Super Strategic Acquisition from Superloop

Small Caps | Sep 29 2022

This story features SUPERLOOP LIMITED. For more info SHARE ANALYSIS: SLC

Superloop has acquired fellow student accommodation provider VostroNet, expected to deliver strategic synergies and expansion into new verticals.

-Superloop makes strategic acquisition with VostroNet purchase
-Also servicing student accommodation networks, VostroNet should support Superloop to build on its existing managed networks
-The acquisition also provides new growth streams, including entry for Superloop into the fibre-to-the-premises market

By Danielle Austin

Superloop ((SLC)) has acquired internet provider VostroNet for $35m, a move that will allow Superloop to build on its existing student accommodation managed networks. Combined, Superloop and VostroNet should hold one-third of the market.

Superloop operates a fibre-optic cable network across Australia, Singapore and Hong Kong, and having underperformed in recent years appears well placed to benefit from strong demand for IP traffic in the region, driven by business migrating to the cloud, according to some analysts.

Focusing on providing high speed fibre-to-the-premises (FTTP) infrastructure to multi-dwelling and broadacre developments, like Superloop, VostroNet already works in the student accommodation space. The company generates 60% of its revenue from providing custom broadband services to student accommodation, with its key customers including Unilodge, Iglu and QUT.

The remaining 40% of VostroNet’s revenue is derived from wholesale FFTP network services to residential multi-dwellings, co-working spaces and hotels. The purchase signals Superloop’s entry into the FTTP market.

Strategic deal delivers new vertical expansion

Alongside synergies, the purchase looks to contribute six months of earnings to FY23 results, totalling an estimated $4.6m. Analysts also expect the merger to provide further growth opportunities from increased customer uptake and new builds, with VostroNet bringing with it a large pipeline of potential builds.

The three FNArena’s database brokers covering Superloop are all equivalent Buy-rated and between them have an average target price of $1.12, with a range of $1.00-$1.30, following the announcement of the acquisition.

The brokers are largely in agreement that the deal is strategic and financially accretive for Superloop. The upfront purchase price of $35m will be comprised $24.5m in cash and $10.5m in Superloop shares, with a potential cash earn-out of $15m available if targets are met within twelve months.

Morgans (Add, target price $1.00) highlighted the largely monopolistic nature of VostroNet’s operations, typically being the sole fixed-line infrastructure provider for sites. However, the broker notes 4G and 5G mobile coverage technology present competition. Morgans also sees VostroNet’s build pipeline as underpinning future high-quality recurring revenue streams. Following the announcement Morgans has lifted its underlying earnings forecasts by 12% and free cash flow forecasts by 20%.

The Morgans analysts compared Superloop’s purchase of VostroNet to Uniti Group’s acquisition of OptiComm in 2020. The broker noted changing investment fundamentals have seen Superloop pay a more palatable 7.5x earnings ratio, compared to Uniti Group’s purchase price.

Morgan Stanley (Overweight, $1.05) finds the purchase to make financial sense and likely to be accretive. The broker expects the merger to give Superloop a market-leading position in the student accommodation segment, and likes optionality to expand into new verticals.

Describing the acquisition as a highly synergistic purchase, Ord Minnett (Buy, $1.30) similarly sees the move as solidifying Superloop’s position as a leading provider of managed services for student accommodation.

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