10m in revenue emanating from this pipeline in FY15. The broker also notes the print-as-a-service offering provides a platform to expand into managed services later this year.

The company's third division, finance solutions, is building scale. The Australian business converts around 95% of customers to the company's financing products. Offerings in both Australia and New Zealand will increase in FY15, with management targeting a book in excess of $220m. Brokers had some concerns over margin compression in this division in the half year, as some positive hedges have rolled off. Also, the NZ book achieves better margins compared with Australia, yet Australia has grown as a proportion. CSG Ltd is confident the division will deliver on expected margins, as more fees are added to the Australian book and banks become less stringent on capital requirements when the company's record is more established.

Long term re-rating of the stock has just begun, in Morgan Stanley's view. The company has cutting edge technology that can sustain strong double digit growth and margin expansion. The broker has lifted forecasts to the top of the company's FY15 guidance range with step ups in FY16 and FY17, as the technology advantage and value proposition translates into winning more customers and improving its share of business expenditures. The broker expects the loan book to double in less than three years.

CSG Ltd intends to explore other regional markets such as Singapore and look for IT managed services opportunities in New Zealand.There are three Buy ratings for the stock on the FNArena database. The consensus target is $1.63, suggesting 15% upside to the last share price. The dividend yield is 6.3% for both FY15 and FY16 consensus forecasts.
 

Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" - Warning this story contains unashamedly positive feedback on the service provided.

article 3 months old

Is Telstra Just A Yield Play?

-Cash generation supports returns 
-Mobiles underpin growth
-Share price hard to justify
 

By Eva Brocklehurst

Telstra ((TLS)) is riding high despite the competition that is mounting in its mobile and broadband segments. Brokers are aware of how attractive the stock is to global income funds - with a dividend yield circling 5.0% - but, looking ahead, wonder whether the market is complacent.

First half results were solid and the medium-term operational outlook is stable. Cash is being generated, which should support capital returns. Citi expects Telstra can deliver earnings growth supported by NBN receipts, further cost rationalisation and lower interest costs. Nevertheless, this momentum will fade in future periods and while the broker gives management credit for being suitably cautious in a changing landscape, with the share trading at a premium valuation a Neutral rating is considered appropriate.

Morgan Stanley puts it plainly. Telstra's dividend yield is 85% higher than Australia's 10-year government bond yield, which in turn is 135% higher than the average of AAA-rated sovereigns. Accordingly, the stock is sought after on the basis of forecast FY15 and FY16 dividend yields, despite the fact the valuation is expensive, which reflects the attractive balance sheet and potential for capital management options. What if economic growth improves? This would add inflationary pressures and long-term bond yields would improve, decreasing the relative attractiveness of Telstra's yield.

Mobiles were the star attraction in the first half and carried the result, as 4G data was monetised. The results suggest consumers are paying to use more data. Morgan Stanley observes Telstra stands to gain up to five percentage points of iPhone share with the launch of iPhone 6. While no dividend guidance was provided, the broker expects the trajectory has been underpinned for the foreseeable future. In Macquarie's view mobiles underpin Telstra's growth story, with service revenue in the division up 7.4% in the half and reversing the slowing trend witnessed in the prior half.

Outside of the mobile segment, Macquarie suggests the business is shrinking and Telstra will need new growth drivers eventually. The broker concedes this is not a concern while the stock holds its attraction for yield-seeking investors. The broker considers the dividend policy is conservative, with management intent on delivering sustainable growth in dividends. JP Morgan has a Neutral rating. The stock trades above valuation but the broker's forecasts are conservative. Dividend support may be strong but there is the debate about margin sustainability. JP Morgan does not believe this adds up to a catalyst for a de-rating, although admittedly struggles to envisage much upside.

The momentum in the results was solid but Deutsche Bank considers this has been more than factored into the share price which makes the current level hard to justify. The price is implying a 7.0% per annum increase to the broker's forecasts over the next three years which, given increasing competition and the lack of competitively priced product in mobiles and broadband, appears unlikely. Despite the struggle to justify the price the search for attractive yields keeps the broker's recommendation at Hold.

The result may strong and the dividend hardy but Morgans downgrades to Hold from Add, following the run up in the share price, and pending further catalysts. The company's success in the mobile sector looks to be durable, for a period, while fixed line voice revenue was steady and growth occurred in broadband and data. NBN payments have also begun to rise. The broker observes upside risks include growth in regional services and NBN payments while downside risks revolve around mobile competition and the higher cost to serve and retain customers.

The company has several years of steady and reliable low-to-mid single digit growth ahead, in Morgans' opinion. The broker is also confident the company has the operating performance potential to increase the FY15 final dividend to at least 16c per share. Telstra has reactivated its dividend reinvestment program and will meet demand for this program through on-market acquisition. Capital management potential remains higher for FY15, in Morgans' view, despite the increase in the dividend.

Credit Suisse notes the strong revenue but also that cost growth is high. The broker retains an Underperform rating to reflect the high multiples relative to the earnings growth profile and increased competitive risk in mobile. The stock is expensive on all measures, despite the sound fundamentals, and for this reason UBS retains a Sell rating. The broker's response to the vote for a yield hovering around 5.0% is that it is only appealing when the environment is low yielding.

So what is the dividend yield? On FNArena's database the consensus dividend yield on FY15 and FY16 estimates is 4.7% and 4.9% respectively. The consensus target price is $5.79, suggesting 11.9% downside to the last share price and compares with $5.48 ahead of the result. There are no Buy ratings but six Hold and two Sell.
 

Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" - Warning this story contains unashamedly positive feedback on the service provided.