Small Caps | Mar 04 2021
A slew of acquisitions and the trend for digitising communications have provided Over The Wire with the formula to sustain a strong earnings trajectory
-Cross-selling to customers enhanced
-Larger contracts envisaged
-Improved outlook for H2 and beyond
By Eva Brocklehurst
A path has been set for Over The Wire ((OTW)) which should mean the business exits FY21 in strong shape across all four divisions, whereby a full range of IT and telco services is on offer. Enlarged potential exists for cross-selling to new customers generated from recent acquisitions, with the ability to target larger contracts from an enhanced suite of products.
While the acquisitions make strategic and financial sense, brokers assert the core business is still required to deliver organic earnings growth and sustainable returns, which has been a challenge over recent months. Management has not provided specific FY21 guidance but did indicate it remains comfortable with consensus forecasts for operating earnings (EBITDA) of $26m.
The majority of first half growth was provided by the acquisitions of Zintel/Fonebox and Digital Sense and there was negligible organic growth, largely from a lack of non-recurring revenue. Still, the acquisitions have also contributed to higher margins and extensive inbound voice capabilities can also now be sold to a new cohort of clients, Ord Minnett assesses.
The broker, with a Buy rating and $4.77 target, believes the company's tier 1 Carrier Interconnect project will bring multiple benefits, including cost savings and the opportunity to engage in fast-growing wholesale cloud services, such as UCaaS/CPaaS (Unified Communications/Communications Platform) and CCaaS (Contact Centre).
Now the business is a tier 1 voice carrier, Morgans agrees there is the potential for considerable savings and additional revenue streams, although the integration of both past and current acquisitions needs to be well in the rear view mirror.
The broker acknowledges Zintel/Fonebox and Digital Sense have less integration risk and the outlook now “looks interesting”. Morgans considers the stock undervalued but, like the rest of the investment community, requires confidence that the downgrade cycle is over and FY22 forecasts are achievable, sticking with a Hold rating and a $4.25 target.
Canaccord Genuity assumes 10% organic growth and some benefit from operating leverage. While the shares are trading on an FY21 forecast price/earnings ratio of 18.6x this is not the most relevant guide, as the broker anticipates recent acquisitions will contribute materially.
Hence, FY22 metrics are considered more relevant and these show a PE ratio of 13.9x and enterprise value/EBITDA of 10.0x. Canaccord Genuity has a Buy rating and $4.85 target.
Bell Potter, as a result of updates to valuations to allow for earnings changes as well as market movements and time creep, upgrades to Buy from Hold with a target of $4.60. The broker also reduces the discount applied in the relative valuation to 5% from 10% and the weighted average cost of capital to 9.9% from 10.1%, because of the improved outlook for the second half and beyond.
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