Symbio Holdings (ASX: SYM) dropped a stunning 37.5% in a single session following a trading update on 20 December 2022.
The communications software provider announced a sharp decrease in its expected FY23 operating earnings (EBITDA) with a decrease in the midpoint guidance of 25% to between $26 million to $30 million. The plunge in expectation was largely due to the Communications Platform-as-a-Service (CPaaS) division where US customers had been returning excess inventory as well as a number of deals with its Australian customers taking longer than expected to finalise.
In response, Symbio has looked internally to reduce expenditure in an attempt to reduce its cost base.
At the time it announced that it would defer selected product development and projects into the second half of 2023 while also reducing discretionary spending in travel, marketing and pausing recruitment all together.
But what has happened since?
Toward the end of April 2023 the company re-confirmed its guidance to be between $26 million to $28 million citing stabilised market conditions and improving domestic and global demand. The Symbio share price has also seen a resurgence from its 52 week low of $1.34 shortly after the December update and has lifted almost 40%. Great news for short term holders although zooming out the one year and three year price performance there has been little relief.
The Company
Symbio provides communication services to software companies, telecom providers and enterprise customers globally.
It is positioning itself as a disruptor of legacy physical networks with the mission to convert customers to cloud based infrastructure and provide faster, easier ways to deliver communication services. The company is experiencing significant tailwinds following increased adoption of cloud based telephone and remote conferencing communication.
Symbio’s customers include some serious global players including Alphabet Inc. (NASDAQ: GOOGL), Microsoft (NASDAQ: MSFT), Zoom Video (NASDAQ: ZM) and Cisco (NASDAQ: CSCO) to name a few.
Symbio 1H23 Results Presentation
The company operates through three divisions which were established in the 2022 financial year as part of its “Vision 2030” strategy, these divisions are:
CPaaS – Communications Platform as a Service
The CPaaS division targets global software companies and larger infrastructure based service providers with the aim to enable calling and messaging via Symbio hosted phone numbers. As part of its strategy Symbio is targeting 100 million phone numbers on its network.
UCaaS – Unified Communications as a Service
The UCaaS division operates cloud calling services and includes partnerships with Microsoft Teams, Cisco WebEx, Twilio and other enterprise software specialists. UCaaS purchases infrastructure from CPaaS with its mission to enable the roll-out and self-service management of enterprise collaboration services across Australia and Asia-Pacific.
TaaS – Telecom as a Service
The TaaS division provides a digital platform for small Australia service providers to operate their own, fully branded, telecom and managed services business. TaaS operates under the Telcoinabox subsidiary and like UCaaS purchases infrastructure from CPaaS as well as other vendors of complementary telecom services.
Post COVID blues
Symbio was not immune to the risk-off trade that played out during 2022.
After soaring to high’s above $7 per share in November 2021 on the back of increased demand for remote communication solutions during the pandemic, the company’s share price fell, feeling the pressure of rising interest rates and inflation in a market where technology stocks were significantly out of favour.
This culminated in the December 2022 revised guidance where it was emphasised that orders were reverting back to normal pre-pandemic operating levels and a softer economy was having an impact on growth.
Looking ahead
As mentioned Symbio confirmed its FY2023 EBITDA guidance in April with the expectation that the initiatives it has put in place should continue to lower the cost run-rate in the 2024 Financial year.
The market lapped this up with a 25% share price increase in the session, appreciating the news that the expansion into Singapore, Malaysia and Taiwan could increase its total addressable market by 170% to 100 million people by 2024.
Co-Founder and CEO Rene Sugo commented:
“It is pleasing to see the global technology sector improve in Q3 and return to a growth focus. Symbio’s strong balance sheet and clear strategic vision will allow us to capitalise on the supportive mega-trends that underpin our long-term growth, both domestically and in Asia.”
Is it a takeover target?
In the small to mid-cap space of the market, there has been a significant rise in merger and acquisition (M&A) activity recently. This trend has caught our attention, and we believe it presents an opportunity worth exploring. Particularly, Symbio, currently trading at a depressed valuation, has the potential to become an appealing target for acquisition by a larger suitor.
Two prominent contenders in this potential acquisition scenario are Aussie Broadband (ASX: ABB) and Superloop (ASX: SLC). Each company brings distinct motives to the table, offering different yet compelling reasons for considering a deal with Symbio.
Aussie Broadband, having recently acquired Over the Wire (OTW), competes directly with Symbio. It appears that substantial synergies, amounting to over $10 million, could be unlocked through the proposed deal. The addition of Symbio to Aussie Broadband’s portfolio could boost its EBITDA by approximately 40%, showcasing the potential for considerable growth.
On the other hand, Superloop sees an opportunity to leverage complementary services and synergies from a potential deal with Symbio. During their recent investor day, the company emphasised the significance of M&A in their growth strategy. Highlighting their strong financial position and long-term earnings ambition, Superloop’s Managing Director, Paul Tyler, hinted at the possibility of exploring opportunities that could be “very accretive” for the company. Integrating Symbio into Superloop’s operations is estimated to increase their EBITDA by up to 80%, significantly advancing their three-year target of doubling the size of their business.
The current M&A activity in the market has led us to closely examine the prospects of Symbio and other small caps as potential acquisition targets. Symbio’s current valuation and strategic positioning could attract the attention of key players in the industry and deserves some second-level thinking.
Watch this space.
Disclaimer: Symbio Holdings (ASX: SYM) and Aussie Broadband (ASX: ABB) are held in TAMIM Portfolios as at date of article publication. Holdings can change substantially at any given time.
This week’s reading and viewing list covers the market at mid-year 2023, why a Japanese company banned late-night work and Kyle Bass On China: ‘We Sit At A Hinge In History Right Now’.
This week’s reading and viewing list covers, what Richard Bernstein is seeing that is making him bullish, Professor and Hedge Fund Manager Chris Beggs, conquering your fears with Tom and Jerry, techs big bets and a keynote by Howard Marks amongst others…
Bank of America Merrill Lynch (BofA) recently published a research paper showing that small cap stocks are now trading at a 20-year low versus their large-cap peers. In fact, the only other time in the last 50 years that small cap stocks were this cheap relative to large companies was during the dot-com bubble surrounding the year 2000.
They currently trade at a 30% discount to their-long term average, or for the finance nerds, 2 standard deviations below the average since 1979. Does this signal a huge opportunity for investors over the next few years?
What’s a Small Cap Stock?
The definition varies a little between sources, but a small cap (short for capitalisation) stock usually has a market capitalisation (that is, shares outstanding times the share price) in the range of $250 million and $2 billion (for example, Forbes says $300 million as a minimum, whereas Investopedia says $250 million). It’s worth remembering that while this might be small for a company listed on a stock exchange (particularly in the United States), they’re still much, much larger than your local neighbourhood store. Many will have sales each year in the millions (or even billions) of dollars!
What’s So Special About Small Caps?
Some investors focus almost exclusively on small cap stocks, and for good reason. They are often underfollowed by the investment community and have very little ownership by large funds and institutions. Because they are so small, investors with a large amount of money (think superannuation funds or big money managers) can’t invest enough to make an overall difference to their portfolios. For example, according to its website, AustralianSuper currently has more than $230 billion in assets under management. Investing in a company that has a market cap of just $300 million would be just 0.1% of their total investments–and that’s if they bought the whole company!
Another factor is that large investors often get their investment research from the brokerage arms of investment banks, which don’t usually provide coverage of small companies. Investment banks make most of their money from debt issues, equity raisings and mergers, and small companies don’t do as many of these–certainly not of the size that interests the global megabanks.
Because there is less research and large investors often avoid them, small caps can often be bought a lot cheaper than the larger, more well-known companies. It can also be a great opportunity to find companies that operate in a small market niche but are highly profitable. (The largest companies are not always the most profitable or necessarily the fastest-growing, but they usually have big total addressable markets). Usually, small caps will be family-owned and/or family-run companies, they won’t have much debt, and will often pay a good dividend–to keep the other family members happy!
Are Small Caps Riskier?
One thing about small companies is that they generally have more customer and supplier concentration. Businesses often start out with just a few major customers or suppliers, and if the terms of these relationships change (the company loses a customer or supplier to a competitor), it can have a huge impact on the company’s financials. They are also more concentrated in geographic regions and have less product diversification. Large companies can have several different product lines and operate in different states, countries and even continents around the world.
It’s often said that there’s a reason that these companies are still small, which can sometimes be true. There may be a limit to the size of the market, the industry may be stagnant or declining, or management may have made some missteps in the past. These can all be said of larger companies too, though!
Small caps certainly are more volatile though (academics often equate risk and volatility, but this is a topic for another day). They are more sensitive to the economy and have historically outperformed larger companies in a strong economy and underperformed during recessionary periods. This could be a big factor in why they’re trading at such a big discount to large caps today.
Good Things Come in Small Packages
There’s been almost endless talk of a recession as central banks around the world have aggressively raised interest rates. Yet this hasn’t slowed the share market, which has remained “resilient” (finance speak for it hasn’t gone down). In fact, large (popular) technology stocks have been on a tear, with the Nasdaq 100 up more than 38% just this calendar year fuelled by the recent optimism about artificial intelligence. Small caps, on the other hand, have been left behind and are now the cheapest they’ve been in 2 decades. The reversal in trends was fast and furious after the dot-com bubble. Could this be dotcom 2.0 for small caps?
