Tag Archives: Telecom/Technology

article 3 months old

Telstra Approaching A Crossroads

-Large productivity savings needed
-Off-market buy-back most likely in FY17
-Investing in technology overlay
 

By Eva Brocklehurst

Telstra Corp ((TLS)) is approaching a crossroads. The company is moving from being an owner of infrastructure, namely the fixed line network, to competing for access to infrastructure – the National Broadband Network (NBN).

The company is facing an earnings gap once the NBN is completed in FY20/21. This will be difficult to fill, brokers maintain, as competition continues to intensify in mobiles, fixed line and corporate offerings.

The company has indicated there is a $2-3bn negative impact from the transition to the NBN. NBN access costs are expected to be around $2bn by the end of the roll-out. The company's access costs are expected to reduce as it decommisions the copper network, which should partially offset the new NBN access costs.

Credit Suisse estimates that access costs make up 30% of the company's existing fixed line cost base, equivalent to $1.2bn in FY16. This highlights the size of the productivity savings needed to achieve even modest fixed line profits under an NBN. Credit Suisse calculates the fixed line business will be loss making under the NBN, without productivity savings.

Credit Suisse describes it as a timing mismatch, where new NBN costs ramp up while the savings take longer to come through. The broker calculates that the mid point of the stated NBN impact range implies fixed line earnings of $200m for Telstra before productivity savings.

In order to achieve the $1bn in longer-term fixed line earnings, which the broker currently forecasts, Telstra would need to achieve productivity savings of $1.2bn and this is not expected to be easy.

Meanwhile, Telstra confirmed a $1.5bn capital management program, funded by the sale of Autohome and supported by its under-geared balance sheet, with the details to be forthcoming at the August results. Credit Susise calculates this should be 1.4% accretive to earnings.

The question now is what form this will take. UBS believes a special distribution is unlikely as it would not reduce the dividend burden or improve earnings. An off-market buy-back is therefore preferable, given domestic investors will benefit from a partially franked dividend and investors tendering into the buy-back benefit from a lower capital base. Still, rulings from the Australian Taxation Office will be critical to the eventual mix.

UBS also noted more disclosure in the briefing around dividends. The company's view of sustainable earnings that underpin the dividend appear to be based on exit-rate earnings once one-off NBN earnings wash through. The company also reminded the market it should expect group margin dilution for major products, in aggregate.

Telstra's intention to look through short-term earnings fluctuations and a continuation of the positive sub trends gives UBS confidence that the current dividend will be, at the least, maintained although the quantum of growth remains at issue.

Macquarie currently incorporates $2.9bn in capital management in its estimates for FY17, although considers some of this amount is interchangeable with future M&A decisions. The broker envisages scope for a $1bn-plus discounted off-market buy-back which could be completed in the first half.

The quantity of the earnings impact from the NBN is conservative, Macquarie maintains. The broker expects it to be more like $2.3bn, but with plenty of offsets from associated restructuring and reduced capital intensity

The broker believes the concept of the earnings gap is well understood by the market and should not cause a shift in considerations. Macquarie continues to expect pressure on the core business and mobiles but believes valuation support is provided by the dividend yield.

Deutsche Bank assumes an off-market buy-back of $1.5bn at a 10% discount to the current price and that Telstra has $2.5bn in surplus captial after dividends, buy-backs and interest payments which can be delivered to further capital management, acquisitions and investment.

Morgan Stanley was critical of the company's more risky capital allocation strategy so lauds the decision to adopt a more conservative approach and return capital to shareholders. The broker estimates a share buy-back will be 2-3% accretive, but a lack of franking credit will likely limit off-market share buy-backs or special dividends.

Further afield the company will need to come up with more than what Morgan Stanley forecasts, in terms of earnings, once the NBN is completed. Telstra is likely to witness its quasi-monopoly returns transfer to its rising competitors, the broker suspects.

The broker believes the strategy to significantly invest in technology assets which add value to the network is sound. Still, there are risks in moving into the software realm as it is characterised by lower barriers to entry, and industry verticals where the broker observes the winner takes all.

This means earnings from the Network Application Services (NAS) and global NAS business, whilst attractive, carry a higher level of risk than traditional telco networks. Morgan Stanley envisages Telstra's normalised returns on equity are declining and will fall from 26% in FY16 to 23% by FY20. The broker maintains an Underweight rating.

FNArena's database has one Buy rating, five Hold and two Sell for Telstra. The dividend yield on FY16 and FY17 consensus estimates is 5.8% and 5.9% respectively. The consensus target is $5.42, suggesting 1.3% in downside to the last share price.
 

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article 3 months old

The Overnight Report: Sell-Off

By Greg Peel

The Dow closed down 210 points or 1.2% while the S&P fell 0.9% to 2075 and the Nasdaq dropped 1.2%.

Rock’n’Roll

It was a wild old session on the local bourse yesterday as a clear determination to buy was interrupted by the Bank of Japan’s determination not to do anything.

The trend in recent times has been for the BoJ to move on monetary policy when no one is expecting a move and to stay put when the world is convinced a move is afoot. The yen has been nothing but strong ever since the BoJ moved its cash rate into the negative in January so the expectation was that the central bank would have do something at its meeting yesterday – head further into the negative or at least pump QE purchases up further.

But the decision was to wait for longer to give negative rates more time to play out. On that note, the Nikkei index plunged 3.6% and the yen soared once more. Locally, the ASX200 was sitting at a peak of up 52 points at 1pm when the BoJ decision hit the wires, and six minutes later was only up 11 points.

But by 2.30pm the index was back up 47 points before closing up 37. The BoJ caused no more than a computer-driven blip, it would seem.

When the dust settled, the theme of the day appeared to be a continuation of Wednesday’s trade when the shock CPI result had the market assuming an RBA rate cut is nigh, maybe even as soon as next Tuesday. The sectors that led the rally were consumer discretionary (1.2%) and staples (1.8%), energy (1.8%), materials (2.8%) and industrials (0.8%).

The consumer sectors benefit from lower rates putting more money in punters’ pockets, the resource sectors have been enjoying the commodity price bounce but have found earnings tempered by the strong Aussie, and many an industrial earns its revenues offshore. No other sector much moved. We might have expected the banks to be sold given they are hampered by lower rates, but a 0.1% gain suggests no one wants to do anything too rash ahead of next week’s earnings results.

The Aussie fell 2% on Wednesday’s CPI result and was heading further south yesterday when the yen took off. The US dollar index is down 0.7% this morning and the Aussie is up 0.4% at US$0.7626 – still about a cent down from where it was pre-CPI.

Technical Trigger

The past few quiet but strong sessions on Wall Street have not had traders convinced, with many looking forward to a pullback to provide a more attractive entry point. The first key support level on the S&P500 before last night was 2087, followed by 2075. The US indices had wobbled around all session up to 2pm, balancing out the BoJ, some M&A announcements and earnings reports, including that of Facebook (up 7%). Then billionaire investor Carl Icahn told CNBC he had sold out of Apple.

Down went Apple shares, and so too the Dow. Icahn went on to imply that indeed he didn’t much like the US stock market at all right now. Down went everything. The S&P breached 2087 and a hole opened up.

The S&P stopped falling at 2075.

The session had begun on Wall Street with the release of the first estimate of US March quarter GDP growth, which came in at a paltry 0.5%, below 0.7% expectation. That makes three March quarters in a row the US economy has stalled. In 2014 and 2015 it was all about being snowed in for most of the quarter. While 2016 also featured one record-breaking “Snowzilla” event, weather was not really a factor this time.

Which makes expectations for this year’s June quarter interesting. In the past two years, everyone assumed, correctly, that the June quarter would see a rebound purely on the weather factor. There is no weather factor this time. Yet some analysts are suggesting that the BoJ’s decision not to cut further means the Fed has a clearer path to a June rate hike.

If there is to be a rebound this year, it will come down to the US dollar. The strong dollar hit multinational earnings hard in the March quarter but it has now fallen back substantially, much to the BoJ’s chagrin.

Commodities

West Texas crude is up another US55c to US$45.88/bbl and Brent is up US69c to US$47.89/bbl.

Between the BoJ and the GDP, the US dollar index is down 0.7% at 93.74. This is enough to support both oil prices and base metal prices, with aluminium, lead, nickel and zinc all up a percent or so, although copper stayed put.

Iron ore is down US$1.10 at US$60.00/t.

The US dollar drop provided a boost to gold, which is up US$20.60 at US$1266.40/oz.

Today

The SPI Overnight closed down 8 points.

I suggested yesterday the 52 point SPI Overnight move looked “ambitious”, but was proven wrong when the index peaked out up 57 points. This morning, one might think a 200 point drop in the Dow would elicit a bit more caution than an 8 point drop in the SPI. It would appear that the local index simply wants to go up.

Australia’s March quarter PPI numbers are out today, proving colour to the shock CPI result. We’ll also see monthly private sector credit.

The Nikkei will have a breather today given Japan is closed. The eurozone will release its first estimate of March quarter GDP tonight. The US will see personal income & spending data, including the Fed’s preferred PCE inflation measure.

Beijing will release China’s April PMIs on Sunday.

On the local stock front, today will see production reports from Origin Energy ((ORG)) and AWE ((AWE)) while Genworth Mortgage Insurance ((GMA)) will provide a quarterly update.
 

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article 3 months old

Brokers Increasingly Confident Of Telstra Buy-Back

-Uncertainty over subsequent Autohome bid
-No large investments in train for Telstra
-Question of the quantum of any return
 

By Eva Brocklehurst

Telstra Corp ((TLS)) is reducing its stake in Chinese online automotive business, Autohome, the rationale being that Autohome would benefit from a strategic investor as it enters the next stage of its development. Telstra believes now is the time to crystallise value for shareholders.

The company has sold a 47.7% stake to Ping An Insurance for US$1.6bn, retaining a residual 6.5%. Telstra expects to book an accounting gain of $1.8bn in the second half of FY16, having acquired a majority stake in Autohome in 2008.

Telstra's operating earnings will be negatively affected in terms of the growth profile, Macquarie notes, as Autohome earnings in Australian dollar terms grew by 64.3% in FY15 and 47.3% in the first half. The broker calculates that even from a relatively small base, this contribution was meaningful.

Yet Telstra's timing of its exit reflects a changing business model in Autohome, which has moved away from a pure online business to a more capital intensive one. The evidence that this affected near-term growth and margins was noted in the last reported quarter.

Moreover, Macquarie does not believe Autohome holds any strategic significance for Telstra, either in terms of its core telco business or its broader expansion plans in Asia. The divestment is around 3-4% dilutive in isolation but, and the majority of broker's agree, this is likely to be offset by capital management.

Macquarie, assuming a re-deployment of $2bn in share buy-backs, assesses the offset would be 160-200 basis points, making the net dilution modest. The sale is also likely to reduce gearing to 1.2 times earnings by June 30, below target ratio levels.

Telstra's excess cash has also grown as it recently abandoned plans for a US$1bn investment in a Philippines joint venture. NBN cash flows are also increasing materially and this adds more certainty to broker expectations of a significant capital management program. Macquarie previously assumed $4.6bn would be returned, via buy-backs and special dividends over the next three years, and now envisages further upside to this number.

Ord Minnett has raised its buy-back assumptions to $6bn over the next three years. The broker marks out three areas for investors to focus on going forward: the heightened competitive environment in mobiles; a step-up in operating expenses as the company invests to replace the upcoming reductions in earnings from the NBN; and capital management options.

Morgan Stanley welcomes the company's more conservative approach, forgoing the Philippines investment and now the sale of this stake. A renewed share-buy-back program would make the broker more positive on the stock.

Subsequent to the sell-down of Telstra's stake, the Autohome CEO, in a consortium with private equity, has made a takeover bid for the company. The bid price is US$31.50 per share versus Telstra's proposed sale price to Ping An of US$29.55 a share.

If Telstra goes ahead and sells its stake it would receive cash before June 30 2016, making this available for capital management, but Morgan Stanley suspects this second bid might prolong the process and awaits further clarity from Telstra on the potential timing issue.

The next step for the broker to become more positive is for excess capital to be allocated to buy-backs. The most important aspect to this would be the improvement in Telstra's organic returns on equity (ROE), ex NBN payments. Morgan Stanley forecasts organic ROE to fall to 23% in FY20 from 26% in FY15. Buying back $2bn in stock would mean ROE remains broadly flat.

Telstra has certainly indicated it remains committed to a capital management strategy, Deutsche Bank maintains. Moreover, credit metrics are now well below internal target levels and there are no large investments on the cards since the negotiations ended in the Philippines. Given the low franking credit balance, this broker, too, expects any capital return would be in the form of a share buy-back.

Nevertheless, Deutsche Bank expects management will only return a portion of the available capital as it chooses to retain the flexibility to make investments in Asia and to support the Australian business, which has encountered increased competition and recent network issues.

FNArena's database shows one Buy rating (Morgans) for Telstra. There are five Hold and two Sell. The dividend yield on FY16 and FY17 estimates is 6.0% and 6.1% respectively. The consensus target is $5.40, suggesting 2.0% upside to the last share price. Targets range from $5.00 (Morgan Stanley) to $5.86 (Morgans).
 

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article 3 months old

TPG Impresses With iiNet Integration

-More iiNet synergies likely
-NBN margin pressure
-Cost reductions continue
 

By Eva Brocklehurst

TPG Telecom ((TPM)) has signalled its recent acquisition of iiNet is following in the footsteps of the successful integration of AAPT, with first half results better than most brokers expected and providing upside potential.

Morgans was impressed with TPG's 31% underlying earnings growth. Revenue from iiNet declined and gross margins held steady at around 44%, so the broker observes an earnings beat in that regard (iiNet earnings were up 30%) was primarily because of cost cutting, as the company takes its cost conscious approach to its new assets to extract greater value.

The broker suspects the cost line in the half-year numbers included a number of one-off redundancies and assumes the underlying cost base could be lower still. Net customer additions were lower than Morgans expected for TPG and higher than expected for iiNet, confounding suspicions that iiNet customers jumped ship after the takeover.

The broker concludes that both are broadly holding market share in the NBN (national broadband network) relative to their national average. Meanwhile, mobile continued to go backwards, with earnings declining 26% as the company works through moving customers to Vodafone from the Optus network.

Morgans previously assumed margin pressure would be more severe under the NBN but now expects TPG to pull sufficient costs out of iiNet in the medium term to offset this, at least partially. Earnings margins are forecast to stabilise at 25%. The ability to offset margin erosion from the NBN remains the key risk either way for the stock, the broker maintains.

Ord Minnett also considers the key risk to its call is higher synergies from iiNet. Forecasts are upgraded to account for this as TPG has also provided guidance for the first time for FY16 earnings, between $770-775m. The broker acknowledges that given the company's strong cost culture, there may be upside to its estimates.

Consumer broadband additions moderated and Macquarie believes NBN margin pressures are starting to show in this segment, largely as NBN and bundled ADSL were the fastest growing categories. The broker expects TPG to focus on market share, on-net products and corporate growth as offsets.

Once fibre-to-the-building (FTTB) assets are working as a functional separate unit, this should allow the company to offer these products via the TPG and iiNet brands, alongside other carriers wanting to buy wholesale access, and this could further increase the take up of the services.

Macquarie notes the TPG corporate segment now delivers a larger earnings contribution than the consumer segment, although this becomes smaller again once the iiNet contribution is included. Still, continued strong growth is expected from corporates as the company takes share from larger incumbent operators and benefits from the roll-out of the Vodafone network.

The broker notes mobile subscriber losses were high, reflecting competition in the BYOD (bring your own device) market and the migration of users to Vodafone. BYOD refers to employees bringing their own devices, such as smart phones, to the workplace for use on the secure corporate networks.

Goldman Sachs also revises up estimates to reflect a higher contribution from iiNet in FY16-17. The broker attributes part of the slowdown in consumer broadband additions to a shift in a portion of its base to the FTTB offering.

Credit Suisse also found subscriber growth below its expectations. The broker calculates TPG/iiNet accounted for 14% of total broadband additions in the half, below its 26% overall market share, which implies some loss of market share.

TPG needs to grow its share substantially, the broker contends, in order to offset the costs from the NBN and this may not be easy in an increasingly competitive environment. Credit Suisse does not believe the headwinds are priced into the current share price, retaining an Underperform rating.

Morgan Stanley expects the company's broadband margin will decline to 30% in the long-term from the current 40%, but not to the 20% the market currently expects. The broker has little doubt the retail broadband margin will fall as the NBN rolls out but believes the market is too bearish on this segment

Morgan Stanley estimates the company generates an earnings margin of 27% on NBN plans and believes the company's lean operating cost structure is a sustainable competitive advantage.

FNArena's database shows one Buy rating (Morgan Stanley), three Hold and one Sell (Credit Suisse). The consensus target is $10.52, suggesting 6.1% downside to the last share price. Targets range from $9.00 (Credit Suisse) to $11.40 (Morgan Stanley).
 

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article 3 months old

Treasure Chest: Appen Cum Market Upgrades, Says Moelis

 Moelis analyst Garry Sherriff has met with management of ASX-listed Appen (APX), crunched the numbers afterwards and concluded there's a real chance market consensus is currently falling 10% short of the company's growth expectations for fiscal 2016.

Amongst the take-away snippets Sherriff brought home from the meeting are:

- Over $60m purchase orders in hand already for 2016 with 10 months still to go. Orders in hand only includes the Microsoft contract up until renewal date at 30 June and not beyond (clear upside if they renew and they have renewed each year for the past 6 years)

- Management guided to low double digit sales growth in 2016 but less than underlying FY15 growth (+35%). According to Sherriff, this implies somewhere between +10-35% in CY16, midpoint is 20% growth or $99m vs $96m consensus at 15% consensus growth.

- Management guided to low double digit underlying earnings growth but less than CY15 growth (+85%). Sherriff notes consensus is only forecasting 15% growth, which seems too conservative given the operating leverage through continued revenue growth given work in hand only 2 months into the year.

-  Management also acknowledged margin pressure from competitors and project ramp-ups. Sherriff notes the company achieved 19.1% EBITDA margins in 2H15, but consensus has CY16 margins at 16.6%, implying significant softening in margins despite ~20% revenue growth.

Putting one and one together, the conclusion from all of the above is this company is cum upgrade and analysts will have to lift their projections. Moelis currently does not cover this stock.

States Sherriff: conservatively assuming margins fall from 19.1% 2H15 to 18.0% for CY16, would see more than  +10% upgrade to consensus.

Appen started life in 1996 but only listed on the ASX in early 2015. The company is specialised in speech recognition software and search engine optimalisation. Its sales are primarily in the USA. 

 

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article 3 months old

Weekly Broker Wrap: Health Care, Banks, Online Mortgage Pricing And Over The Wire

-Hospital usage, health cover lower
-Health insurance affordability at issue
-Bank funding costs appear manageable
-New tech finds tough going against banks
-OTW offers exposure to growing markets
 

By Eva Brocklehurst

Health Care

Private hospital benefits paid by insurers grew 5.0% in the December quarter, below the 7.0% and 10.5% growth experienced in FY15 and FY14 respectively. The percentage of Australians holding private hospital cover decreased to 47.2%, around 20 basis points below September 2015 levels.

Despite these figures, and six months of lower utilisation growth, Goldman Sachs is upbeat about the outlook for private hospital outlays. The broker expects Healthscope ((HSO)) and Ramsay Health Care ((RHC)) will take market share as they are adding capacity and projects in catchment areas with strong underlying demographics.

Looking into FY17, Goldman Sachs believes the key question for the insurers, Medibank Private ((MPL)) and nib Holdings ((NHF)), is whether they can sustain their margins at the near record first-half levels, or whether these gains are partially reinvested back into lower premium growth.

Macquarie observes hospitals claims growth has hit a 10-year low and most drivers of growth are moderating, other than population growth. The broker also believes the fall in the number of Australians with hospital cover is a further sign that insurance affordability is becoming problematic.

Although specific measures to address this are as yet to materialise, the broker envisages a risk to private hospitals, given these comprise the largest segment of insurer claims. Macquarie also suspects hospital industry growth will continue below historical levels.

Credit Suisse also notes the slowing in episodic growth in private hospital statistics. The reasons are not clear but the broker suspects it could be a combination of the cycling of strong comparables, capacity constraints, and exclusions in policies and higher excess levels resulting in the postponement of elective surgery.

Of more concern for the industry, Credit Suisse believes, are the high exit rates from private health insurance by both younger age groups and those aged 70 years and older. The risk is that another round of premium increases above the CPI could put further pressure on participation.

Banks

Concerns over bank funding and liquidity have lifted unnecessarily in recent weeks, Goldman Sachs observes. The broker cautions against reading too much into the shift in Certificates of Deposit (CDS) spreads, which has led to some concerns about a dramatic blow-out in funding costs.

The broker estimates the major banks' new issuance spreads have moved 20-30 basis points wider since late 2015, rather than the 50-60 basis points seen in CDS. Should this widening in new issuance spreads hold up, a small headwind is likely for margins.

The broker also finds no evidence of a cyclical lift in Reserve Bank exchange settlement account balances. With less reliance on wholesale funding, a lengthening in funding tenor and improved liquidity, the banking sector is now better able to navigate the short term credit market aberrations and while funding costs for banks have lifted, the increase is manageable to date, the broker maintains.

Online Mortgage Pricing

Google is discontinuing its US mortgage comparison website after only three months of operation. The exit is attributed to a lack of advertising revenue and Ord Minnett observes the largest financial services companies were unwilling to come on board.

While the broker still finds merit in new technology with brand affiliation looking to disrupt with price discovery, the failure of Google's venture does indicate the banks are negotiating from a strong position.

On the back of this development the broker notes that in Australia, the major banks have not signed up to Apple Pay, with negotiations on profit share ongoing. Additionally, in areas like consumer finance where disruptive technology has been stronger, banks have been successful in maintaining their presence.

Ord Minnett's analysts recently calculated that bank-backed firms have 62% share of the US$200m mobile US-peer-to-peer market.

Over the Wire

Over the Wire ((OTW)) is an Australian based provider of telecommunications and IT. The company listed late 2015 with a small free float of 10m shares. Most of the shares are owned by the vendors and Micro Equities believes this is the reason for a lack of coverage and attention from institutional and retail investors.

The company offers exposure to a number of growing markets, with a focus on the small-medium enterprise segment, and the broker forecasts FY16 earnings to grow 6.4% on pro forma FY15 earnings. The broker also maintains there is a lack of natural buyers for small companies in Over the Wire's markets which may provide some acquisition opportunities. Micro Equities initiates coverage with a Buy rating and price target of $1.41.
 

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article 3 months old

Rhipe For The Picking

-Pure play exposure to the cloud
-Negative cash flow timing resolved
-Key relationship with Microsoft
 

By Eva Brocklehurst

Rhipe ((RHP)) is ripe for growth. The cloud-based software distributor is gaining traction with licensing momentum on the domestic scene very strong. Stripping out investment costs and non-cash items in the first half, the core business recorded a 17% increase in earnings to $3.3m.

Licensing revenue growth was 38% and this is the key metric in the midst of the company's growth phase, Ord Minnett contends, as scale is needed for distribution in order to build long-term profitability. Revenue growth is expected to be 40% in FY16, with licensing gross margins of 14-16%. This implies, the broker suggests, a stronger performance from leasing in the second half.

Softer margins and the timing of cash flow detracted from the first half results but Ord Minnett is not put off. The stock offers a pure play, capital-light leverage to cloud computing. It has key vendor relationships with Microsoft and a strategic partner network which should enable it to take market share. A Buy rating is maintained for the stock and the target lowered to $1.75 from $1.95.

Solutions revenue was flat and did not contribute to first half earnings. This is non-core business and therefore the result is not considered material, although Ord Minnett does reduce earnings estimates as a result. The broker expects Solutions to break even going forward.

Gross operating cash flow was a negative $5m, affected by a new system which affected debtor collections. Ord Minnett understands that a large part of the drain has been reversed and the cash balance is now stronger than it was in December.

Negative cash flow points to a timing issue that has since been resolved so Morgans is also not concerned. The rest of the trends are tracking in line with expectations. The broker notes the company is displaying resilience in the face of increasing competition and believes the company is on track for profit in FY16.

Morgans considers Rhipe a compelling way for Australian investors to tail Microsoft and other multi-national cloud vendor strategies as they gain an increasing foothold in the Asia Pacific region.

The Australasian business accounts for 69% of revenue and while this segment has been exposed to increased licensing competition the company’s value proposition continues to resonate with customers, the broker observes. South East Asia reported growth of 38% and, whilst this is positive, Morgans believes there is significantly higher growth potential ahead.

The broker is also reassured that while Microsoft added new partners to the Australasian distribution agreements last year, the revenue trajectory remains impressive. This supports the view that the addressable market is growing fast enough for new distributors not to put pressure on existing distributors.

This is the main risk. The company's relationship with Microsoft is across various levels and, with Microsoft continuing to issue Rhipe with new product and geographical licences, Morgans views the partnership more as an opportunity than under threat.

Other risks to the downside include slower realisation of profitability. If it takes longer than expected to reach self-funding for growth the company's cash position may erode. Upside risk relates to faster customer take up. On this subject Morgans is reassured by demand for Microsoft's Public Cloud, which has been strong, and Azure, which was recently launched.

The broker does note that high price/earnings ratio stocks have come under selling pressure recently as investors review their willingness to pay higher multiples for higher growth. As Rhipe is not currently profitable this can exacerbate its share price movements, Morgans contends.

Ultimately, Morgans believes large-scale legacy distributors will look to acquire key licences and critical mass and this could be a risk and a reward for Rhipe, as by that stage it should have more revenue and profit and be an attractive means for a legacy vendor to enter new markets. Morgans has an Add rating and $1.89 target.
 

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article 3 months old

1-Page Set To Ramp Up HR Sourcing Platform

-Strong HR support for the technology
-Further opportunities in other markets
-Meaningful revenue in next few quarters
 

By Eva Brocklehurst

1-Page ((1PG)) has potential to become one of the leading technology platforms trying to secure a significant market share in human resources (HR) recruitment in the US. Canaccord Genuity believes a revenue ramp-up is imminent and could be rapid once the conversion of curated pool contracts for the company's Sourcing platform commences.

The broker has confidence in the stock, having undertaken a survey of the company's corporate clients. These businesses range from 3,000 employees to multi-national enterprises, across a range of industries. The feedback suggests multiple technology platform providers have a chance to secure a share of a very large industry. The market opportunity is estimated to be US$23-34bn in the US.

In essence, HR personnel are looking for technology to provide a means to finding the right person for a job, and filling it quickly. A number of respondents also suggested 1-Page has a strong database, good data integrity and provides a broader range of candidates than many other systems.

1-Page is being mentioned, the broker observes, in the same vein as existing and emerging platforms such as LinkedIn, Indeed, Glassdoor and Connectifier (now owned by LinkedIn). The company has a database of over 1.2bn people and a tailored offering that narrows down into niche jobs and functions.

While the proprietary master database is being monetised through the HR market and the Sourcing platform, the broker believes there could be further opportunities for 1-Page through alternatives such as marketing, advertising and demographic applications. These opportunities are not included in the broker’s base case scenario.

The company operates on a January fiscal year and the broker expects an update regarding customer numbers at the end of February. Actual revenue and cash flow is expected to remain low as meaningful contracts appear to have only ramped up in the fourth quarter and payment terms are, on average, 60-90 days.

Canaccord Genuity initiates coverage on the stock with a Speculative Buy rating and $4.70 target, which represents 85% upside to the current share price. This is a global initiation as the broker's Australian arm launched regional coverage in August last year.

The broker note US enterprises have been receptive to 1-Page products, with over 300 companies in the active sales pipeline. The company expects 30 contracted paying clients by the end of FY16. 1-Page seeks to monetise customers immediately, charging to trial or set up the curated talent pool, rather than making user growth a priority.

The company is based in California and uses its BranchOut business, acquired in 2014, to formulate a proprietary database. The sourcing service based on this asset is disruptive and beneficial to HR managers and also difficult to easily or affordably replicate. BranchOut uses 820m profiles built within the Facebook platform.

The outcome is a database of candidates for difficult-to-source jobs at an affordable cost. The broker points out that the company does not “scrape” data but only uses publicly available data.

Canaccord Genuity understands that the recent partnerships 1-Page has engaged have gained significant traction in the last few months and should start delivering meaningful revenue in the next couple of quarters. The broker expects 1-Page to generate over 95% of its revenue in the short term through the Sourcing platform but there are two others, Innovation and Assessment which the company is also commercialising.

The Assessment platform provides an automated mechanism for assessing candidates and Canaccord Genuity forecasts revenue to grow to $1.2m in FY17. The Innovation platform aims to facilitate innovation within large corporations by providing a forum for staff to offer ideas and track the success of these initiatives. The revenue stream is expected to increase to $800,000 in FY17.

1-Page's estimated operating cash flow in FY16 is $10.6m and the company has suggested a 60% reinvestment rate based on revenue growth of 100% per annum in the short term. Canaccord Genuity considers this reinvestment important to further growth, but notes the low costs in the business which provide leverage to the capital deployed. Positive free cash flow should be in evidence by FY17, the broker maintains.
 

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article 3 months old

Netcomm Underpinned By Strong Contract Profile

-NBN/Ericsson contract volumes to accelerate
-US rural broadband volumes larger than expected
-Potential catalysts from global opportunities
 

By Eva Brocklehurst

Netcomm Wireless ((NTC)) has been underpinned by a better-than-expected contribution from the NBN/Ericsson fixed wireless contract in the first half and management expects volumes from this contract will further accelerate in FY17.

Netcomm provides, in Canaccord Genuity's view, a small but important means to leverage the global theme of connecting the world's devices. The broker suggests the current share price offers a compelling risk/reward proposition and retains a Buy rating with a $3.84 target.

Operating cash flow was weak in the half, primarily due to a $7m build in working capital associated with a change from air to sea freighting product to Australia. This change is expected to result in a $14 per unit cost saving which the broker estimates will add 2-3% to gross profit margins. Revenue grew 54% and earnings 126% in the first half, on the back of the company's machine-to-machine (M2M) division.

For the first time the company provided some qualitative comments around the US rural broadband opportunity. Guidance suggests volumes expected from this contract are much larger than those under the Ericsson/NBN contract, and should flow over an extended number of years.

Canaccord Genuity's valuation incorporates increases in operating expenditure, without the associated earnings of future contract tenders. This suggests meaningful upside exists around global fixed wireless opportunities and any involvement in Australia's National Broadband Network (NBN) fibre roll out.

The broker makes some refinements to assumptions regarding the ramp-up in NBN connections in FY16 and FY17 and increases operating cost assumptions as the company prepares to tender for a range of contracts.

Nevertheless, Canaccord Genuity remains comfortable with the company allocating available cash flow to invest in global fixed wireless and the NBN in Australia. Capital management may need to be considered, the broker suspects, should the company win a meaningful contract where a customer does not qualify for the receivable sales facility.

The base broadband business contracted in the half year, with revenue down 9.0% as the business continues to focus on M2M opportunities, Moelis observes. There was a significant increase in inventory because of a decision to increase the order volume of NBN contract manufacturing and shift to the cheaper sea freight.

For Moelis, the value in the stock lies with its contracts, which detail the long-term earnings profile. Further opportunities are expected to provide the catalysts for the share price. In particular, rural broadband across US and Europe and the NBN contracts.

Significant value, in the broker's view, should be apportioned to the contracts already won, particularly the recent US telco rural broadband opportunity, which the broker assumes to be with AT&T. Revenues associated with this contract likely to be 18 months away.

Moelis understands the timing of a decision for the NBN's FTTdp tender is for the middle of this year The broker retains a Buy rating as well, and a $4.00 target.

See also, Netcomm Wireless Taps US Potential on December 1 2015.
 

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article 3 months old

Competition Intensifies For Telstra

-Mobile earnings slowing
-Growth drivers needed
-Defensive appeal?
 

By Eva Brocklehurst

Competition remains fierce and shows no signs of abating for Telstra ((TLS)). First half results signalled a slowing in retail services revenue in mobile, with earnings up just 0.8%. Top line growth was firm, with most divisions achieving on expectations, but there was a step-up in costs which led to a miss of some broker estimates at the profit line.

The company's decision to re-base mobile plans is, Macquarie maintains, a better outcome than shifting to structurally higher value plans, or losing subscribers to competitors. Nonetheless, the changes in plans make it difficult to obtain clarity on any structural changes in the base.

Delivery of new growth drivers and more meaningful mobile growth is becoming more important, the broker asserts. Competitors are hanging in the market and getting stronger. Macquarie envisages scope for pressure to mount for mobile revenues.

The slowdown in momentum in post-paid mobile subscriptions is evident and an issue for Morgan Stanley too. The broker also remains concerned about Telstra's intentions regarding capital allocation and the lack development in the Philippines venture proposal.

Growth in fixed data and other revenue streams, such as IP (intellectual protocol) and NAS (network application services), should enable the company to achieve low single digit earnings growth for the next two years, despite a lack of growth in mobile revenue, Deutsche Bank maintains.

Accelerating NBN (national broadband network) disconnection payments should also further strengthen the company's capital position. Deutsche Bank retains a Hold rating based on a low total shareholder return.

Macquarie is more inclined to the view that the core business is also in decline. Excluding NBN payments and the acquired Pacnet revenues, earnings fell 1.9% in the half year. Aggregate costs from new business ventures are becoming material, in the broker's view.

Macquarie notes management flagged the prospect of further share buy-backs and assumes $5.2bn in cumulative buy-backs out to FY20. Furthermore, the broker note the dividend yield has contracted to around 100 basis points below that of the banks, which it believes encapsulates the broader macro concerns.

UBS upgrades to Neutral from Sell on valuation grounds, despite lingering concerns over the moderating operating outlook. Rising competition is occurring across mobile, fixed broadband, data and IP, in the broker's opinion. Moreover, the company faces a future earnings hole from the loss of high margin copper revenues and it remains to be seen whether Telstra can fill the void with new growth initiatives.

Despite the competition, Morgans suggests Telstra's ability to continue growing its subscriber base in fixed broadband illustrates the company's offering is competitive. Net additions accelerated to levels not seen for a number of years. Telstra accounts, in the broker's estimates, for 42% of the NBN activated households, above its metro market share. Furthermore, 78% of NBN subscriptions were bundled, which proves to Morgans the company is adding value.

Morgans maintains that its contrarian view is largely based on the fact that while competition has intensified it is not heavily based on price and Telstra's contracted subscriber volumes will take several years to be affected. The share price has also declined from its highs and so is factoring in negative news.

The broker likes the defensive earnings, under-geared balance sheet, short-term acceleration in cash-flow from the NBN and a growing dividend. Given the highly volatile market this appeal underscores the broker's Add rating.

Credit Suisse is at the other end of the spectrum. The broker expect mobile trends to deteriorate further in the near term, forecasting earnings to decline 1.7% in FY16 and 2.4% in FY17.

Fixed broadband was the highlight of the result, and the broker acknowledges Telstra appears to be having success in this area. Nonetheless cost pressures are expected to increase as the NBN roll-out accelerates. Overall, the earnings risk is to the downside in the broker's view and an Underperform rating is in place.

The consensus target on FNArena's database is $5.50, suggesting 1.9% upside to the last share price. Telstra has one Buy rating (Morgans), six Hold and one Sell (Credit Suisse). The dividend yield on FY16 and FY17 forecasts is 5.9% and 6.0% respectively.
 

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