This week we look at the telco sector and how it is benefiting from a surge in demand due to the shift to working and staying at home. We believe the demand for faster connectivity will continue for the foreseeable future regardless of how the Covid-19 situation unfolds. We currently see good value in two companies servicing the sector. Read on to find out more.
Author: Ron Shamgar
Over the last few weeks we have spoken to several telcos and service providers and the common theme so far is an increase in demand for faster internet, higher bandwidth and business services such as teleconferencing and number porting. With a wide range of ASX stocks to choose from,
we have invested in a couple of stocks that are both highly profitable, cashed up and on an upgrade cycle. This week we discuss one of them.
Uniti Wireless (UWL.ASX) is a provider of telecommunications services specialising in fixed wireless, fibre and telco services to both consumers and small/medium sized businesses. UWL competes directly with the NBN and wholesales its fibre network to internet service providers in residential multi dwelling buildings and housing estates. This division of the company generates 55% of group revenues, has very high margins and is cash generative.
Source: Company filings
UWL also provides businesses with connectivity solutions such as 1300 numbers, number porting and phone PBX (Private Branch Exchange, a private telephone network used within a company or organisation) hosting solutions. This division is approximately 45% of group revenues and, although it operates in a more competitive part of the telco market, we believe it will continue to grow organically and through acquisitions.
Source: Company filings
Part of the appeal of UWL is the
high quality senior management team and a board of directors with extensive experience in the industry. For instance, CEO Michael Simmons has over 30 years’ experience and was the CEO of both SP Telemedia and Vocus. Similarly, director Vaughan Bowen was the founder of M2 Group which was established 20 years ago and eventually acquired by Vocus.
Directors have been continuously buying shares on market and in placements.
We view UWL as a sector consolidator. The company has undergone a series of acquisitions since listing last year and will continue to be acquisitive going forward. The company has over $36m of net cash to deploy. So far management has shown that acquired businesses are growing ahead of original expectations.
Source: Company filings
The company has
upgraded profits twice this financial year so far while most other companies have been withdrawing their guidance. At the last quarterly update in April, UWL notes the following key developments:
- March 2020 run-rate EBITDA is tracking above the internal forecasts that underpinned the prior upgraded guidance released in February 2020.
- All three UWL business units performed above forecast in the March quarter, including revenue, earnings and cash collections.
- Increased levels of work-from-home, online learning and domestic internet consumption due to Covid-19 have strengthened underlying demand for UWL’s superfast fibre-to-the-premises (FTTP) services.
- UWL’s fibre infrastructure business delivered a record number of net new FTTP connections in March 2020.
Source: Company filings
We estimate UWL will earn over $80m of revenues and about $45m of EBITDA in FY21. The sector is currently trading on EV/EBITDA of close to 10x. UWL is on 9.5x while growing at significantly higher rates and, unlike many of its peers, is debt free.
We believe UWL deserves a premium and we value the stock at about the $1.80 level.
Disclaimer: UWL is held in the TAMIM Australia All Cap portfolios.
