Exetel Fills A Void For Superloop

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In acquiring Exetel, Superloop can obtain meaningful synergies and fill an under-utilised fibre network

-Superloop should obtain substantial earnings and cash flow growth
-Combined business will be a stronger competitor in fibre and broadband
-Morgan Stanley raises concerns about re-selling NBN
 

By Eva Brocklehurst

Superloop ((SLC)) should be able to expand its broadband offering significantly with the acquisition of Australian retail service provider, Exetel, the deal expected to engender further confidence in the FY22 outlook.

The company has reaffirmed FY21 guidance for operating earnings (EBITDA) of $18-18.5m and announced the acquisition will be funded by a fully underwritten $51m entitlement offer and $49m placement. The offer price is $110m comprising $100m in cash and $10m in scrip.

Morgans considers the price reasonable and notes Exetel is an organically-grown retail service provider that should should offer meaningful synergies and help fill an under-utilised network. Management expects around $5m in synergies in FY23 from bringing customers on-net, while the combined entity will allow the cross-selling of mobile and voice (VoIP) to Superloop customers.

Superloop is expected to invest some of the savings back into the business but Morgans still anticipates substantial earnings and free cash flow growth over the next few years.

The broker emphasises Superloop is a growth business and needs to invest for this to happen while acknowledging the costs involved to invest in growth are unclear. The deal results in 50% upgrades to Morgans' normalised EBITDA forecast and 30% upgrades at the earnings per share level.

Superloop has sizeable tax losses, the broker notes, which means no tax will be payable for the combined entity for the immediate future. Morgans concludes this is a "financially wise" acquisition with a 9% free cash flow yield before synergies and 13% after synergies.

The acquisition of BigAir previously proved to be problematic but the broker asserts all acquisitions involve some risk and therefore Exetel can be seen as "lower" risk as there has been a long and non-competitive purchase process.

On this point, Ord Minnett was surprised by the acquisition, particularly as the company has a "patchy" track record with BigAir, yet agrees the acquisition makes sense as there is earnings accretion and direct cost synergies.

This is a rapid way of the company monetising and increasing the utilisation of the excess capacity on its network. The business will have more than 155,000 consumer and small-medium enterprise customers.

Moreover, the broker ascertains the combined business will be a stronger competitor in the domestic fibre and broadband market. The ability to grow and retain customers will be key to the success of the transaction.

Exetel is forecast to record FY21 revenue of $150m and EBITDA of $11m and Ord Minnett calculates an enterprise value/EBITDA acquisition multiple of 10x.

Morgan Stanley agrees with the positive aspects of scale, accretion and reduced leverage yet raises concerns about the competitive aspect of re-selling the NBN. Exetel is a relatively low-margin business and it is difficult to control costs, one reason why major telcos have launched 5G with fixed wireless (to bypass NBN).

FNArena's database has two Buy ratings and one Hold (Morgan Stanley) for Superloop. The consensus target is $1.23, suggesting 16.8% upside to the last share price.

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