Small Caps | Aug 04 2015
-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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