Tag Archives: Telecom/Technology

article 3 months old

The Overnight Report: Going Nowhere

By Greg Peel

The Dow closed down 15 points or 0.1% while the S&P gained 0.2% and the Nasdaq rose 0.3%.

Risk On?

The ASX200 is not exactly shooting the lights out at the moment but the bias clearly remains to the upside. The index has spent the week grafting its way to 5550 from 5500 with the technicals still suggesting higher levels to come.

The Brexit blip notwithstanding, the longer run rally from below 5000 to yesterday had initially been led by defensive stocks, with the big cap banks and miners dipping and recovering at different times. I have made mention often enough of how the utilities sector just kept rising and rising.

Analysts were already struggling with valuations among the defensives, while at the same time conceding the fact global interest rates continue to fall, the Fed continues to stall, and the RBA may yet act again. So throw out your historical PE comparisons – what’s the point when the German government is issuing zero coupon ten-year bonds? We have never been here before.

But on Wednesday we finally saw some selling in the local utilities sector and yesterday that continued. The banks have quietened down now with Commonwealth Bank’s ((CBA)) result, due in a couple of weeks, set to be the next catalyst other than a rate cut next week.  Yesterday’s big movers were materials, up 1.5% consumer discretionary, up 0.8%, and energy, down 1.0%. Everything else was pretty quiet.

Energy fell on the oil price and that currently is looking a bit vulnerable but solid iron ore prices, resilient gold prices and some strength in base metals have seen materials now taking the lead. This is cyclical, not defensive, as is consumer discretionary, which of course would benefit from another rate cut.

Central banks are driving global markets. They are the “free put”. If the defensive yield plays have now stretched about as far as they can, even under the new world order, will it be cyclicals that take us back to 6000? That, supposedly, will depend on result season.


And on the subject of earnings, Ford (Dow) shocked all and sundry last night by posting a weak result and disappointing guidance. Its shares fell 8%, and ensured the Dow was down over hundred points early in the session in a dour mood.

The result was a shock because US car sales have been posting record after record every month and providing some hope for the US economy. But on the one hand there are concerns about the growing number “subprime” car loans being issued, and on the other, it turns out Ford has been forced to offer huge money-back incentives in order to post those record sales numbers. Globally, Ford cited the China slowdown as also being a drag.

However, General Motors reported earlier in the season and beat on expectations. So maybe Henry just needs to have a good look at himself. Whatever the case, and as so often has played out these past couple of weeks, Wall Street grafted its way back through the session to a relatively flat close.

The past ten sessions of almost no close-to-close movement is the tightest in a couple of decades.

US earnings season is at the halfway mark, with just over 50% of S&P500 companies having reported. So far, everybody’s pleased. The quarterly decline in earnings to date is closer to 3% than the 6% forecast pre-season.

Just don’t tell anyone the same has been happening every quarter for some time now. Forecasts are marked down and down and down until most companies can’t help but beat.

Wall Street may be pleased, but it’s still not going anywhere.

This mornings after-the-bell results have included a beat from Amazon which has its shares up 2%, and a strong beat from Google parent Alphabet, which has its shares up 4%.

One obvious drag on Wall Street at the moment is oil. Following another 2% fall last night, WTI is close to its 200-day moving average. If that breaks, commentators assume the oil-stocks correlation of early 2016 will reassert itself.


West Texas crude is down US81c at US$41.10/bbl.

The US dollar index is only down 0.1% at 96.68 but base metals had a strong session last night following a couple of weaker ones. There is likely positioning going on ahead of today’s BoJ meeting for which great expectations are held, and in between there’s the Filipino nickel industry story.

Nickel rose 3% in London last night, zinc 1.5%, aluminium 1% and copper 0.5%.

Iron ore rose another US$1.20 to US$59.20/t.

After jumping sharply post-Fed on Wednesday night, despite the Fed remaining as inconclusive as ever, gold is back down US$5.10 at US$1334.60/oz this morning.

The Aussie is 0.2% higher at US$0.7504.


The SPI Overnight closed up 8 points.

As I have noted before, whenever the world is expecting shock & awe from the BoJ the central bank usually does nothing, but often catches everyone out another time when expectations are negligible. Expectations are very high that today the BoJ will do something significant on the monetary front, to be followed up next week by something significant from the government on the fiscal front.

Stay tuned.

Locally we’ll follow up Wednesday’s June quarter CPI result with the PPI today, along with month of June private sector credit.  Japan will dump a lot of monthly data and the BoJ meets, and tonight sees first estimates for June quarter GDP in both the eurozone and US.

Origin Energy ((ORG)) is among those posting the last of the production reports today.

Rudi will Skype-link with Sky Business around 11.05am today to discuss broker calls.

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article 3 months old

XPED Primed For Rapid Growth In Smart Technology

-Key product for IoT growth
-Large revenue opportunity
-Acquires JCT Healthcare


By Eva Brocklehurst

Having listed on ASX in April, XPED ((XPE)) is a semi conductor company with a product that has the potential to become an essential part of wireless communications protocols. The technology is used to solve the communication problem derived from the use of different computer languages.

The problem with machine-to-machine communications is that manufacturers have a preference to incorporate their own languages and protocols. With more and more devices connected to the internet there is a need for common languages and access protocols across a substantial part of the network.

XPED's technology – Auto Discover Remote Control or ADRC - uses several protocols and, regardless of brand or product type, enables seamless wireless communications between multiple devices through a single touch. Examples include a connection between a smart phone and smart TV, or an industrial battery sensor in a data centre and the tablet of a mobile maintenance engineer.

The product is part of the rapid growth area of the Internet of Things (IoT), driven by applications in both the consumer and industrial arena, including smart cities, health care, transport and smart buildings and infrastructure. XPED's technology brings substantially improved functionality and cost savings, the broker observes.

TMT Analytics notes the potential of XPED's technology is underscored by a collaboration agreement signed with Intel and a licence agreement with Telink Semiconductor. In addition, the broker expects XPED to sign a commercial IP (internet protocol) licensing agreement with Intel in the near term.

Telink Semiconductor is based in Shanghai and is growing fast on the back of some high profile customers, the analysts note. The company is producing chips for the IoT and XPED signed an agreement in May to integrate its ADRC technology into one of Telink's existing chip designs. TMT Analytics believes this relationship has the potential to expedite XPED's commercial roll-out.

Cisco estimates the number of connected devices on the internet will total 50bn by 2020, with the industry growing at a compound 33%. TMT Analytics expects XPED to address the market using its asset-light business model and through selling IP to semiconductor manufacturers and consumer electronics companies.

In June, the company acquired JCT Healthcare, which provides communications solutions to health care facilities. In the broker's view, combining such products with future ADRC-enabled devices such as monitors and sensors, provides a very substantial growth opportunity in remote health care monitoring over the IoT.

Given a relatively short commercialisation record, TMT Analytics is being conservative in its estimates, assuming five semiconductor customers will adopt the technology in the next 18 months. Still, given the size of the global IoT market, there is potential for strong upside to these numbers if XPED can obtain some of the larger names as its customers, such as Cisco, Qualcom, STMicro, Texas Instruments, Sony, Samsung and Panasonic.

The broker considers the consumer segment remains the largest revenue opportunity within the IoT space, growing to an estimated US$398bn market in 2020, or 40% of the addressable IoT market. The infrastructure and smart cities opportunities are envisaged at US$210m and US$270m respectively, or nearly 50% of the IoT market.

The broker initiates coverage on the stock with a Buy rating and 24c target, using a discounted cash flow valuation with a discount of 12%. XPED is expected to start generating revenue from 2017 onwards, ramping up gradually in the first few years. The broker believes a higher rate of return is required from an investment in the stock to account for the uncertainties surrounding customer uptake, sales volumes and royalties. Hence the discount of 12%.

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article 3 months old

WiseTech Poised To Gain Share In Growth Market

-Strong demand growth
-Key contract with DHL
-Opportunity to take share


By Eva Brocklehurst

Software provider to the logistics industry, Wisetech Global ((WTC)), has sparked attention, with several brokers recently initiating coverage of the stock. The company has established a profitable foothold in freight forwarding and compliance.

The addressable market is significant. In 2015, software forecaster Gartner estimated a market in supply chain execution software of US$3.5bn, with 10.4% compound growth to US$5.2bn by 2019, given increased global trade, supply chain complexity and cost pressures.

Macquarie notes the software-as-a-service (SaaS) model delivers high recurring income, customer retention and margin growth from new customer acquisitions and takes up coverage with an Outperform rating and $4.70 target.

The company's main product is CargoWise One, which enables global logistics businesses to manage, track and trace freight and control customs, compliance and warehousing. This is a secure online application suite which improves efficiency and reduces costs and risks involved in the movement and storage of goods.

As supply chains become more complex, regulations specific to a country become more intricate and there is increased recognition of the benefit of a complete solution. Macquarie attributes the company's success, in part, to a strong network. The CargoWise One platform is mission-critical software, underpinned by extremely low annual attrition rates.

Organic growth has been complemented by acquisitions which the broker expects will continue, given a fragmented market. The company's cash balance of $90m is expected to be deployed over the next 12-18 months.

Macquarie acknowledges the premium valuation demands strong medium-term earnings growth, needed to offset the normalisation of expenses and R&D capitalisation. Yet, while the valuation at current prices may not appear compelling, the broker believes the long-term market penetration opportunity is substantial.

Over the past 20 years the company has made several acquisitions of small software suppliers to penetrate new markets and acquire customers.The show piece in its armoury is the exclusive global contract with Deutsche Post/DHL, signed last December. Morgan Stanley estimates this contract will contribute $15.2m annually in revenue and should improve confidence in WiseTech's ability to establish itself as a vertical leader.

Macquarie concurs leadership in freight forwarding has been underscored by DHL choosing WiseTech for its air and sea freight forward business but suggests, given industry feedback, that CargoWise in some instances lacks necessary product depth to offer a full supply chain solution. The challenge, therefore, is to drive penetration of non-freight forwarding modules to the existing client base, the broker contends.

Credit Suisse notes the genesis of the deal with DHL Global Forwarding was the failure of the company's internal IT project, which resulted in a EUR 345m write-down when it was finally abandoned in favour of a commercially proven enterprise software solution.

This failure of an internal solution demonstrates both the cost and complexity of proprietary software in an increasingly interconnected and cloud-based world and the broker suggests more major logistics companies will follow this lead.

This is one of the risk areas Macquarie identifies for WiseTech Global. Competitors are targeting the online logistics segment and they include large multinational competitors that typically offer adjacent enterprise-type solutions. Furthermore, while it remains attractive economically to acquire smaller, sub-scale regional operations to migrate customers, offshore M&A is inherently risky.

Macquarie assumes total R&D investment growth will be sustained at 9% over the medium term and the earnings profile estimate is supported by $120m of estimated acquisition investment across FY18-21. The broker's estimate of 33% revenue growth in FY17 is largely driven by a combination of the commencement of contracted global trading agreements and the end of temporary pricing arrangements for certain customers.

Morgan Stanley initiates with an Overweight rating and $5.00 target, believing the stock offers a structural growth story that is early in its life cycle, as global logistics companies chose to move to the cloud and away from in-house software. The broker retains a strong conviction regarding the industry's growth path, as most forwarders are still using in-house solutions. Moreover, the economics of shifting to the cloud are compelling.

Credit Suisse initiates with a Neutral rating and $4.32 target, believing WiseTech will benefit from the trend towards solutions in the cloud. The broker also suspects there is opportunity for an integrated provider such as WiseTech to take market share as the end user dispenses with legacy products.

Yet, Credit Suisse is also of the opinion that strong execution is required to justify the premium to global peers. Structurally higher margins and attractive unit economics should be supportive but the global roll-out strategy needs to be maintained to uphold the current premium.

These three brokers contribute to a consensus target of $4.67 on FNArena's database, suggesting 1.2% upside to the last share price, with two Buy ratings and one Hold.

WiseTech was founded in 1994 and has more than 6,000 customers, ranging from small and mid sized regional or domestic enterprises to large multinationals. The company's Sydney base has expanded to include offices across Australia, New Zealand, China, Singapore, South Africa, the UK and the US.

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article 3 months old

Linius Technologies Shapes Video Streaming

-Ability to personalise video advertising
-Partnering with DigiSoft
-Price structure to be finalised

By Eva Brocklehurst

Newly re-listed Linius Technologies ((LNU)), formerly Firestrike Resources, has developed a technology that has far-reaching implications for the video streaming market, particularly for personalised TV advertising.

The company has a patented technology which enables video files to be played out on any device anywhere on the internet without the need for content providers to store copies in different formats, languages and subtitles. The video virtualisation allows for audio tracks, subtitles and advertising to be added as the video is being played.

TMT Analytics maintains the company's co-operation with DigiSoft is a major endorsement of potential. Cost savings are expected to be substantial in terms of storage and transcoding, which the broker asserts could be up to as much as 80%. Moreover, content providers will be able to personalise the offering to the individual viewer, based on known preferences. This will mean the value of advertising time is increased.

The company aims to roll out its commercial products late this year targeting the video processing industry in the first instance, in terms of transcoding, content delivery networks (CDN) and personalised ads. The price structure is being finalised along with the sales model.

So far, TMT Analytics has calculated a discounted cash flow-derived valuation of 28c, providing a valuation rather than a price target at this stage. Still, considering substantial potential upside in the share price, and assuming successful monetisation of the technology, the broker initiates coverage with a Buy rating.

The company is likely to require additional funding to facilitate a full-scale rollout of its technology, for marketing and additional developers, the broker contends, and unfamiliarity with the technology and integration into existing work flows may limit adoption and acceptance by some customers. This is why partnering with established players may expedite the commercial rollout.

Catalysts for the near to medium term include the development of showcases which will enable Linius Technologies to convert the interest received from industry players into concrete agreements. The broker expects channel partners will be signed ahead of the actual commercial rollout.

Additionally, the company should be able to attract multiple enterprise customers directly rather than through channel partners closer to the launch date, allowing for higher revenue per customer in the absence of revenue sharing in these situations.

Simply put, the technology starts by asking a question about which device is actually requesting a play-out of a particular piece of content. The variables are then matched to include specifics of the device, the media player, the subtitle language, if any, and viewer specific preferences. This is then compiled into the actual feed.

TMT Analytics considers the viewer-specific advertising feature facilitated by the technology has potential to be a game changer, as this level of specialisation is only seen with online advertising. On average, space in such a model is almost three times more valuable to advertisers than generic advertising space on TV.

Given the company addresses a well-established industry with incumbent players and structures and will mainly be selling through channel partners in revenue sharing agreements, this reduces the need to build up a large sales force early on. DigiSoft is the first channel partner but TMT Analytics expects up to nine to be signed to address the initial three market segments in the medium term.

The broker also observes the CDNs are growing strongly, resulting in a market that is expanding towards US$12.8bn in 2020, from around US$5bn in 2015. While video accounted for 64% of the internet traffic in 2014, Cisco estimates this will rise to 80% by 2019.

TMT Analytics models Linius Technologies revenues from the CDN market in a similar way to the transcoding market, ie a small but growing market share which is defining customer costs that are expected to be reduced by 80%. These cost savings form the basis for a 12.5% licence fee, of which the company's re-seller takes 30%.

Hence revenues are projected at $5.6m in 2017, growing to $14.6m in 2018 and $42.6m by 2020. Linius Technologies is projected to make a maiden profit in 2018 of $2.8m, growing to $14.2m by 2020. The broker emphasises that this is a work in progress and modelling still needs to be finalised, which is expected towards the end of 2016.

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article 3 months old

Is Telstra’s Dividend Yield Enough?

-Mobile outages influencing churn
-Is the yield play enough?
-More conservative on capital
-But is it sufficient?


By Eva Brocklehurst

Many headwinds batter Telstra Corp ((TLS)) as it progresses from a monopoly owner of infrastructure to a competitor for access to the NBN. Still more are being identified in the mobile network, where competition has raged for longer.

Several brokers consider Telstra is in a tough situation, facing increasing competition and declining returns. Morgan Stanley asks: should Telstra invest offshore for growth or invest domestically to retain market share? Either way, the broker envisages returns declining and considers this scenario is under-appreciated by the market.

While the fixed data business faces lower profitability and market share losses as the NBN is rolled out, increased competition and its own network outages are also affecting the company's mobile business. Deutsche Bank initiated a survey to gauge the propensity to switch providers among mobiles.

In view of the recent well publicised  outages in Telstra's network, the survey found no change in the perception of network quality. Yet the results suggest mobile churn could rise to 19% from the current 11%. This could lead to a fall of 6% in FY17 mobile, hand-held subscribers, the broker maintains. Of significance, mobile outages also appear to be influencing the churn intentions of fixed data customers, with many indicating this was the reason to switch providers.

The frequency of the mobile outages in February and March this year caused the greatest concern, particularly as Telstra's services are priced at a premium to reflect a superior network. The broker estimates the implied churn rate could lead to a 4% reduction in fixed data subscribers in FY17 and a 1.6% reduction to FY17 earnings.

Deutsche Bank also enlists the experience of the Vodafone/Hutchison joint venture in its analysis. That JV experienced severe network outages in 2010-11, which considerably tarnished its image and resulted in the loss of 2.4m unique subscribers and 9% market share.

The broker revises forecasts to reflect a higher churn rate for Telstra in FY17, leading to reductions in earnings estimates of 5% in FY17 and 10-11% in FY18-20. Yet the attractive dividend yield and prospective capital management means the broker sticks with a Hold rating.

Morgan Stanley also recognises Telstra's yield is valuable in the global chase for yield but prefers Spark New Zealand ((SPK)) as its dividend yield play as that company is returning capital to shareholders in the form of special dividends. The broker envisages normalised returns on equity (ex NBN payments) for Telstra will decline to 23%, from 28%, by FY20. The stock is also noted to be trading at a 22% premium to its long-term average and Morgan Stanley retains an Underweight rating.

The broker bases its rating on the fact once almost guaranteed returns are fading amid increasing competition across 75% of its revenue base, and the company will struggle to fill a $2-3bn earnings hole while costs are growing. Telstra will need to reduce costs by 1.4% per year for the next five years to remove $1.1bn in costs by FY20 and this looks difficult to achieve, in the broker's view.

Morgan Stanley presents a detailed analysis of the company's iPhone business, which suggests, in the longer term, competition will erode any profit and add $40-50m per annum in costs to the mobile business. The situation is thus: the market envisages Telstra absorbing a $400 phone subsidy every time it sells a 24-month, post-paid plan on iPhone i.e. this is not evaluated as a profit centre or source.

This is not the case, Morgan Stanley maintains. The company is not absorbing the subsidy, rather it is actually generating a small profit on the lower-priced plans of around $4 per iPhone. Most other operators, in the US and NZ markets as well, do not use the iPhone as a profit centre. Therefore, competition on price will erode or erase any iPhone subsidy changes Telstra makes, the broker contends, and, on extrapolation, this will not fill the earnings hole.

Analysis suggests Optus is also using the iPhone as a profit centre but Morgan Stanley expects this competitor will move away from that position because, over the last two years, it has become increasingly competitive in the mobile segment. With the first steps towards lower prices being undertaken, the broker believes it would not be unreasonable to expect Optus to stop generating a profit from iPhones.

The broker acknowledges Telstra has adopted a conservative approach to capital to the near term, abandoning its Philippines investment and selling most of the stake in Autohome, as well as announcing a $1.5bn capital management program. Yet, the longer-term capital allocation strategy is intent on plugging the earnings hole, once NBN payments are finished ,which means a continued focus on growth and an Asian expansion strategy.

This introduces an elevated level of risk for Telstra and Morgan Stanley is mindful the company has had mixed experiences offshore. The broker would prefer that a forecast $5.2bn in excess capital over the next five years is returned to shareholders as a $1bn share buy-back per annum. This would shrink the equity base and stop the returns on equity falling by FY20.

The consensus target on the FNArena database is $5.38, signalling 1.4% in upside to the last share price. The dividend yield on FY16 and FY17 forecasts is 6.0% and 6.1% respectively. The one Buy rating - Morgans' Add recommendation – is predicated on the strength of the balance sheet and relative safety of the company's earnings. Otherwise, there are five Hold ratings and two Sell.

See also, Telstra Approaching A Crossroads on May 3 2016.

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article 3 months old

Uptrend For Aconex

By Michael Gable 

The US and UK markets were closed last night, so we don't have much of a lead for today. The increasing likelihood of a US rate rise in June is keeping a lid on the gold price, so we have had another look at the chart. To paraphrase, we will try to see the wood for the trees and determine if we need to worry about it or not. This week, we take a close look at Aconex ((ACX)) which, despite being listed for a little over 12 months, has quickly become a market darling. We'll give our thoughts on the company as well as the best entry point to aim for.

In the last several weeks, ACX has found it difficult to trade through the mid $6's. The longer-term trend is still going up, so there is not too much wrong with holding the stock here. However, in looking for an entry point, we would wait and see if it once again finds some sellers here in the mid $6's and makes another dip under $6.

Content included in this article is not by association the view of FNArena (see our disclaimer).
Michael Gable is managing Director of  Fairmont Equities (www.fairmontequities.com)

Michael assists investors to achieve their goals by providing advice ranging from short term trading to longer term portfolio management, deals in all ASX listed securities and specialises in covered call writing to help long term investors protect their share portfolios and generate additional income.

Michael is RG146 Accredited and holds the following formal qualifications:

• Bachelor of Engineering, Hons. (University of Sydney) 
• Bachelor of Commerce (University of Sydney) 
• Diploma of Mortgage Lending (Finsia) 
• Diploma of Financial Services [Financial Planning] (Finsia) 
• Completion of ASX Accredited Derivatives Adviser Levels 1 & 2


Michael Gable is an Authorised Representative (No. 376892) and Fairmont Equities Pty Ltd is a Corporate Authorised Representative (No. 444397) of Novus Capital Limited (AFS Licence No. 238168). The information contained in this report is general information only and is copy write to Fairmont Equities. Fairmont Equities reserves all intellectual property rights. This report should not be interpreted as one that provides personal financial or investment advice. Any examples presented are for illustration purposes only. Past performance is not a reliable indicator of future performance. No person, persons or organisation should invest monies or take action on the reliance of the material contained in this report, but instead should satisfy themselves independently (whether by expert advice or others) of the appropriateness of any such action. Fairmont Equities, it directors and/or officers accept no responsibility for the accuracy, completeness or timeliness of the information contained in the report.

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article 3 months old

Valuation An Issue For Technology One

-10-15% profit growth reiterated
-Strong competitive advantage
-Is the stock too expensive?


By Eva Brocklehurst

A fall in first half profit for Technology One ((TNE)) does not worry brokers unduly, given the company enjoys strong momentum and a host of contracts in the pipeline. The issue for the stock is more one of valuation, given a substantial premium to peers.

The company reported a first half profit that was 17% below the prior corresponding half. Brokers account for the weaker than expected result in the combination of strong revenue growth that was offset by growth in total expenses. Operating cash flow was affected by working capital investment.

There is always a timing issue, and Morgans is inclined to look past first half results to the momentum that is occurring. As the company has guided to FY16 profit growth of 10-15% and is already at 14.7%, and 11% cost growth was pre-empted, the broker makes no changes to estimates.

The company expects 11% in expenses growth across the full year, versus 16% in the first half and has declared a 2.36c per share dividend, up 10%, which Morgans believes is indicative of its confidence in the outlook.

On analysis, UBS also believes FY16 guidance is achievable, driven by first half revenue growth of 12%, growth in cloud services and the second half revenue pipeline. Still, the broker tinkers with forecasts, lowering revenue estimates for FY17-18 by 2-3% on slightly slower initial licence fee expectations.

Incorporating a marginally higher cost base to reflect continued investment, UBS reduces its profit margin estimates by 96-180 basis points which results in a reduction of 6-10% in FY17-18 net profit forecasts.

All that aside, the broker believes the company has an enviable track record of earnings growth and a strong competitive advantage. Moreover, in the transition to the cloud, UBS believes Technology One is well positioned to take market share as its product is modular and can be configured, compared with alternative product suites that have been highly customised.

UBS observes there are two main benefits from the shift to the cloud. Firstly, revenues become stickier and, secondly, margins improve through increased operating leverage. The benign organic growth environment faced by many industrial stocks under coverage means the company's growth rate and history of delivering warrants a premium valuation in the broker's view. Still, this is already reflected in the share price. Hence,UBS retains a Neutral rating.

Morgans agrees the business is high quality but expects momentum to weaken eventually, which will be the catalyst to exit the stock. For now, as the market is buoyant and supportive, there is little reason to change the share price dynamics and a Hold rating is maintained. While acknowledging cheaper capital has pushed equity risk premiums lower, even on relative valuation grounds the stock appears expensive to Morgans, given its profit growth is not as substantial as its peers.

The main risk for the stock relates to market sentiment, the broker contends. A large part of the re-rating of the share price has been an investment market being willing to pay a substantially higher multiple for the same dollar of earnings. To emphasise this point, Morgans notes Technology One has traded historically on a 15 times price/earnings multiple and nowadays it is more like 39 times.

The results were highly likely to favour the second half but the scale of this seasonality was a minor surprise for Macquarie. Revenue growth was marginally stronger than expected, while expenses were the main drag as the company invested ahead of a number of large contracts which are to be finalised in the second half.

The broker observes the balance sheet remains in a strong net cash position. Cloud customers have more than quadrupled since September 2014 and Macquarie expects the cloud service fee will be a medium-term driver of growth, providing significant operating efficiencies as products scale up.

There is the potential for delays in uncertain markets, but Macquarie observes the company's customer base of government and education entities tends to be more resilient. The broker considers a premium valuation is warranted and retains an Outperform rating.

Bell Potter downgrades earnings forecasts by 1-2% for the next three years, driven by higher depreciation, lower interest revenue and higher number of fully diluted shares. The broker forecasts pre-tax profit growth of 16% for FY16, and subsequently expects an uplift in FY17 and FY18 to 20% and 18% respectively, driven by continued growth as well as a move into profitability for both the cloud services and UK business.

Bell Potter, not one of the eight stockbrokers monitored daily on FNArena's database, retains a Sell rating and $4.75 target. The recommendation is solely based on valuation and the broker emphasises it continues to have high regard for the stock and its outlook.

The database contains one Buy and two Hold ratings for Technology One. The consensus target is $5.22, suggesting 3.6% in downside to the last share price. This compares with $4.25 ahead of the results.

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article 3 months old

Vocus: A Growing Force In Telecoms

-Merger synergies of $40m identified
-Potential to gain market share
-Weakness in mobile infrastructure


By Eva Brocklehurst

Vocus Communications ((VOC)) is consolidating its merger with M2 Telecom, joining its infrastructure with M2's sales and marketing force to form a vertically integrated, full service operator of fixed line telecommunications.

The earnings potential is high, as the merger synergies entail an ability to pursue new opportunities in the small-medium enterprise (SME) market. Vocus has historically targeted corporate and government customers, while M2 has pursued the SME market.

Now, in concert, Deutsche Bank envisages significant potential to take a further 10% share of the the $2.9bn CBD SME market in the next four years. Management has identified $40m in cost synergies associated with both network and non-network savings, which is expected to improve margins by 250 basis points.

Deutsche Bank also alludes to the potential for margin expansion through on-net buildings and cross selling, forecasting earnings margins should improve by 580 basis points between FY16 and FY20.

The company has been building out its fibre network and is now undertaking more in-building marketing to sell additional services inside its footprint. Further penetration within its existing fibre would incur minimal costs. Deutsche Bank estimates an additional customer would have a gross margin of 90-95%.

Management acknowledges it has a gross churn ratio for its consumer division of 36%, which appears higher than its competitors. The reason suggested is because of a younger customer demographic and sales-centred model. Still, with the merger comes faster broadband speeds and Deutsche Bank suspects, as a result, a reduction in churn.

The broker forecasts a compound earnings growth rate of 34% for FY17-20. Deutsche Bank values the stock from an equally weighted average of several methodologies, initiating coverage with a Buy rating and $10.38 target. The main downside risk relates to merger synergies not being realised.

Morgans rates the company's management highly, noting an enviable track record of delivering shareholder value, but believes at current levels the share price is factoring a lot of upside and would prefer to accumulate the stock at lower prices. Hence, the broker kicks off coverage with a Hold rating and $8.50 target.

Vocus is the only one of the big four telcos which does not have to defend consumer margins under a National Broadband Network (NBN) and is well placed to gain market share.

How Morgans envisages this advantage will play out is in the fact competitors are all currently selling their services on the internet and need to sell NBN product at a higher price to protect their profits. Vocus has a consumer brand, Dodo, that is already a re-seller and therefore enjoys pricing flexibility and the ability to substitute, if necessary, margin uplift for market share.

The main weakness, the broker contends, is that there is a lack of mobile infrastructure within the merged group and limited control, therefore, over the mobile product. Still, a recently re-signed re-seller agreement with Optus should strengthen the offering. The broker also notes the time to realise cost synergies in telecoms is typically longer than expected as supplier contracts of two to fifteen years need to roll off.

Other brokers also laud the merger rationale. Credit Suisse considers the business will be transformed, with the company growing into a major telco over time, while execution on potential synergies remains the key factor in determining success.

Morgan Stanley has previously suggested the company needs to fill a hole by increasing its Australian backhaul assets. These assets are the links from a core network to the perimeter networks, or the “edge” of the network where applications are made.

This should mean further market share and a possible re-rating. Based on in-house analysis the broker calculates that an acquisition of NextGen, owned by the Ontario Teachers Pension Plan and Cimic ((CIM)), could be beneficial to both.

There are four Buy ratings and one Hold on FNArena's database. The consensus target is $9.10, suggesting 2.9% in upside to the last share price. Targets range from $8.50 (Morgans) to $10.38 (Deutsche Bank).

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article 3 months old

Weekly Broker Wrap: Budget, Renewables, Aged Care, Classifieds, Outdoor And Telstra

-Mixed impact from federal budget
-Key solar agreement at wind parity
-Lower organic growth probable for EHE, JHC
-APO, OML on track for upgrades?
-National listings to offset Sydney weakness
-Telstra losing regional share


By Eva Brocklehurst

Commonwealth Budget

Good for property, bad for equities is how Credit Suisse describes the 2016 budget. The absence of an expansionary budget, with the deficit forecast to shrink to 2.2% of GDP from 2.4%, is expected to put pressure on the Reserve Bank to cut the cash rate further and be a positive for the bond market.

The broker considers the impact on the Australian dollar is mixed, with lower interest rates a negative but a tighter fiscal position a positive. The budget does provide some positives for equity investors, the broker acknowledges, but this is likely to be offset by planned changes to superannuation. Credit Suisse envisages less money flowing into the Australian pension pool and, hence, less flowing into equities.

The sectors most set to benefit from the budget's proposals include: building materials - renewed demand for investment property and infrastructure spending; retailers - personal income tax cuts and small business write-offs; and media - a reduction in licence fees.

The sectors likely to suffer include: fund managers - super changes; health care - changes to Medicare; and banks - associated costs for the Australian Securities and Investments Commission and less self-managed super fund demand.

Utilities And Renewables

Origin Energy ((ORG)) has signed a power purchase agreement (PPA) with the first non-government backed, large solar project at a price below parity with wind power, which Credit Suisse suspects signals an important stage in the transition to renewables.

The 13-year agreement with the 100MW Care solar farm is for the purchase of energy output plus renewable certificates for a bundled price around $80/MWh. This is roughly half the cost of AGL Energy's ((AGL)) Broken Hill and Nyngan solar projects.

The broker envisages the developments for both Origin and AGL are an opportunity to increase near-term earnings. With the pair having a stated target of over 1,000MW in renewables projects the near-term uplift could be 5-6% or more, the broker maintains.

Credit Suisse believes the drop in PPA solar prices does put a cap on how far wholesale electricity prices can rise, yet retains a view that tighter climate policy will necessarily lead to higher wholesale electricity prices which will benefit the companies' existing portfolios.

Aged Care

The federal government has flagged changes to the Aged Care Funding Instrument (ACFI) as expenses have grown ahead of forecasts, driven by higher complex health care claims, largely because of an increase in frailty.

To cut the rate of growth the government plans to halve the indexing for complex health care funding, saving $1.2bn over four years. The budget papers indicate the government will look to further strengthen the way care funding is determined, separating resident needs from service provision.

The changes support Morgan Stanley's view of lower organic growth for listed operators in aged care and are slightly negative for Estia Health ((EHE)) and Japara Healthcare ((JHC)).

Outdoor Media

Growth in outdoor media hit 17% in the first four months of the year. This suggests to CLSA that APN Outdoor ((APO)) and oOh!Media ((OML)) are on track for upgrades to 2016 guidance. The broker upgrades earnings forecasts for APN Outdoor by 7.0% and by 4.0% for oOh!Media.

The broker believes the growth has been driven entirely by digital revenue and billboards have taken over retail as the strongest growing outdoor segment. Retail and billboards represent 80% of oOh!Media's earnings. APN Outdoor is not involved in retail but billboards represent 50% of earnings.

While roadside transit, street furniture and transport (train stations and airports) advertising declined in April, the broker is cautious about extrapolating this data further. Year to date these segments are still showing solid growth.

Real Estate Classifieds

New listings for the Australian property market grew 2.0% in April following 1.0% growth in March. Deutsche Bank suggests the lack of a significant rebound, despite easy comparables, is attributable to weaker volumes in the Sydney market.

The broker continues to expect the national market will grow in the June quarter, with other capitals and regional areas offsetting the Sydney declines. Given the significance of the Sydney market the broker continues to forecast lower revenue growth in the second half for REA Group's ((REA)) domestic operations as well as Fairfax Media's ((FXJ)) Domain.

Telstra And NBN

What is happening to Telstra's ((TLS)) NBN share? This is the question UBS asks after Australian Competition and Consumer Commission (ACCC) data revealed Telstra had 47% of NBN services in operation as of March 31, broadly consistent with its existing fixed data share. Yet, of the 941,000 NBN subscribers to date, 53% are regional.

UBS estimates that in regional Australia Telstra currently enjoys a 70% share, given the lack of unbundling from peers affords it an input cost advantage. Yet the ACCC data shows Telstra's regional NBN share is 52%, and this implies Telstra is losing regional market share as access costs equalise.

On the other hand, product differentiation and the Belong brand, which taps into value oriented metro subscribers, appear to be buoying Telstra's metro share. Its NBN metro share is currently 41% and outer metro share 46%. UBS believes Telstra needs to execute further on a lean operating model and differentiated product to hold a 50% fixed data share.

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article 3 months old

SMS Management Struggles To Transform

-Struggling with transformation
-Core business not reflected in price
-Potential takeover target

By Eva Brocklehurst

SMS Management & Technology ((SMX)) is struggling as it transforms into a managed services provider from a consultancy. The company announced another large downgrade to guidance, now expecting FY16 earnings to be in the range of $15.5-16.5m. At the mid point this is down 45% on the prior year.

The company has attributed the downgrade to a lack of contract wins for the consulting division in the second half, which attracts substantial costs, with margins reduced as a result of a fall in staff utilisation.

Morgans believes the company is in a difficult situation where its business is being re-positioned while it also defends its core. The broker suggests the transition is a long process and key staff are likely to have left, so it makes it challenging to ensure the core business remains intact.

This is underscored by the departure of the CEO, Jackie Korhonen, who has resigned after 14 months in the job, effective immediately. The board has appointed CFO Rick Rostolis as the new CEO and, given his history in professional services, Morgans believes this a positive development.

The board has also signalled it will continue with the on-market share buy-back, subject to prevailing market conditions. As the stock appears to be trading below book value, with minimal debt, Morgans considers this a low-risk strategy and should create more value rather than via acquisitions.

The market has changed over the past five years yet the core business has strong relationships which are of considerable value. Moreover, the underlying performance of the core consultancy is not being reflected in the short-term share price. This makes the company a potential takeover target, the broker contends, but if earnings can be stabilised then there is upside potential for the stock.

Morgans believes the key to the stock is how long it takes for earnings to re-base. The value appears compelling for long-term investors but given uncertainty and current conditions, this may take time to be realised. Given the poor operating performance, the broker expects the company may be hit by other one-off costs and reduces FY16 and FY17 forecasts by 32% and 17% respectively.

Macquarie observes the billable head count is down by 100 to 820 and drives a negative impact of $4-5m to the earnings numbers. Earnings visibility is low and given the transformation is in its early stages the broker is cautious about any rebound in the short term.

Despite the measures to diversify, the consulting business remains a large proportion of revenue. There are risks associated with operating such a high fixed cost business model in the current environment and Macquarie highlights the downside risk to earnings. The broker retains a Neutral rating given the potential for a takeover bid.

UBS incorporates the revised guidance into forecasts and its estimate of FY16 earnings at $15.5m sits at the bottom of the range. The broker assumes a more stable head count in FY17.

Earnings leverage to any improvement in utilisation is substantial, yet the broker's data checks suggest IT job vacancies have peaked and are starting to decline. This, combined with the potential uncertainty generated by the forthcoming federal election, should mean a more subdued operating environment in FY17, UBS contends.

There are three Hold ratings and one Sell on FNArena's database. The consensus target is $1.72, suggesting 9.0% upside to the last share price. This compares with $2.31 ahead of the downgrade. The dividend yield on FY16 and FY17 forecasts is 7.2% and 7.8% respectively.

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