Feb 1, 2018 - MP1, which is leading the charge on global elastic cloud connectivity (customer adoption continues to ...
Telecommunications│Australia│Equity research│February 1, 2018
Telco - Overall February 2018 market check & results preview Neutral (no change)
Over the last six months we have progressively upgraded our investment view on the telecommunications sector and moved to a neutral weighting late last year.
Summary valuation metrics
The potential for higher interest rates and margin compression are the key downside risks and upside risk comes from NBN potentially lowering access costs.
FY18F FY18F FY18F Code PE EV/EBITDA Yield
Our preferred picks are TLS, NXT and MP1.
NXT
139.7x
31.6x
0.0%
OTW
20.1x
12.3x
0.8%
SDA
20.0x
13.2x
1.4%
SLC
35.0x
19.3x
0.3%
Telstra's share price has been through several tough years (-29% TSR in 2017 and -9% TSR in 2016) as investors battled through the negative implications of the NBN and increased competition. 2018 is the half way mark for NBN take-up and it could be the turning point at which the NBN takes a much needed, in our view, write-down and lowers last mile access prices. Increased competition aside, this could mark the turning point for earnings and sentiment in the fixed line segment.
TLS
12.6x
5.8x
6.0%
NBN nearly half way there and prices continue to decline
TPM
15.7x
9.1x
0.6%
VOC
13.2x
7.8x
0.0%
SOURCE: MORGANS
After several years of underperformance Telstra is now our key pick
Australia ended 2017 with around 40% of fixed line internet connections on the NBN and it should exceed 50% by June 2018. We expect around 900k net Active NBN adds (and a similar number of legacy declines) from June 2017 to December 2017 with this number slowing to 500k from December 2017 to June 2018. The NBN now moves its focus to metro and this has seen Telstra and surprisingly TPG Telecom losing market share while Optus and others have expanded theirs. Our telco shopper shows continued ARPU pressure across NBN and mobile.
Noteworthy points TLS is likely to have a stronger 1H skew due to NBN delays negatively impacting 2H18. We think details on cost out and Belong progress could be well received. VOC has promised an update on potential divestments and should deliver some solid sales momentum at this result. We see downside risk to VOC should they be unable to provide progress on divestment and ASC presales (and upside risk should they deliver these). TPM makes its first of three material mobile spectrum payments (A$595m) in January so free cashflow will remain weak. We expect NXT to reaffirm guidance but to have a stronger 2H skew due to revenue growth combined with additional costs on the AJD dispute, and B2 and M2 (which opened in 1H18). SDA’s acquisition of Harris Cap Rock 12 months ago appears very well timed given higher oil prices. Since this was a company-transforming acquisition, we remain focused on the operating and free cashflow generation as a proxy for how well the business is tracking. Assuming they deliver healthy cash flow and HCR integration, then SDA warrants a closer look. Lower US currency and tax rates could be positives. SLC’s key assets and revitalised sales team should deliver record sales but higher 1H acquisition integration costs will likely skew earnings to the 2H. MP1 released its quarterly, which showed sales grew 76% yoy to the December quarter and costs continued to decline. We expect an update on geographic expansion should show North America is growing strongly and just starting to gain momentum. OTW should continue to deliver strong organic growth and like SLC will have a stronger 2H skew due to acquisition timing.
Investment picks Our key picks are: TLS, where we consider risk is skewed to the upside given its low valuation and high likelihood of an NBN rebasing; NXT, which could surprise positively on the sales front (Gen 2 facilities B2, M2 and S2 are the best and first of their kind in Australia) plus customer demand continues to accelerate in line with Cloud adoption; and MP1, which is leading the charge on global elastic cloud connectivity (customer adoption continues to accelerate as their footprint and ecosystem expand).
Nick HARRIS T +61 7 3334 4557 E
[email protected] James BARKER T (61) 7 3334 4893 E
[email protected]
Figure 1: Key metrics Code TLS TPM VOC NXT SDA SLC OTW MP1
Price Target
Recommendation
EPS growth forecast chg %
Old
New
% chg
Old
New
FY18F
FY19F
FY20F
4.11 5.95 2.78 6.25 4.77 2.81 2.76 4.44
4.11 5.95 2.78 6.39 5.62 2.81 3.33 4.44
0% 0% 0% 2% 18% 0% 21% 0%
ADD HOLD HOLD ADD HOLD ADD ADD ADD
ADD HOLD HOLD ADD HOLD ADD ADD ADD
0.4% -0.9% 0.0% 2.5% 0.3% 0.8% 0.0%
0.0% -3.0% 0.0% 0.3% 1.0% 0.5% 0.1%
-0.2% -0.5% 0.2% -3.7% -0.8% 0.1% 0.0%
SOURCES: MORGANS, COMPANY REPORTS
IMPORTANT DISCLOSURES REGARDING COMPANIES THAT ARE THE SUBJECT OF THIS REPORT AND AN EXPLANATION OF RECOMMENDATIONS CAN BE FOUND AT THE END OF THIS DOCUMENT. MORGANS FINANCIAL LIMITED (ABN 49 010 669 726) AFSL 235410 - A PARTICIPANT OF ASX GROUP
Powered by EFA
Telecommunications│Australia│Equity research│February 1, 2018
Contents Key charts ............................................................................................................................................................................... 3 Sector view – a reminder of why we upgraded to neutral ....................................................................................................... 6 National Broadband Network (NBN) progress report ............................................................................................................. 6 The short version of what’s happened in the last six months .............................................................................................. 6 Rollout progress ................................................................................................................................................................... 7 NBN metro connectivity is increasing .................................................................................................................................. 8 Revised NBN wholesale plan prices .................................................................................................................................. 11 Telco shopper – NBN plan prices ...................................................................................................................................... 12 Quarterly NBN statistics – 2Q18 is due any moment ........................................................................................................ 14 Telco shopper – Mobile plan prices ...................................................................................................................................... 15 Challenger brand pricing in postpaid ................................................................................................................................. 16 Telstra Corporation (TLS, ADD, A$4.11 PT) ........................................................................................................................ 19 TPG Telecom (TPM, HOLD, A$5.95 PT) .............................................................................................................................. 27 Vocus (VOC, HOLD, A$2.78 PT) .......................................................................................................................................... 31 NEXTDC (NXT, ADD, A$6.39 PT) ........................................................................................................................................ 36 SpeedCast (SDA, HOLD, A$5.62 PT) .................................................................................................................................. 41 Superloop (SLC, ADD, A$2.81 PT) ...................................................................................................................................... 46 Megaport (MP1, ADD, A$4.44 PT) ....................................................................................................................................... 50 Over The Wire (OTW, ADD, A$3.33 PT) .............................................................................................................................. 54 Comparable company peer tracker ...................................................................................................................................... 58 Australian telco peer tracker .............................................................................................................................................. 58 International data centre peer tracker................................................................................................................................ 60 International satellite operator peer tracker ....................................................................................................................... 62 Asian telco operator peer tracker ...................................................................................................................................... 63 Telco sector short interest levels .......................................................................................................................................... 65 Fixed line net adds ................................................................................................................................................................ 66 TIO complaints ...................................................................................................................................................................... 69
2
Telecommunications│Australia│Equity research│February 1, 2018
Key charts Figure 2: Morgans telco coverage – FY18F PE vs EPS growth (excludes SLC, VOC, MP1)
Figure 3: Morgans telco coverage – FY18F EV/EBITDA vs EPS growth (excludes SLC, VOC, MP1)
100.0%
100.0%
80.0%
80.0%
60.0%
60.0%
OTW
40.0%
OTW
40.0%
SDA 20.0%
NXT
0.0%
-20.0%
-40.0% 0.0x
SDA
20.0%
20.0x
NXT
0.0%
TLS TPM
TLS -20.0%
40.0x
60.0x
80.0x
100.0x
120.0x
-40.0% 0.0x
140.0x
5.0x
TPM
10.0x
15.0x
SOURCES: MORGANS, COMPANY REPORTS
18.6%
SDA
1.7%
TPM
-1.5%
TLS
-2.1%
-3.0%
DTL
DTL
-4.2%
VOC
-4.7%
-3.9%
SDA
-10%
35.0x
-1.5%
VOC
OTW
SLC
-1.2%
NXT
30.0x
Figure 5: Consensus FY18F EPS revisions (FACTSET) – last 90 days
0.3%
TLS
25.0x
SOURCES: MORGANS, COMPANY REPORTS
Figure 4: Consensus FY17F EPS revisions (FACTSET) – last 90 days (excludes SLC)
TPM
20.0x
-5.9%
NXT
-8.1%
-6.2%
OTW -8%
-6%
-4%
-2%
0%
2%
-16.5%
-45%
-25%
-5%
SOURCES: MORGANS, FACTSET
15%
35%
55%
SOURCES: MORGANS, FACTSET
Figure 6: Price target, recommendation and EPS changes overview Code TLS TPM VOC NXT SDA SLC OTW MP1
Price Target
Recommendation
EPS growth forecast chg %
Old
New
% chg
Old
New
FY18F
FY19F
FY20F
4.11 5.95 2.78 6.25 4.77 2.81 2.76 4.44
4.11 5.95 2.78 6.39 5.62 2.81 3.33 4.44
0% 0% 0% 2% 18% 0% 21% 0%
ADD HOLD HOLD ADD HOLD ADD ADD ADD
ADD HOLD HOLD ADD HOLD ADD ADD ADD
0.4% -0.9% 0.0% 2.5% 0.3% 0.8% 0.0%
0.0% -3.0% 0.0% 0.3% 1.0% 0.5% 0.1%
-0.2% -0.5% 0.2% -3.7% -0.8% 0.1% 0.0%
SOURCES: MORGANS, COMPANY REPORTS
3
Telecommunications│Australia│Equity research│February 1, 2018
Figure 7: Australian telco sector one year forward looking EV/EBITDA band chart 9 8.5 8 7.5 7 6.5
5.8x
6 5.5
5 4.5 2012
2013
2014
EV/EBITDA (NTM)
2015
AVG
2016
STD +1
2017
2018
STD -1
SOURCES: MORGANS, FACTSET, as at 24 Jan 2018
Figure 8: Global satellite peers - one year forward looking EV/EBITDA band chart 11
10.5x
10.5 10 9.5 9
8.5 8 7.5 7 6.5 6 2012
2013
2014
EV/EBITDA (NTM)
2015
AVG
2016
STD +1
2017
2018
STD -1
SOURCES: MORGANS, FACTSET, as at 24 Jan 2018
Figure 9: Global data centre peers - one year forward looking EV/EBITDA band chart 20 18
17.2x 16
14 12 10 8 6 2012
2013
2014
EV/EBITDA (NTM)
2015
AVG
2016
STD +1
2017
2018
STD -1
SOURCES: MORGANS, FACTSET, as at 24 Jan 2018
4
Telecommunications│Australia│Equity research│February 1, 2018
Figure 10: Morgans telco coverage company comparison table – consensus estimates Company
Ticker
Market Cap
Data#3 Limited.
DTL-AU
249
Nextdc Limited
NTM
FY+1
FY+2
NTM
FY+1
FY+2
NTM
FY+1
FY+2
FY+1
FY+2
FY+1
FY+2
FY+1
FY+2
Net Debt/EBITDA FY+1 2.9x
PE
EV/EBITDA
EV/EBIT
EPS Growth
EBITDA Margin
Div Yield
NXT-AU
1655
93.3x
148.1x
74.3x
26.1x
31.3x
23.5x
49.0x
62.1x
42.9x
-14.8%
99.2%
40.2%
44.2%
0.0%
0.0%
Over The Wire Holdings Ltd.
OTW-AU
127
20.0x
24.3x
17.9x
9.6x
11.8x
8.5x
13.9x
17.3x
12.2x
44.5%
35.6%
21.0%
22.5%
0.9%
1.0%
0.7x
Rhipe Limited
RHP-AU
126
18.4x
23.4x
16.0x
10.7x
14.6x
8.9x
11.7x
16.3x
9.7x
122.1%
46.0%
4.1%
5.4%
0.0%
0.0%
-3.0x
SpeedCast International Ltd
SDA-AU
1293
17.4x
24.8x
17.7x
8.9x
11.7x
8.9x
15.6x
25.2x
15.8x
303.4%
40.1%
22.3%
23.7%
1.5%
2.1%
3.0x
Superloop Ltd.
SLC-AU
542
37.6x
58.5x
30.2x
15.5x
19.1x
13.7x
27.4x
40.5x
22.3x
-687.0%
93.8%
23.8%
28.4%
0.3%
0.5%
0.9x
Telstra Corporation Limited
TLS-AU
43292
11.3x
12.0x
10.8x
5.4x
5.6x
5.3x
9.5x
10.1x
9.1x
-6.4%
10.6%
38.3%
39.5%
6.0%
6.0%
1.5x
TPG Telecom Limited
TPM-AU
5911
18.1x
15.7x
21.2x
9.5x
9.2x
9.7x
15.4x
13.6x
17.5x
-15.0%
-26.2%
30.9%
28.0%
0.8%
0.8%
1.9x
Vocus Group Limited
VOC-AU
1935
14.2x
14.1x
14.3x
7.8x
7.8x
7.8x
12.9x
13.2x
12.7x
-10.9%
-1.0%
19.6%
19.1%
0.0%
0.7%
2.7x
Average
28.8x
40.1x
25.3x
11.7x
13.9x
10.8x
19.4x
24.8x
17.8x
-33.0%
37.3%
25.0%
26.3%
1.2%
1.4%
1.3x
Median
18.2x
23.8x
17.8x
9.5x
11.7x
8.9x
14.7x
16.8x
14.3x
-8.7%
37.8%
23.0%
25.9%
0.6%
0.7%
1.7x
As at 31 Jan 2018. SOURCE:MORGANS; FACTSET
Figure 11: Telco sector – consensus estimates over the last 90 days Company
NEXTDC Over The Wire SpeedCast International Superloop Telstra Corporation TPG Telecom Vocus Communications
FY18F EPS Growth
EV/EBITDA
% 3 month change
Now
As at 90 days ago
Now
As at 30 days ago
As at 60 days ago
As at 90 days ago
-15% 47% 41% 238% -6% -14% -11%
-13% 70% 54% 317% -3% -14% -11%
26.1x 9.6x 8.9x 15.5x 5.4x 9.5x 7.8x
27.9x 10.0x 8.6x 16.5x 5.4x 9.7x 7.7x
27.3x 9.2x 8.6x 16.9x 5.2x 8.9x 7.9x
24.8x 9.6x 7.5x 18.2x 5.2x 8.2x 7.5x
FY18 EPS growth (absolute %) -2% -23% -13% -79% -3% 0% 0%
EV/EBITDA multiple
Share Price
6% 0% 17% -15% 4% 16% 4%
10% 12% 31% -7% 4% 18% 4%
As at 31 Jan 2018. SOURCE: MORGANS RESEARCH, COMPANY
5
Telecommunications│Australia│Equity research│February 1, 2018
Sector view – a reminder of why we upgraded to neutral Our view has always been that the NBN will fail financially and therefore investing in the sector was/is a waiting game. A few critical things changed late last year being: 1) The investment market mostly priced in the negative impact of the NBN; 2) Competing technologies are getting closer (direct NBN competition like fixed wireless & Optus’s 140Gb mobile BB product are already on offer; while 5G is only two years away from mass market); 3) The regulators (ACCC and ACMA) reported that the NBN would /should end badly; and 4) Malcolm Turnbull said in the Australian Financial Review in October 2017 that there is no way the NBN would reach its forecast 3% rate of return. Those in power are starting to change their tune so this could be the turning point for the NBN. The Federal Government / Malcolm Turnbull may choose to write down the NBN before the next election as: 1) Politicians are beginning to acknowledge that NBN economics are broken (in the words of Malcolm Turnbull, the ACCC’s, and us). If this is expected to be the case then at some stage a write-down needs to happen; 2) A write-down would be a politically smart move, in our view, as it would allow the coalition to say they tried to work with Kevin Rudd/ Labor’s NBN but it is beyond repair (financially); 3) Writing down the NBN and lowering last mile access costs to A$15 (not the planned $52) solves a large part of the NBN problems (56% of NBN complaints were due to poor service quality); 4) Consumers (or more importantly if you’re a politician - voters) get a decent internet connection at a decent price (which is what they wanted all along) and therefore those consumers are more likely to vote for the coalition; and 5) The telco sector rerates?
National Broadband Network (NBN) progress report The short version of what’s happened in the last six months The NBN will shortly pass the half way mark (albeit with a few recently announced delays). To date a lot of the rollout has been largely focused on regional areas where there has been limited competition (like Tasmania). However with the rollout largely done in the less populated/dense cities, it is now moving into metropolitan areas. See maps below for a visual representation. Rollout, aside the NBN, appears to have started acknowledging disgruntled customers, and has taken steps to improve the on-boarding process (the announced rollout delays aim to improve quality of provisioning to get onboarding up to scratch before moving to on-board substantially more customers). In addition to this the NBN has recently announced temporarily lower access prices (effective from 14 December 2017). Broadly speaking changes to NBN last mile access prices should be a positive for telco margins. However we think it’s safer to assume the competition eats away at these margins for the next few years. We think medium term (FY21+) margins should improve once the NBN rollout / land grab stage is completed and customers return to being more sticky. This can happen via: 1) telcos using higher margin alternative technologies, 2) NBN fixed line prices going up (higher APRU) to offset margin pressure (the four pillars / big four telcos share some similarities with the big four banks in that they control ~95% of the market between them and could act oligopolistically
6
Telecommunications│Australia│Equity research│February 1, 2018
/economically rational), and/or 3) the NBN gets written down (and last mile prices / CGOS decline) at which point margins return to more normal levels.
Rollout progress According to the NBN at the end of 2017 (28 December) there were 7.1m NBN ready and 3.4m Active NBN connections in Australia. From an activation perspective this means NBN net adds were +1.7m yoy (December 2017 vs December 2016) and + 940k hoh (December 2017 vs June 2017). We estimate 45% of House Holds (HH) are now on the NBN and that this tips the halfway mark (to 52%) by June 2018. NBN delays announced in December 2017 see active NBN premises being 0.5m lower in June 2017 than originally expected. The NBN has not yet revised its corporate plans but we assume this has a knock on effect. Figure 12: In December 2017 45% of households were on the NBN and this figure will pass 50% before June 2018
SOURCES: MORGANS, NBN Co, ACCC, ABS, COMPANY REPORTS
7
Telecommunications│Australia│Equity research│February 1, 2018
NBN metro connectivity is increasing The figures below illustrate NBN rollout progress. They illustrate that the rollout in less populated/dense regional areas has largely completed. For context NBN started in Hobart and NBN coverage in Hobart is largely complete. With the regional rollout under control, the focus has moved to rolling out the NBN in metro areas, which is where, in our view, alternative technologies are a real threat to the NBN offering. Figure 13: Hobart NBN rollout
SOURCE: NBN CO
Figure 14: Adelaide NBN rollout
SOURCE: NBN CO
8
Telecommunications│Australia│Equity research│February 1, 2018
Figure 15: Perth NBN rollout
SOURCE: NBN CO
. Figure 16: Darwin NBN rollout
SOURCE: NBN CO
. Figure 17: Melbourne NBN roll out
SOURCE: NBN CO
.
9
Telecommunications│Australia│Equity research│February 1, 2018
Figure 18: Sydney NBN rollout
SOURCES: MORGANS, COMPANY REPORTS
. Figure 19: Brisbane NBN rollout
SOURCES: MORGANS, COMPANY REPORTS
10
Telecommunications│Australia│Equity research│February 1, 2018
Revised NBN wholesale plan prices In December 2017 the NBN announced new plans that where aimed at improving the customer speed based experience (by incentivising telcos to provision greater speeds as CVC or volume base inclusions have increased by ~50% to 2 Mbps). According to the NBN new plans “include nearly double the current average capacity being purchased by retailers across all nbn™ fixed line services today – will help entice retailers and end users to move up the speed chain, reposition the nbn™ 50 service as the company’s flagship plan and unleash the potential of the nbn™ access network”. (Source: https://www.nbnco.com.au/corporateinformation/media-centre/media-releases/Pricing-evolution.html.) Assuming speed matters (which it does to around 20% of NBN customers (source: ACCC p59)) then telcos are likely to promote higher speed plans (e.g. upgrade from 25/5 to 50/20) because the cost of a 50Mbps plan is now the same as the cost of a 25Mbps plan (and both come provisioned with 2Mbps rather than 1 Mbps that was originally offered). This basically means that peak speeds offered will be faster (contention aside). Assuming price matters (which it does to around 25% of NBN customers (source: ACCC p59)) then some telcos may look to keep consumers on their current plans and gain an uplift on profitability (because COGS will decrease). This appears to be TPG’s strategy. Overall we think it’s a mixed bag but a positive sign that the NBN is starting to acknowledge that price does matter. Broadly speaking we think that competition remains intense so ARPU and gross profit ($ per subscriber) will remain broadly unchanged (current plans indicate telcos will pass on the benefits and consumers will end up with higher speeds). Figure 20: Revised NBN prices
SOURCES: NBN Co
11
Telecommunications│Australia│Equity research│February 1, 2018
Discounts as below have been implemented in an attempt to minimise congestion and improve customer satisfaction. NBN lowers access prices to promote greater speeds for the end customer.
Figure 21: NBN plan changes
SOURCE: NBN Co
Telco shopper – NBN plan prices Overall NBN plan prices continue to decline despite access costs on the NBN being higher than legacy.
Figure 22: Telco shopper – NBN plan pricing 125 115
105
$95.6
95 85 75
$73.7 $70.0 Mar-15 Apr-15 May-15 Jun-15 Jul-15 Aug-15 Sep-15 Oct-15 Nov-15 Dec-15 Jan-16 Feb-16 Mar-16 Apr-16 May-16 Jun-16 Jul-16 Aug-16 Sep-16 Oct-16 Nov-16 Dec-16 Jan-17 Feb-17 Mar-17 Apr-17 May-17 Jun-17 Jul-17 Aug-17 Sep-17 Oct-17 Nov-17 Dec-17 Jan-18
65
Average price (25mpbs and unlimited/1,000gb downloads) Average price (1000mpbs and unlimited/1,000gb downloads) Average price (incorporating speed impact of 50mbps plans)
SOURCE: MORGANS RESEARCH, COMPANY
Competition from new entrants stepped up in 1H18 with Amaysim, MyRepublic and Vodafone offering aggressively priced plans at ~$10 to $30 discounts to incumbents. Notably MyRepublic currently offers its 100Mbps plan for broadly the same price as the average 50Mbps plan.
Belong (TLS’s challenger brand) and amaysim (an Optus reseller) offer the best value plans at ~A$60. TLS has historically priced its plans at a ~$10 per month premium to peers but their pricing premium was removed in January 2018, we assume temporarily.
The most notable change in our recent price check is the move away from 25/50/10mbps plans to 12/50/100 mbps plans. A number of the existing 25/5 plans that were previously available have now been replaced with 50/20 mbps plans. We believe this is a reflection of the recently revised NBN wholesale price plans. As a result, this means our Telco Shopper pricing (Figure 22 above) is now incorporating higher speeds in the 25/5mbps plans, with pricing still declining.
If we incorporate TLS, iiNet and TPG now offering 50/20 plans at the same 25/5mbps price point (historically a ‘speed boost’ from 25/5 to 50/20mbps
12
Telecommunications│Australia│Equity research│February 1, 2018
plans has been ~A$10), this actually represents a decline of c8% (vs underlying of 2%).
Other points to note: o
TLS has reduced its ‘Connect Plus’ (1000GB) plan to A$80/month. Additionally TLS has increased the bandwidth offered to the NBN50 plan (vs 25/5mbps previously).
o
iiNet has reduced its ‘Turbo’ (mid-range) plan to A$79.99/month. Additionally iiNet has increased the bandwidth offered to the NBN50 plan (vs 25/5mbps previously).
Sector view and implications:
In the short to medium term the higher access price of the NBN is likely to eat into telco profit margins.
We continue to hold the view that the key assumptions of the NBN are overly optimistic and the NBN’s access price will need to be reviewed downwards (which will ultimately be a medium-long term positive, relative to expectations for the telcos).
While we had previously expected this ‘rebasing event’ to occur in 2022 (18 months after the last NBN household is migrated and when 5G is more widely available), there have been a few events over the last six months that have caused us to think this will happen sooner: o
The regulators (ACCC and ACMA) have reported that the NBN would/should end badly;
o
Malcolm Turnbull was quoted in the AFR in October 2017 saying that “there is no way the NBN would reach its forecast 3% rate of return”;
o
The NBN has recently introduced discounted pricing for its plans, which assists our view that the NBN’s targeted ARPU of A$53 is not achievable and could see downgrades to the NBN’s Corporate Plan/forecasts when released in August 2018;
o
Further progress in mobile services with all major providers (Optus, TLS, Vodafone) all offering >100GB mobile data plans.
Should NBN access prices not be substantially reduced, we expect competing technologies (which offer better value solutions to the consumer and better economics to telcos) will take market share at the expense of the NBN’s last mile.
Below we highlight four of our key concerns around the NBN’s key assumptions:
1) It’s unlikely there will be as many Australian households (potential customers) as the NBN’s plan forecasts. To achieve this, the rate of household builds needs to virtually double from current levels (which are debatably peak). NBN noted on its Q3 results call that it is currently reassessing this forecast. 2) 85% of the NBN’s services are in the lowest quartile of speeds (25mbps). We’d argue this is because the higher access costs are inhibiting higher speed customer take-up and note telcos are now offering 12 mbps speeds which is on-par with the current average speed in Australia of 11mbps (showing the NBN may not improve speeds at all in some instances). 3) Telco data points prove fixed and mobile plan prices per month have tracked lower while inclusions (volume given to the end customer) continue to track higher. This is the opposite of the NBN’s assumption that prices will track higher because people are prepared to pay higher rates for more. 4) There are already several last mile alternatives in commercial operation in Australia that offer last mile access at faster speeds and lower costs than the NBN. These could mean NBN’s active household forecasts are too aggressive.
13
Telecommunications│Australia│Equity research│February 1, 2018
For more details, see our sector report NBN economics under inspection (Released 28.4.17).
Quarterly NBN statistics – 2Q18 is due any moment As the figures below show, TLS has been over-indexing with respect to its NBN vs legacy market share. In 1Q18 TLS's share of NBN quarterly net adds (according to the ACCC) dipped to 47% (no doubt reflecting the fact that the NBN has hit metro which competition is more intense). TPG continues to lose, Vocus to add market share and most interestingly Optus has had a serious surge in market share. We expect the 2Q18 figures will be published in early February. Figure 23: Quarterly NBN market share Name
Jun-16
Sep-16
Dec-16
Mar-17
Jun-17
Sep-17
Telstra
55.2%
52.0%
56.7%
53.1%
52.0%
47.1%
TPG
24.4%
23.0%
21.5%
21.2%
21.8%
20.0%
Optus
14.2%
11.2%
13.3%
12.8%
13.3%
16.7%
M2 / Vocus
10.4%
9.6%
8.5%
9.4%
10.2%
11.6%
Other
-4.2%
4.1%
0.0%
3.5%
2.7%
4.7%
$86.96
$96.65
$87.48
$84.98
$79.98
$73.70
Average 25 Mbps price (RHS)
SOURCE: ACCC, MORGANS RESEARCH, COMPANY
Figure 24: Cumulative market share trends Name
Apr-16
Jun-16
Sep-16
Dec-16
Mar-17
Jun-17
Sep-17
Telstra (legacy 48%)
47.4%
48.7%
49.4%
50.6%
51.1%
51.3%
50.5%
TPG (legacy 27%)
28.1%
27.5%
26.6%
25.7%
24.9%
24.3%
23.5%
Optus (legacy 15%)
14.6%
14.5%
13.9%
13.8%
13.6%
13.5%
14.1%
M2 / Vocus (legacy 5%)
5.8%
6.6%
7.2%
7.4%
7.8%
8.3%
8.9%
Other (legacy 5%)
4.1%
2.6%
2.9%
2.4%
2.6%
2.6%
3.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
Total
SOURCE: ACCC, MORGANS RESEARCH, COMPANY
14
Telecommunications│Australia│Equity research│February 1, 2018
Telco shopper – Mobile plan prices Figure 25: Telco shopper – cost of data/GB across Telco post-paid mobile plans 10 9
40
$34.3 35
$31.5 8
30
$6.6
6
25
$5.2 $18.3
5 4 3
$4.2 $4.1 $3.4
20
$ per GB
$ per GB
7
15 10
2
$2.7 5
1 0
0 Jul 17
Aug 17
Med (~15-30GB of data)
Sep 17
Oct 17
Nov 17
High (~40-150+ GB of data)
Dec 17
Jan 18
Low (~2-6GB data) (RHS)
SOURCE: MORGANS RESEARCH, COMPANY
All major telcos continue to increase their mobile data offering at the ‘high’ end, with Telstra now offering a 120GB ‘Premium’ plan (up from the previous maximum plan of 75GB); Optus is now offering a 200GB plan (vs 100GB max previously); and Vodafone now offering a 150GB plan (vs 36GB max previously). As the chart above shows, this has caused significant price reductions in the cost/GB, with Vodafone offering the best value at $0.67/GB in its 150GB plan. A number of these plans are significantly above the average monthly mobile data usage per person in Australia (~2GB per capita according to ABS) and even above the average fixed line home internet connection usage per capita (~145GB per capita according to the ABS). Additionally, 50% of NBN plans download less than 95 Gb per month (p170 Summary of the ACCC’s communications sector market study).
15
Telecommunications│Australia│Equity research│February 1, 2018
Challenger brand pricing in postpaid We highlight a number of prepaid plans below that offer (in our view) compelling value compared with some of the incumbent telco prepaid plans. Figure 26: TPM’s mobile plans are attractively priced as at 24 Jan 2018
SOURCES: MORGANS, COMPANY REPORTS
Figure 27: Belong’s mobile plans as at 24 Jan 2018
SOURCES: MORGANS, COMPANY REPORTS
16
Telecommunications│Australia│Equity research│February 1, 2018
Figure 28: amaysim’s mobile plans as at 24 Jan 2018
SOURCES: MORGANS, COMPANY REPORTS
Figure 29: Kogan mobile plans as at 24 Jan 2018
SOURCES: MORGANS, COMPANY REPORTS
17
Telecommunications│Australia│Equity research│February 1, 2018
Figure 30: Vodafone mobile plans as at 24 Jan 2018
SOURCES: MORGANS, COMPANY REPORTS
18
Telecommunications│Australia│Equity research│February 1, 2018
Telstra Corporation (TLS, ADD, A$4.11 PT) Reporting date: Thursday 15 February 2018 Earnings guidance: TLS provide full year earnings guidance but do not provide half yearly guidance. Historically TLS’s EBITDA split has been ~50/50 1H/2H but given NBN delays negatively impact 2H18, we expect 1H18 to contribute ~54% of full year EBITDA. That said we think TLS will pay the same dividend in the 1H and 2H which is 11cps (in-line with 22cps full year guidance). Investment view: TLS is our key telecommunications pick. We consider it to have a broadly asymmetric risk / reward profile which is now skewed to the upside. Positives include: 1) An undemanding valuation (potential now for a rerating); 2) Low overall investor sentiment (which could change); 3) Ample upside if (or more likely in our view when) the NBN gets rebased (written down and last mile access costs reduced); and 4) Investors get paid to wait. We think the NBN will get rebased and this will be a positive to TLS shareholders but timing is difficult to predict. Political rumblings hint that this could happen soon but it could be many years away. Noteworthy items
We are expecting a stronger 1H skew than normal due to the NBN delays which will adversely impact 2H18. As a reminder guidance was downgraded in December 2017 due to NBN activation and rollout delays. TLS noted that “by far the much bigger impact is actually in the delay in relation to the HFC cease sale” which means that one-off NBN disconnection payments will be most impacted.
Competition remains intense with a number of new brands entering the NBN space in the last six months and heavy discounting on mobile prices continuing. Consequently we expect lower net adds in fixed and mobile than last year and ARPU to come under pressure.
19
Telecommunications│Australia│Equity research│February 1, 2018
Figure 31: 1H18 result expectations
A$m
1H16
2H16
1H17
2H17
1H18 F
1H18 / 1H17
2H18
PROFIT & LOSS Total revenue EBITDA D&A EBIT Net interest expense PBT Tax NPAT EPS DPS EBITDA margin Tax rate
13,801.0 5,272.0 2,031.0 3,241.0 340.0 2,901.0 905.0 1,996.0 16.1 15.5 38% 31%
13,249.0 5,193.0 2,124.0 3,069.0 370.0 2,699.0 863.0 1,836.0 15.4 15.5 39% 32%
13,703.0 5,189.0 2,248.0 2,941.0 283.0 2,658.0 873.0 1,785.0 14.9 15.5 38% 33%
14,502.0 5,490.0 2,193.0 3,297.0 308.0 2,989.0 900.0 2,089.0 17.5 15.5 38% 30%
14,628.1 5,581.5 2,271.4 3,310.1 333.7 2,976.4 922.7 2,053.7 17.2 11 38% 31%
14,408.7 4,739.4 2,343.5 2,395.9 304.5 2,091.4 648.3 1,443.0 12.1 11 33% 31%
6.8% 7.6% 1.0% 12.5% 17.9% 12.0% 5.7% 15.1% 15.3% -29.0%
CASH FLOW Operating cashflow Capex Free Cash Flow Adjusted cash flow conversion Capex / revenue Capex / depreciation
3,157.0 -1,606.0 1,551.0 83% 12% 111%
4,109.0 -1,445.0 2,664.0 103% 11% 96%
3,536.0 -1,672.0 1,864.0 90% 12% 111%
3,494.0 -2,053.0 1,441.0 86% 14% 132%
5,047.7 -2,340.5 2,707.2 113% 16% 153%
3,784.9 -2,161.3 1,623.6 100% 15% 135%
42.8% 40.0% 45.2%
2,171.0 17,388.0 15,217.0 14,820.0 12,405
3,550.0 17,302.0 13,752.0 15,907.0 11,941
1,188.0 17,210.0 16,022.0 14,569.0 11,991
938.0 18,284.0 17,346.0 14,560.0 11,962
1,291.1 17,784.0 16,492.9 14,759.6 11,962
1,098.9 17,284.0 16,185.1 14,886.8 11,962
8.7% 3.3% 2.9% 1.3% -0.2%
1.4 27% 22%
1.3 23% 21%
1.5 25% 19%
1.6 29% 21%
1.5 28% 21%
1.7 19% 15%
BALANCE SHEET Cash Debt Net Debt Equity Shares on issue Annualised statistics Net Debt / Annualised EBITDA Annualised NPAT / Equity Annualised EBIT / Equity + Net Debt
SOURCES: MORGANS, COMPANY REPORTS
Expectations commentary Fixed
We forecast fixed line revenue to decline by ~12% to A$2.9bn and EBITDA to decline by 12% to A$1.5bn.
This represents a 35% EBITDA margin in 1H18 from 37% in 1H17. BroadBand margin compression is largely due to NBN migrations.
According to the ACCC, TLS’s share of fixed line NBN net adds dropped to 47% for the September 17 quarter (from 52% in the June 17 quarter). Optus and other (not the big 4) both increased their market share by ~2% in this quarter predominately at the expense of TLS. We also expect this reflects changing NBN demographics (the NBN rollout has increased its metro rather than regional presence and comps are stronger in the metro area).
New entrants into the NBN market are promoting aggressively discounted prices but we expect this will take time to impact the average TLS subscriber. We expect NBN adds to grow as the size of the market grows (ie more NBN activations this half than last) but we expect TLS’s share of the net adds to drop below 50% for the first time as competitors increase their effort. 20
Telecommunications│Australia│Equity research│February 1, 2018
We forecast +739k fixed Broadband net adds yoy (from +720k yoy net adds in 1H17).
Mobile
We forecast 1H18 mobile revenue of A$4.9bn which is down 2% yoy and mobile EBITDA of A$2bn which is down ~4% yoy.
Our forecast assumes a 40% EBITDA margin (from 41% in 1H17) and reflects negative fixed cost leverage on pricing pressure.
We forecast mobile net adds to slow to ~230k (vs ~260k yoy in 1H17) due to increasing competition and a small decline in ARPU. We think that Belong (TLS’s challenge brand) could surprise with respect to net adds as 1) it’s a new category for TLS, and 2) the Belong product represents compelling value, in our view.
21
Telecommunications│Australia│Equity research│February 1, 2018
Figure 32: Net add forecasts
SIO's (1,000s) TOTAL FIXED + MOBILE ...yoy net adds… …hoh net adds… TOTAL BB SUBS ...yoy net adds… …hoh net adds… TOTAL MOBILE ...yoy net adds… …hoh net adds…
1H15 18,249 1,494 1,185 4,675 1,051 930 13,574 443 255
2H15 18,622 1,558 373 4,918 1,173 243 13,704 385 130
1H16 19,080 831 458 5,176 501 258 13,904 330 200
2H16 19,609 987 529 5,559 641 383 14,050 346 146
1H17 19,993 913 384 5,829 653 270 14,164 260 114
2H17 1H18 F 20,120 20,801 511 808 127 681 6,053 6,411 494 582 224 358 14,067 14,390 17 226 -97 323
2H18 20,870 750 70 6,625 572 214 14,245 178 -145
FIXED SIO's (1,000s) Fixed retail voice Wholesale fixed voice Voice total ...yoy net adds… …hoh net adds… NBN subs ...yoy net adds… …hoh net adds… Total fixed subs ...yoy net adds… …hoh net adds… Wholesale fixed BB ...yoy net adds… …hoh net adds… MOBILE SIO's (1,000s) TOTAL Mobile ...yoy net adds… …hoh net adds… Postpaid ...yoy net adds… …hoh net adds… Mobile BB ...yoy net adds… …hoh net adds… Pre paid ...yoy net adds… …hoh Mobile net adds… Total phones
1H15 0 0 0 0 0 0
2H15 5,981 1,338 7,319 7,319 7,319 93
3,859
93 3,985
816 39 27 1H15 13,574 443 255 7,275 163 81 3,809 137 130 2,490 143 44
126 840 51 24 2H15 13,704 385 130 7,307 113 32 3,866 187 57 2,531 85 41
1H16 5,852 1,353 7,205 7,205 -114 211 211 118 4,115 256 130 850 34 10 1H16 13,904 330 200 7,387 112 80 3,914 105 48 2,603 113 72
2H16 5,710 1,328 7,038 -281 -167 500 407 289 4,219 234 104 840 0 -10 2H16 14,050 346 146 7,476 169 89 3,960 94 46 2,614 83 11
1H17 5,549 1,251 6,800 -405 -238 792 581 292 4,253 138 34 784 -66 -56 1H17 14,164 260 114 7,555 168 79 3,993 79 33 2,616 13 2
2H17 1H18 F 5,363 5,299 1,124 1,221 6,487 6,520 -551 -280 -313 33 1,176 1,618 676 826 384 442 4,194 4,166 -25 -87 -59 -28 683 627 -157 -157 -101 -56 2H17 1H18 F 14,067 14,390 17 226 -97 323 7,562 7,663 86 108 7 101 4,007 4,066 47 73 14 59 2,498 2,661 -116 45 -118 163
2H18 5,113 1,094 6,207 -280 -313 1,955 779 337 4,144 -50 -22 526 -157 -101 2H18 14,245 178 -145 7,660 98 -3 4,068 61 2 2,518 20 -143
9,765 306 125
9,838 198 73
9,990 225 152
10,090 252 100
10,171 181 81
(prepaid + postpaid excluding Mobile Broadband) ...yoy net adds… …hoh net adds…
10,060 -30 -111
10,324 153 264
10,178 118 -146
SOURCES: MORGANS, COMPANY REPORTS
22
Telecommunications│Australia│Equity research│February 1, 2018
Yield and sensitivity to rising 10 year bond yields
The figure below shows that the 20 year average and median cash dividend yield for Telstra (on a 12 month forward looking basis) is 6.2%. This yield got as a high as 10.4% (supressed by the NBN negotiations and Future Fund selling between late CY2010 and early CY2011) and as low as 2.1% in the Dot Com/2000s.
It can be argued that investors have historically used TLS as a bond proxy, especially given relatively low bond yields in recent years. Over the past 10 years, TLS’s dividend yield has provided investors with an average 320bp spread above the Australian 10 year bond yield, compared to -70bp from 1999 to 2007.
Over the past 10 years, there has been a positive (0.6) correlation between the TLS dividend yield and the Australian 10 year bond rate. However, over the preceding 9 year period, TLS was negatively correlated to rising bond yields (-0.5). We believe this was largely related to the downward trends in 10 year bond yields over 1999-2008, in addition to increasing TLS dividend yield (comprised by a rise in gross dividends paid, partially offset by increases in the TLS share price).
In terms of TLS being referred to as a ‘bond proxy’, the positive correlation between TLS and 10 year bond rates over the last ten years shows that there is insufficient evidence to satisfy this theory. Given the amount of industry change (predominately NBN/competition issues), in addition to recent changes to capital management (i.e. dividend cut), we believe there is too much ‘noise’ (in terms of TLS’ share price and yield) to have a clear read-through in the context of its exposure to rising interest rates.
Figure 33: TLS NTM dividend yield vs Australian 10yr bond rate and spread (RHS) 12.0% 10.0% 8.0% 6.0% 4.0% 2.0% 0.0% 1999 -2.0%
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
-4.0% -6.0% TLS & 10yr Bond Spread
TLS - Dividend Yield
Aus - 10 Year Bond
SOURCES: MORGANS, FACTSET
Statistically TLS looks cheap based on its long term trading PE. No doubt some of this is warranted given the challenging outlook but our view is that the market is pricing TLS for pessimism (and therefore anything positive is an upside risk).
23
Telecommunications│Australia│Equity research│February 1, 2018
Figure 34: TLS historical PE (12 month forward) 20
18
16
14
12
10
8 2002
2003
2004
2005
2006
2007 PE
2008
2009 AVG
2010
2011 STD +1
2012
2013
2014
2015
2016
2017
2018
STD -1
SOURCES: MORGANS, COMPANY REPORTS
Changes to forecasts and valuation
We have made some minor forecast changes reflecting updates as a result of new plan prices impacting our net add forecasts. Otherwise we have made immaterial changes and our valuation and Add recommendation are unchanged.
Figure 35: Changes to forecasts and valuation (A$m)
Revenue Gross profit Opex EBITDA EBIT NPAT EPS DPS Ops Cash Flow Capex Free Cash flow DCF EV/EBITDA Weighted valuation Premium / (discount) Price target
FY18 old
FY18 new
% change
FY19 old
FY19 new
% change
29,048 20,426 10,103 10,322 5,704 3,497 29.2 22.0 8,875 4,506 4,368 $4.09 $4.15 $4.11 0% $4.11
29,037 20,414 10,093 10,321 5,706 3,497 29.2 22.0 8,784 4,502 4,282 $4.10 $4.14 $4.11 0% $4.11
0.0% -0.1% -0.1% 0.0% 0.0% 0.0% 0.0% 0.0% -1.0% -0.1% -2.0% 0.1% -0.1% 0.1% n.m. 0.1%
31,326 20,979 9,965 11,014 6,217 3,902 32.6 22.0 8,109 4,858 3,251
31,284 20,937 9,933 11,003 6,208 3,893 32.5 22.0 8,063 4,851 3,213
-0.1% -0.2% -0.3% -0.1% -0.1% -0.2% -0.2% 0.0% -0.6% -0.1% -1.2%
SOURCES: MORGANS, COMPANY REPORTS
Risks and rewards
Delays to the NBN rollout as noted in December 2017 could have a negative impact on TLS’s short term earnings (albeit a positive valuation impact due to the timing). With the most recent exception, over the last few years the NBN has tracked to plan but as we are now entering the peak rollout and migration period this may not continue to happen. The NBN downgraded/delayed their rollout plan by 0.5m households in FY18 and we have pre-emptively assumed the same again in FY19 but it could be larger. The other key risk remains competition and TPM launches their initial mobile network trial in mid 2018 so the market impact of this (and TLS’s competitive response with Belong) remains to be seen. Belong is a lower cost challenger brand and we expect that overall it will be a net positive to TLS's earnings (since they don’t currently play at this end of the market) but offsetting this is likely to be the knock on effect as TPG’s low price offering adversely impacts Vodafone (more so than TLS) but Vodafone’s pricing response is likely to impact Optus which in turn will impact TLS and overall could lower ARPU / total mobile spend in Australia. 24
Telecommunications│Australia│Equity research│February 1, 2018
Upside risk relates to TLS’s balance sheet strength – for example the possibility of further meaningful EPS accretive acquisitions or more likely in our view buybacks. Medium term risk relates to the impact of NBN’s substantially higher last mile access prices potentially taking A$2bn off TLS’s EBITDA. This earnings hole has been well flagged to the market so should not represent a negative downside surprise. In fact we think it’s an upside surprise risk as in our view the NBN economics are far from guaranteed. See our sector piece: NBN economics under inspection (Released 28.4.17) for further details.
The key operational downside risk, in our view, relates to increased competition eating away at TLS’s fixed and mobile market share. While increased competition has captured a lot of media attention to date, TLS’s mobile and NBN market share has tracked better than many are expecting.
25
Telecommunications│Australia│Equity research│February 1, 2018
Figure 36: TLS financial summary Profit and loss Revenue Gross Profit
Jun-16A Jun-17A Jun-18E Jun-19E Jun-20E 27,050 28,205 29,037 31,284 31,066 19,804 20,534 20,414 20,937 19,167
Telstra - valuation details Share Price Price Target
$3.67 Market Cap A$45.0bn $4.11
Total Operating Costs
-9,339
-9,855
-10,093
-9,933
-7,834
Upside
11.9% Rec
EBITDA Depreciation Amortisation & impairments EBIT Net Interest Income Pre-tax Profit Tax Reported Profit Exceptional items Normalised Profit Gross dividends paid
10,465 -2,957 -1,198 6,310 -710 5,600 -1,768 5,849 -2,017 3,832 3,783
10,679 -3,058 -1,383 6,238 -591 5,647 -1,773 3,874 0 3,874 3,708
10,321 -3,135 -1,480 5,706 -638 5,068 -1,571 3,497 0 3,497 2,632
11,003 -3,316 -1,480 6,208 -566 5,642 -1,749 3,893 0 3,893 2,632
11,333 -3,509 -1,480 6,344 -511 5,833 -1,808 4,025 0 4,025 2,632
TSR
17.9%
Cash flow statement Jun-16A Jun-17A Jun-18E Jun-19E Jun-20E EBITDA 10,465 10,679 10,321 11,003 11,333 Net interest -796 -729 -687 -611 -584 Tax -1,860 -1,571 -1,571 -1,749 -1,808 Changes in working capital -610 -959 721 -580 -1,244 Operating cash flow 7,199 7,420 8,784 8,063 7,697 Capex -3,051 -3,725 -4,502 -4,851 -4,809 Free Cash Flow 4,148 3,695 4,282 3,213 2,888 Acquisitions, divestments, capitalised-1,143 -663 0 0 0 Investing cash flows -4,194 -4,388 -4,502 -4,851 -4,809 Increase / decrease in Equity -1,894 -1,502 0 0 0 Increase / decrease in Debt 1,033 139 -1,000 -500 -500 Dividends paid -3,787 -3,736 -3,170 -2,632 -2,632 Other financing cash flows -221 -151 0 0 0 Financing cash flows -4,869 -5,250 -4,170 -3,132 -3,132 Balance Sheet Cash And Deposits Debtors Inventory Total Current Assets Fixed Assets Investments Goodwill & Intangibles Total Non-Current Assets TOTAL ASSETS Short Term Debt Creditors Total Current Liabilities Long Term Debt Total Non -Current liabilities TOTAL LIABILITIES Issued capital Retained earnings Other reserves and FX TOTAL EQUITY
Jun-16A 3,550 4,737 557 9,340 20,581 29 9,229 33,946 43,286 2,655 3,948 8,275 14,647 18,191 27,379 5,167 10,642 62 15,907
Jun-17A 938 5,468 893 7,862 21,350 29 9,558 34,271 42,133 3,476 4,189 8,294 14,808 18,414 27,573 4,421 10,225 -105 14,560
Jun-18E 1,099 4,934 888 7,484 22,717 29 8,078 34,158 41,642 1,728 4,371 6,728 15,556 19,162 26,755 4,748 10,225 -105 14,887
Jun-19E Jun-20E 1,225 5,299 953 8,040 24,252 29 6,598 34,213 42,253 1,678 4,221 6,528 15,106 18,712 26,105 6,009 10,225 -105 16,148
1,054 6,521 916 9,055 25,552 29 5,118 34,033 43,087 1,628 4,162 6,419 14,656 18,262 25,546 7,402 10,225 -105 17,541
WACC 7.9% 6.4
DCF EV / EBITDA Weighted valuation and price target Key metrics/ multiples P/E (normalised) Yield (cash) EV / EBITDA Price / Book Value
ADD Valuation $4.10 $4.14 $4.11
Upside 12% 13%
Jun-17A 11.3 8.4% 5.7 3.0
Jun-18E 12.6 6.0% 5.8 3.0
Jun-19E 11.3 6.0% 5.4 2.7
Jun-20E 10.9 6.0% 5.2 2.5
8.8 16.5% 8.2%
6.5 19.5% 9.5%
4.6 17.9% 7.1%
3.5 17.1% 6.4%
Per share data Jun-17A Diluted shares on issue 11,962 Reported Earnings per share (A$) 0.32 Normalised EPS (A$) 0.32 Dividends per share (A$) 0.31 Dividend payout ratio 96.1% Dividend vs. FCF 100.4%
Jun-18E 11,962 0.29 0.29 0.22 75.3% 61.5%
Jun-19E 11,962 0.33 0.33 0.22 67.6% 81.9%
Jun-20E 11,962 0.34 0.34 0.22 65.4% 91.1%
Result quality Cash flow conversion FCF vs. NPAT
Jun-17A 91.0% 95.4%
Jun-18E 107.0% 122.5%
Jun-19E 94.7% 82.5%
Jun-20E 89.0% 71.7%
Gearing Net Debt Net Debt / Net Debt + Equity Net Debt / EBITDA (x) EBITDA interest cover (x) Invested Capital Enterprise Value
Jun-17A 17,346 54.4% 1.6 18.1 32,865 61,247
Jun-18E 16,185 52.1% 1.6 16.2 30,351 60,086
Jun-19E 15,559 49.1% 1.4 19.4 32,288 59,460
Jun-20E 15,230 46.5% 1.3 22.2 34,016 59,131
Growth ratios Revenue EBITDA NPAT Reported EPS Normalised EPS DPS Operating cash flow
Jun-17A 4.3% 2.0% 1.1% -31.9% 1.9% 0.0% 3.1%
Jun-18E 2.9% -3.4% -9.7% -9.4% -9.7% -29.0% 18.4%
Jun-19E 7.7% 6.6% 11.3% 11.3% 11.3% 0.0% -8.2%
Jun-20E -0.7% 3.0% 3.4% 3.4% 3.4% 0.0% -4.5%
Margin analysis GP margin EBITDA Margin EBIT margin NPAT margin ROE ROIC
Jun-17A 73.2% 37.9% 22.1% 13.7% 26.6% 19.0%
Jun-18E 72.8% 35.5% 19.7% 12.0% 23.5% 18.8%
Jun-19E 70.3% 35.2% 19.8% 12.4% 24.1% 19.2%
Jun-20E 66.9% 36.5% 20.4% 13.0% 22.9% 18.7%
Price / Net Tangible Assets Operating cash flow yield Free cash flow yield
SOURCES: MORGANS, COMPANY REPORTS
26
Telecommunications│Australia│Equity research│February 1, 2018
TPG Telecom (TPM, HOLD, A$5.95 PT) Reporting date: Tuesday 20 March 2018 Earnings guidance: TPM provided no interim guidance but FY18 guidance is for Underlying EBITDA of A$800-815m and capex guidance (including spectrum purchases) of ~A$1bn (~A$300m business as usual capex + A$595m on Au Mobile Spectrum + capex on AU and SG mobile builds). We believe the NBN delays present upside risk to TPM’s guidance as the negative impact from NBN migrations is less than when guidance was originally provided (we estimate that around 80k less TPM customers are being moved from on-net to NBN which saves TPM around A$10m over the six months). However TPM may take the opportunity to fast track some expenses in order to soften the negative NBN impact in FY19.
Investment view: Hold. We see TPM’s investment view as a tale of three parts with short term upside risk to guidance on NBN delays, medium term downside risk (if the NBN continues in its current form) and longer term substantial upside potential on mobile rollout and the potential NBN write-downs. For those willing to take a more binary bet on the likelihood of the NBN being written down within the next 12 months then TPM has the most upside but conversely the same with respect to downside risk. Consequently, we sit on the fence with a Hold recommendation.
Noteworthy items:
We forecast 1H18 EBITDA of A$413m (a 51% 1H18 skew). This suggests EBITDA will decline 13% on a reported basis and 1% on an underlying basis (vs 1H17). Reported EBITDA in 1H17 was boosted by one-off IRU gains and the Amcom/ Vocus stock divestment which netted a large profit and in retrospect was a very smart move from TPM.
Capex – 1H18 will include A$595m of mobile spectrum capex (one of three payments which collectively total A$1.3bn). We forecast around A$830m of capex in 1H18 which includes the Vodafone network rollout, mobile Spectrum, mobile network builds in Au and SG, Fibre To The Basement, and Business as Usual capex.
Dividend – we forecast a 2c interim dividend which is down 75% yoy and inline with the 2 cent final dividend TPM paid in 2H17. We forecast TPM to hold the dividend at 2 cents for the next three years despite capex substantially exceeding operating cashflow and gearing edging uncomfortably higher, in our view. Therefore it is possible that TPM looks to cut the dividend further over the next three years.
We expect TPM’s fixed line net adds to be negative for the first time. This view reflects a large number of customers migrating onto the NBN and that fact that TPM is under indexing on NBN nets (TPM services ~27% legacy market share and is therefore losing subscribers as they migrate off legacy and onto the NBN but TPM’s share of NBN net adds is ~20%). We expect +180k NBN versus -250k legacy net adds.
TPM vs iiNet premium – On average iiNet’s NBN plans have been set at a ~$10 premium to TPG’s (reflecting the premium brand positioning) however in our January 2018 telco shopper we noted that the iiNet premium has been removed and iiNet is now being priced at the same level as TPM (and now at a discount to TLS).
It will be interesting to see whether this is a temporary blip or TPM is looking to reposition the iiNet brand, which seems counter intuitive to us. To date TLS has priced its challenger / value brand Belong at ~A$30 discount to TLS premium product so TLS has both the cheapest and most expensive NBN offerings.
Mobile – TPM have experimented with what we consider to be some very aggressively price mobile plans over the last 12+ months. Given the compelling value proposition from TPM’s aggressive mobile offering we would have expected strong customer take-up. However TPM struggled to add mobile subscribers (losing 6k in January and July 2017). We expect a similar loss again in 1H18.
27
Telecommunications│Australia│Equity research│February 1, 2018
Result expectations Figure 37: 1H18 result expectations
1H18 / 1H17 4.1% 14.4%
1H18 / 2H17 3.5% 5.7%
6.2% -3.4% -17.7% -18.1% -17.9% -202.5% -2.4% -24.8% -75.0%
3.3% 1.0% -2.2% -5.9% -3.2% -12.8% -4.1% -9.7% 0.0%
318.8 286.2 -246.1 -828.2 72.7 -542.0 104.2% 94.4% 19.7% 64.1% 344.2% 1121.0%
311.0 -14.9% -354.6 150.8% -43.6 -9133.8% 98.1% 2.7% 27.1% 141.0% 326.6% 136.3%
1,284.0 1,883.3 849.0
858.6 2,399.3 864.3
1,448.4 2,566.6 926.2
1,525.2 2,703.9 926.2
1.4 22.0% 22.2%
1.0 17.6% 18.1%
1.8 15.8% 14.4%
1.9 12.8% 11.3%
Revenue COGS + OPEX EBITDA reported EBITDA underlying Depreciation Amortisation EBIT Tax NPAT reported Adjustments NPAT norm EPS reported DPS EBITDA margin Tax rate
1H17 1,241.8 768.4 473.4 417.6 69.6 52.8 351.0 96.1 225.0 -17.5 207.5 26.5 8.0 38.1% 27.4%
2H17 1H18 F 1,248.9 1,292.7 831.5 878.9 417.4 413.7 417.4 71.5 73.9 50.5 51.0 295.4 288.8 83.7 78.7 190.7 184.6 20.6 17.9 211.3 202.6 22.1 19.9 2.0 2.0 33.4% 32.0% 28.3% 27.3%
2H18 1,310.4 909.6 400.8
Operating Cash Flow Capex Free Cash Flow Adjusted cash flow conversion Capex / revenue Capex / depreciation
336.2 -330.2 6.0 91.8% 26.6% 474.4%
Net Debt Equity Shares on issue Annualised statistics Net Debt / EBITDA Norm NPAT / Equity EBIT / Equity + Net Debt
108.6 54.2 238.0 66.4 155.7 17.3 173.0 16.8 2.0 30.6% 27.9%
1H17 skew 49.9% 48.0% 53.1% 50.0% 49.3% 51.1% 54.3% 53.4% 54.1% -571.9% 49.6% 54.6% 80.0%
1H18 skew 49.7% 49.1%
-10.2% 236.5% -845.6% -9.4% 225.2% 225.7%
51.3% 57.3% 7.6%
52.7% 22.9% -15.5%
12.8% 36.3% 9.1%
68.7% 7.0% 7.2%
59.9% 44.0%
37.2% 48.3%
29.1% -28.4% -35.1%
70.2% -10.4% -20.7%
40.5% 48.5% 54.8% 54.2% 54.2% 50.9% 51.1% 52.5% 50.0%
SOURCES: MORGANS, COMPANY REPORTS
Net add forecasts Figure 38: Subscriber data TOTAL SIO's ...yoy net adds… …hoh net adds… TOTAL FIXED SUBS (ADSL & NBN) ...yoy net adds… …hoh net adds… NBN BB subs ...yoy net adds… …hoh net adds… ADSL BB subs ...yoy net adds… …hoh net adds… TOTAL MOBILE ...yoy net adds… …hoh net adds…
1H16 2H16 1H17 2H17 1H18 F 2H18 2,315 2,343 2,340 2,344 2,321 2,214 80 46 25 1 -19 -130 18 28 -3 4 -23 -107 1,842 1,868 1,887 1,899 1,882 1,781 105 58 45 31 -5 -118 32 26 19 12 -17 -101 194 276 388 561 744 881 114 150 194 285 356 320 68 82 112 173 183 136 1,648 1,592 1,499 1,338 1,138 901 -9 -92 -149 -254 -361 -437 -36 -56 -93 -161 -200 -237 473 475 453 445 439 433 -25 -12 -20 -30 -14 -12 -14 2 -22 -8 -6 -6 SOURCES: MORGANS, COMPANY REPORTS
Changes to forecasts and or valuation We have made minor changes to our forecast around net customer add changes and the net result is our valuation and price target is unchanged.
28
Telecommunications│Australia│Equity research│February 1, 2018
Figure 39: Changes to forecasts and valuation FY18 old
FY18 New
2,597.5 812.5 374.6 37.9 40.4 4.3 1,182.9 1,182.9 -591.0 $5.56 $6.33 $5.95 0.0% $5.95
2,603.1 814.5 376.1 38.0 40.6 4.0 1,182.9 1,182.9 -588.8 $5.55 $6.35 $5.95 0% $5.95
Revenue EBITDA Cash NPAT Reported EPS Normalised EPS DPS Operating Cash Flow Capex Free Cash Flow DCF EV/EBITDA Weighted valuation Premium / (discount) Price target
% change 0.2% 0.3% 0.4% 0.4% 0.4% -5.9% 0.0% 0.0% 0.4% -0.3% 0.3% 0.0% n.m. 0.0%
FY19 old FY19 New 2,679.2 783.4 270.8 26.0 29.2 4.0 1,112.0 1,112.0 -450.8
2,658.3 781.3 269.5 25.8 29.1 4.0 1,112.0 1,112.0 -454.0
% change -0.8% -0.3% -0.5% -0.6% -0.5% 0.0% 0.0% 0.0% -0.7%
SOURCES: MORGANS, COMPANY REPORTS
Risks and rewards Management have a strong track record of delivering value when the drivers have been within their control. Unfortunately one of the key drivers of TPM’s earnings outlook for the next few years is NBN and its implications for TPM’s earnings. From an earnings perspective upside risk relates to NBN delays (TPM keeps its higher margin on-net customers longer) while downside risk relates to NBN progress (as lower margin NBN eats away at higher margin on-net and lowers profitability per customer). Offsetting this TPM have undertaken an extensive capex program for mobile in Australia, mobile in Singapore and Fibre To The Basement in Australia. Collectively this necessitates a very large investment, which has the potential, in our view, to make or break, the company. We forecast capex at nearly double operating cashflow for the next few years (since the NBN negatively impacts EBITDA and cashflow). This means TPM’s net debt goes much higher and their free cashflow is non-existent for the next three years, on our forecasts. In our view, NBN margin erosion and the ability to offset this through cost reductions (and over time to some extent TPM’s new mobile networks) remains the key upside and downside risk for TPM. TPM has done a commendable job of reducing costs and simplifying acquired businesses (Pipe Networks, AAPT and iiNet). Two of these three businesses were TPM’s key suppliers so it was vertically integrating. iiNet however is a predominately consumer facing business with higher customer advocacy so TPM needs to tread more carefully with respect to integration and cost out. We note that iiNet Broadband subscriber numbers declined by 11,000 in FY17 and TPM’s market share continues to track lower in the NBN (versus its legacy market share).
29
Telecommunications│Australia│Equity research│February 1, 2018
Figure 40: TPM financial summary Profit and loss Revenue Operating costs EBITDA Depreciation Amortisation & impairments EBIT Net Interest Income Pre-tax Profit Tax Reported Profit Exceptional items Normalised profit Gross dividends
Jul-16A Jul-17A Jul-18E Jul-19E Jul-20E 2,387.8 2,490.7 2,603.1 2,658.3 2,830.6 1,538.4 1,599.9 1,788.6 1,877.1 2,091.9 849.4
890.8
814.5
781.3
738.7
-136.9 -115.1 597.4 -83.6 513.8 -129.5 384.3 -23.3 361.0 123.0
-141.1 -103.3 646.4 -50.9 595.5 -179.8 415.7 1.6 417.3 86.4
-182.5 -105.2 526.9 -41.3 485.6 -145.2 340.4 35.7 376.1 37.0
-266.8 -150.0 364.5 -23.5 341.0 -102.0 239.0 30.5 269.5 37.0
-316.7 -184.1 237.9 -13.6 224.3 -67.1 157.2 22.2 179.4 37.0
FY18 guidance - Underlying EBITDA of A$800-815m FY18 capex guidance of ~A$600m plus a further A$595m on Au Mobile Spectrum
Cash flow statement Jul-16A Jul-17A Jul-18E Jul-19E Jul-20E EBITDA 849.4 890.8 814.5 781.3 738.7 Net interest -84.6 -52.3 -44.5 -31.2 -29.5 Tax -138.8 -147.0 -145.2 -102.0 -67.1 Changes in working capital -167.5 -21.1 -30.8 10.0 17.3 Operating cash flow 458.5 670.4 594.0 658.0 659.5 Maintenance capex -90.0 -112.1 -117.1 -119.6 -127.4 Free cash flow (pre expansion) 368.5 558.3 476.9 538.4 532.1 Total capex -246.9 -576.3 -1,182.9 -1,112.0 -878.5 Free Cash Flow 211.6 94.1 -588.8 -454.0 -219.0 Acquisitions and divestments 0.0 0.0 0.0 0.0 0.0 Other Investing cash flow 1,735.5 -119.2 45.2 20.6 19.7 Investing cash flows 1,488.6 -695.5 -1,137.7 -1,091.4 -858.8 Increase / decrease in Equity 326.9 400.3 0.0 0.0 0.0 Increase / decrease in Debt 757.8 -450.0 780.0 700.0 350.0 Dividends paid -108.4 -133.8 -35.8 -37.0 -37.0 Other financing cash flows 0.0 -7.4 0.0 0.0 0.0 Financing cash flows 976.3 -190.9 744.2 663.0 313.0 Balance Sheet Cash And Deposits Debtors Inventory Other current assets Total Current Assets Fixed Assets Investments Goodwill & Intangibles Other non-current assets Total Non-Current Assets TOTAL ASSETS Short Term Debt Creditors Other current liabilities Total Current Liabilities Long Term Debt Other Non current liabilities Total Non -Current liabilities TOTAL LIABILITIES Issued capital Retained earnings Other reserves and FX TOTAL EQUITY
Jul-16A Jul-17A Jul-18E Jul-19E Jul-20E 39.2 46.3 159.7 355.8 445.9 145.2 131.6 122.1 124.7 133.9 12.0 6.4 6.6 6.7 7.2 162.2 26.9 26.9 26.9 26.9 358.6 211.2 315.2 514.1 613.9 895.1 1,055.5 2,055.9 2,901.1 3,462.9 6.4 2.9 2.9 2.9 2.9 2,485.2 2,632.5 2,572.5 2,443.1 2,278.7 25.7 8.9 8.9 8.9 8.9 3,412.4 3,699.8 4,640.2 5,356.0 5,753.4 3,771.0 3,911.0 4,955.4 5,870.0 6,367.3 27.1 32.5 168.5 238.5 273.5 298.0 289.4 249.2 261.9 289.0 188.8 245.7 245.7 245.7 245.7 513.9 567.6 663.4 746.1 808.2 1,350.4 872.4 1,516.4 2,146.4 2,461.4 127.5 71.7 71.7 71.7 71.7 1,477.9 944.1 1,588.1 2,218.1 2,533.1 1,991.8 1,511.7 2,251.5 2,964.2 3,341.3 1,051.9 1,449.4 1,754.0 1,955.9 2,076.1 686.1 968.0 968.0 968.0 968.0 41.2 -18.1 -18.1 -18.1 -18.1 1,779.2 2,399.3 2,703.9 2,905.8 3,026.0
TPG Telecom - valuation details Share Price $6.37 Market Cap A$4,934.9m Price Target $5.95 Total shareholder return Recommendation DCF EV / EBITDA Weight valuation Premium / (discount) Price Target Key metrics/ multiples Cash P / E Yield
-6.0% WACC HOLD Multiple n.a. 9.0 x
8.8%
Weighting Valuation 50.0% $5.55 50.0% $6.35 $5.95 0% $5.95
Jul-17A 13.2 1.6%
Jul-18E 15.7 0.6%
Jul-19E 21.9 0.6%
Jul-20E 32.9 0.6%
PEG 1.0 EV / EBITDA 7.1 Price / Book Value 2.3 Price / Net Tangible Assets -23.6 Operating cash flow yield 13.6% Free cash flow yield (pre expansion capex) 11.3% Free cash flow yield 1.9%
-1.0 9.1 2.2 44.9 12.0% 9.7% -11.9%
-0.8 10.1 2.0 12.7 13.3% 10.9% -9.2%
-1.0 11.1 1.9 7.9 13.4% 10.8% -4.4%
Per share data Shares on issue Reported EPS (A$) Normalised EPS (A$) Dividends per share (A$) Payout ratio
Jul-17A 864.3 0.49 0.48 0.100 20.6%
Jul-18E 926.2 0.38 0.41 0.040 10.5%
Jul-19E 926.2 0.26 0.29 0.040 15.5%
Jul-20E 926.2 0.17 0.19 0.040 23.6%
Result quality Cash flow conversion FCF vs. NPAT Gross dividends vs FCF
Jul-17A 97.6% 22.5% 91.8%
Jul-18E 96.2% -156.6% -6.3%
Jul-19E 101.3% -168.5% -8.2%
Jul-20E 102.3% -122.1% -16.9%
Gearing Net Debt Net Debt / Equity (x) Net Debt / EBITDA (x) EBIT interest cover (x) Invested Capital Enterprise Value
Jul-17A 859 0.36 0.96 12.7 3,237 6,364
Jul-18E 1,525 0.56 1.87 12.8 4,198 7,425
Jul-19E 2,029 0.70 2.60 15.5 4,945 7,929
Jul-20E 2,289 0.76 3.10 17.5 5,332 8,189
Growth ratios Revenue Operating costs EBITDA NPAT Reported EPS growth Cash EPS growth DPS growth Operating cash flow
Jul-17A 4.3% 5.8% 4.9% 15.6% 2.5% 13.4% -31.0% 46.2%
Jul-18E 4.5% 16.4% -8.6% -9.9% -21.7% -15.9% -60.0% -11.4%
Jul-19E 2.1% 13.1% -4.1% -28.3% -32.1% -28.3% 0.0% 10.8%
Jul-20E 6.5% 37.9% -5.5% -33.4% -34.2% -33.4% 0.0% 0.2%
Margin analysis EBITDA Margin EBIT margin Cash NPAT margin Cash ROE ROIC
Jul-17A 35.8% 26.0% 16.8% 17.4% 20.0%
Jul-18E 31.3% 20.2% 14.4% 13.9% 12.5%
Jul-19E 29.4% 13.7% 10.1% 9.3% 7.4%
Jul-20E 26.1% 8.4% 6.3% 5.9% 4.5%
SOURCES: MORGANS, COMPANY REPORTS
30
Telecommunications│Australia│Equity research│February 1, 2018
Vocus (VOC, HOLD, A$2.78 PT) Reporting date: Wednesday 20 February 2018 Earnings guidance: VOC have provided no interim guidance other than to say they will not pay an interim dividend. The Board has provided FY18 guidance for revenue of A$1.9bn to A$2.0bn; EBITDA of $370-390m, Underlying NPAT of A$140-150m and capex of A$246-A$266m (including A$56m on ASC @ 75c AUD/USD). FY18 guidance suggests underlying EBITDA will down ~5% in FY18 (compared to FY17 when including two months of NextGen). Investment view: In the shorter term we see VOC as remaining higher risk due to rising debt and declining underlying EBITDA. VOC has said it will update investors on plans to divest its data centre business and/or New Zealand businesses at its February 2018 result. We think the NZ business is high quality and could attract buyers (and reasonable prices) but clearly there are no guarantees. In the absence of a divestment debt will track higher this year due to VOC’s capex exceeding its cash flow. In the medium term we expect the business will be properly integrated and this will create value for shareholders but in the longer term VOC’s lack of mobile offering may be problematic (especially considering our view that fixed and mobile will converge over the next 3-5 years). Noteworthy items
We expect Net Debt to increase in 1H18 (from A$1,029m at 30 June 2017 to A$1,059m at 31 December 2017). While we are very pleased to see tighter capex and cost controls being implemented committed projects will need to be finalised before capex contracts in 2H18. Consequently we expect as capex to be higher in 1H18.
Proposed Divestments of Vocus NZ and/or Au Data Centres. In FY17 NZ reported A$232m of revenue and A$57.5m of EBITDA. Applying 6-8x would value this at A$340-450m. A divestment would see EBITDA drop by ~17% but gearing would drop from ~3x to ~2.2x and take the pressure off VOC’s balance sheet.
VOC is also looking to divest the Au data centre business but we are less convinced that it offers corporate appeal given it consists of a number of smaller and aged assets which are likely, in our view, to require significant shorter term stay-in-business capex and meaningful rectification capex when they eventually get closed down.
Significant Board and Management changes have occurred over the last 12 months including a new Chairman, changeover of directors, new Chief Financial Officer, New Chief Technology Officer, and new head of Enterprise and Wholesale. In addition to this VOC pre-released their intensions to change reporting segments. With all these changes now made, the business focus should be aligned and traction should be starting to be made.
VOC have noted strong trading results in Enterprise & Wholesale in Au in the last three quarters including adding sales staff, winning six government tenders and reducing the backlog, albeit with more improvements still required. VOC noted that east coast accounted for 65% of new orders and that they added 25 new starters in Q1FY18 with 12 roles still to fill and that they also added 35 new partners in Q1FY18.
Consumer Australia is tracking well in terms of NBN net adds (based on ACCC releases VOC continues to over-index) and that iPrimus has been relaunched. That said there are material costs associated with the NBN migration including cycling higher costs of the deferred Subscriber Acquisition Connections Costs (SACS) that were capitalised in FY17.
Consumer New Zealand started the year well with bundling of energy or mobile tracking at around 14%. VOC also folded one brand and have increased promotions around Orcon which is proving successful.
Submarine cable Australia Singapore Cable (ASC) is expected to be installed in Q3 FY18 (i.e. about now) and be ready (commissioned) by Q1 FY19 (i.e. September 2018). The upfront capex component of this build has 31
Telecommunications│Australia│Equity research│February 1, 2018
been reduced with payment timing pushed into outer years (and slightly lowered). At last count there were ~20 engaged potential customers but todate we have seen no signed customers. Interesting at their AGM VOC noted that it now thinks ASC swaps will allow them to avoid US$110m of capex (i.e. instead of buying east coast capacity off the likes of Southern Cross they are hopefully of a capacity swap between the likes of Southern Cross & ASC to avoid VC Southern Cross style capex). VOC have guided to US$32m of 1H18 capex on ASX and US$10m in 2H18 (the stronger AUD should have a lower AUD costs which is a positive).
VOC continues to highlight substantial transformation benefits including A$90m of EBITDA benefits in FY21. However they do not specify the stepup timing or cost of achieving these benefits. We would logically expect this to be progressively realised.
Result expectations Figure 41: 1H18 result expectations
Revenue COGS + OPEX EBITDA reported EBITDA underlying Depreciation Amortisation EBIT Tax NPAT reported Adjustments NPAT norm EPS reported DPS EBITDA margin Tax rate
1H17 2H17 1H18 F 2H18 1H18 / 1H17 1H18 / 2H17 1H17 skew 1H18 skew 885.9 934.7 947.9 960.5 7.0% 1.4% 48.7% 49.7% 718.6 756.2 769.4 768.9 7.1% 1.7% 48.7% 50.0% 167.3 178.5 48.4% 187.2 179.2 178.5 191.6 -4.7% -0.4% 51.1% 48.2% 51.0 47.3 47.3 49.6 -7.3% 0.0% 51.9% 48.8% 54.5 58.4 58.4 58.4 7.1% 0.0% 48.3% 50.0% 61.8 72.8 72.8 83.6 17.8% 0.0% 45.9% 46.6% 13.8 14.8 14.8 18.1 7.1% 0.0% 48.3% 45.0% 47.2 -1,556.8 32.9 40.2 -30.2% -102.1% -3.1% 45.0% 44.7 1,617.2 33.4 33.4 -25.2% -97.9% 2.7% 50.0% 91.9 60.4 66.4 73.7 -27.8% 9.9% 60.3% 47.6% 7.71 -245.36 5.3 6.5 -31.0% -102.2% -3.2% 102.2% 6 0 0 0 n.m. n.m. n.m. n.m. 18.9% 19.1% 18.8% 19.9% 22.4% 20.3% 20.3% 21.6%
Operating Cash Flow Capex Free Cash Flow Adjusted cash flow conversion Capex / revenue Capex / depreciation
95.2 -109.4 -14.2 71.7% 12.3% 214.5%
36.2 -101.9 -65.6 42.2% 10.9% 215.4%
92.8 -123.2 -30.5 74.3% 13.0% 260.6%
139.7 -120.1 19.6 95.5% 12.5% 242.0%
-2.6% 12.6% 115.1% 3.7% 5.3% 21.5%
155.9% 21.0% -53.6% 76.1% 19.3% 21.0%
72.4% 51.8% 17.7%
28.1% 45.3% 68.3%
Net Debt Equity Shares on issue Anualised statistics Net Debt / EBITDA Norm NPAT / Equity EBIT / Equity + Net Debt
988.2 3,833.5 611.5
1,029.3 2,303.1 618.0
1,059.8 2,336.1 619.0
1,040.1 2,376.3 621.0
7.2% -39.1% 1.2%
3.0% 1.4% 0.2%
49.0% 62.5%
49.3% 49.6%
3.0 4.8% 2.6%
2.9 5.2% 4.4%
3.0 5.7% 4.3%
2.7 6.2% 4.9%
0.5% 18.5% 67.3%
3.0% 8.3% -1.9% SOURCES: MORGANS, COMPANY REPORTS
32
Telecommunications│Australia│Equity research│February 1, 2018
Net add forecasts We forecast higher NBN net adds yoy but this is partially offset by higher legacy migrations to the NBN (relative to 2H17) which means the net adds (NBN + legacy) is lower yoy. Figure 42: Subscriber data c AU Broadband ... yoy net adds ... ... hoh net adds … AU Voice ... yoy net adds ... ... hoh net adds … AU Mobile ... yoy net adds ... ... hoh net adds … AU Energy ... yoy net adds ... ... hoh net adds …
Dec-15 1H16 477 39 12 411 27 19 172 172 172 126 20 13
Jun-16 2H16 520 55 43 409 17 -2 170 170 -2 147 34 21
Dec-16 1H17 537 60 17 377 -34 -32 164 -8 -6 153 27 6
Jun-17 2H17 547 27 10 324 -85 -53 162 -8 -2 161 14 8
Dec-17 1H18 574 37 27 283 -94 -41 164 1 3 169 16 8
Jun-18 2H18 594 47 21 252 -72 -31 169 7 4 177 16 8
187
192 6 5
193 6 1
189 -3 -4
193 0 4
194 5 1
NZ Broadband ... yoy net adds ... ... hoh net adds …
1
SOURCES: MORGANS, COMPANY REPORTS
Changes to forecasts and valuation Overall we have made immaterial forecast changes around plan price changes and net adds. Our valuation and price target remain unchanged at A$2.78. Figure 43: Changes to forecasts and valuation Revenue EBITDA EBIT Reported NPAT Underlying NPAT Underlying EPS DPS Shares on issue EV/EBITDA valuation DCF Weighted valuation Premium / Discount Price target
2018 old 1,908.4 370.0 156.4 73.2 140.0 22.6 0.0 621.0 $2.47 $3.09 $2.78 0% $2.78
2018 new 1,908.4 370.1 156.5 73.2 140.0 22.6 0.0 620.4 $2.47 $3.10 $2.78 0% $2.78
% change 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% -0.1% 0.0% 0.2% 0.2% n.m. 0.2%
2019 old 1,895.3 381.5 159.3 143.2 76.4 22.6 0.0
2019 new 1,895.7 381.8 159.7 143.5 76.6 23.0 0.0
% change 0.0% 0.1% 0.2% 0.2% 0.3% 1.9% 0.0%
SOURCES: MORGANS, COMPANY REPORTS
Risks and rewards
We see VOC as having short-medium term upside potential on the potential divestment of the New Zealand business which we think is a high quality business and could net a high price and/or upfront contracts signing on their ASC submarine cable build – both could ease the balance sheet pressure.
Our key concern from a risk perspective relates to debt on balance sheet relative to declining underlying EBITDA and lower return on capital than cost of capital. The possible divestment of NZ (or other assets) could improve VOC’s balance sheet position but for now VOC continues to invest heavily with capex (including capitalised items) exceeding operating cashflow in FY17 and FY18. If the return on capital exceeded VOC’s cost of capital, this would be value creating but as it currently stands, it appears to not be the case.
As a positive example of ROIC, even though Telstra has many of its own challenges, we calculate its Return on Equity (ROE) is 25.8% and Return on Invested Capital (ROIC or EBIT / Equity + Net Debt + Working Capital) is 20.7% in FY18 versus a Weighted Average Cost of Capital (WACC) of 7.9%. 33
Telecommunications│Australia│Equity research│February 1, 2018
VOC’s guidance for FY18 Underlying EBIT of A$245m (at the mid-point) over invested capital of A$3bn generates a 7% ROIC which is less than VOC’s 8.8% WACC. Six months ago VOC’s ROIC was lower still but the A$1bn write-down and a 12 month contribution from NextGen has improved the equation however we think there is more work to do to justify VOC’s ongoing investments and improve ROIC.
VOC’s ROIC sitting below its cost of capital manifests itself in VOC shares trading well below its book value per share. However this is also an upside risk as if VOC is able to deliver revenue growth and take costs out (on a net basis) then logically its ROIC should expand and this would manifest itself in the form of share price appreciation (as the share price discount to book value should reverse).
Our preference is to see VOC’s attractive operating cashflow reinvested to de-gear the balance sheet and de-risk the business for equity holders. Given the return on capital equation versus cost of capital argument, we think capital is better spent de-gearing the business but this will not happen in FY18.
In our view the key upside and downside risk for VOC shareholders relates to the earnings trajectory of the business – that is whether from this point in time the earnings outlook improves or worsens. Given the complexity of the business, it’s difficult to cleanly extract data points but we estimate that on a like for like basis earnings declined in FY17 and will do so again in FY18, before hopefully improving slightly in FY19.
On a more positive note VOC consists of a series of strong cash generating businesses with 1-15 year customer contracts so the backbone cash generation of the business remains, in our view, strong (operating cashflow to market capitalisation is currently 13%).
34
Telecommunications│Australia│Equity research│February 1, 2018
Figure 44: VOC financial summary Vocus - valuation details
Jun-16A
Jun-17A
Jun-18E
Jun-19E
Jun-20E
Revenue
830.8
1,820.6
1,908.4
1,895.7
2,003.1
Gross Profit
390.4
760.9
763.4
758.3
801.2
Total shareholder return
-6.9%
Total Operating Costs EBITDA Depreciation Amortisation & impairments EBIT Net Interest Income Pre-tax Profit Tax Net Profit after Tax
-173.6
-425.4
-393.3
-376.4
-394.7
Recommendation
HOLD
216.8
335.5
370.1
381.8
406.5
-36.9
-86.9
-96.9
-105.5
-112.9
DCF
8.8%
50.0%
A$3.10
-41.6
-1,638.8
-116.7
-116.7
-116.7
EV / EBITDA multiple
7.0x
50.0%
A$2.47
138.4
-1,390.2
156.5
159.7
177.0
Weight valuation
-23.6
-40.9
-50.4
-48.6
-47.1
Discount / premium
114.8
101.0
106.1
111.1
129.9
Price Target
-27.9
-33.8
-32.9
-34.4
-40.3
86.9
-1,464.8
73.2
76.6
89.6
Key metrics/ multiples
Impa i rments , a morti s a ti on & one-offs 14.8
1,617.1
66.8
66.8
66.8
P / E (underlying)
152.3
140.0
143.5
156.5
Profit and loss (A$m)
Underlying NPAT
101.7
FY18 Guidance - $1.9 to 2.0bn Revenue and $370-390m EBITDA , Underlying NPAT of A$140-150m Capex of A$246-266m (inc A$56m on ASC @ 75c AUD/USD) June 2018 net debt of A$1-A$1.1bn, implying zero free cash flow for FY18 (excluding possible divestments)
Cash flow statement
Operating cash flow Total capex & capitalised items Free Cash Flow Acquisitions and divestments Other Investing cash flow Investing cash flows Increase / decrease in Equity Increase / decrease in Debt Divs & other fin cash flows Financing cash flows
Share Price
A$2.99
WACC / Multiple
Weighting Valuation
A$2.78 0.0% A$2.78 Jun-17A
Jun-18E
Jun-19E
12.1
13.2
13.0
11.9
Normalised EPS growth
-17.6%
-8.3%
1.9%
8.7%
PEG EV / EBITDA Dividend yield Operating cash flow yield Free cash flow yield
-0.69 8.6 2.0% 7.1% -4.3%
-1.60 7.8 0.0% 12.5% -0.6%
6.84 7.5 0.0% 15.1% 2.4%
1.37 6.8 0.0% 16.2% 5.4%
0.80
0.78
0.76
0.73
Jun-17A
Jun-18E
Jun-19E
Jun-20E
618.0
621.0
625.0
625.0
Normalised EPS
0.25
0.23
0.23
0.25
Ordinary dividends
0.06
0.00
0.00
0.00
Total dividends
0.06
0.00
0.00
0.00
Ordinary div payout ratio
24%
0%
0%
0%
Jun-16A 135.6
Jun-17A 131.5
Jun-18E 232.4
Jun-19E 281.2
Jun-20E 301.2
-66.9
-211.3
-243.3
-237.0
-200.3
68.7
-79.8
-10.9
44.2
100.9
23.7
-817.8
0.0
0.0
0.0
Per share data
-0.3
-0.3
0.0
0.0
0.0
Diluted shares on issue
-43.5
-1,029.3
-243.3
-237.0
-200.3
1.3
673.4
0.0
0.0
0.0
100.9
202.6
-25.0
-25.0
-50.0
-81.2
-73.1
0.0
0.0
0.0
21.1
802.9
-25.0
-25.0
-50.0
Jun-16A
Jun-17A
Jun-18E
Jun-19E
Jun-20E
128.6
50.2
14.3
33.6
84.5
144.4
167.1
181.6
268.2
298.6
60.7
110.2
127.0
127.7
130.1
P/B
Result quality Balance Sheet Cash And Deposits Debtors Other current assets Total Current Assets Fixed Assets Goodwill & Intangibles Other non-current assets Total Non-Current Assets TOTAL ASSETS Short Term Debt Creditors Other current liabilities Total Current Liabilities Long Term Debt Other Non current liabilities Total Non -Current liabilities TOTAL LIABILITIES Issued capital Retained earnings Other reserves and FX TOTAL EQUITY
Market Cap A$1,856.8m
Jun-20E
Jun-17A
Jun-18E
Jun-19E
Jun-20E
Cash flow conversion
57.0%
85.3%
95.4%
95.6%
FCF vs. EBITDA
-23.8%
-2.9%
11.6%
24.8%
FCF / Book Equity
-3.5%
-0.5%
1.8%
4.0% Jun-20E
333.7
327.5
322.9
429.5
513.2
Gearing
Jun-17A
Jun-18E
Jun-19E
522.4
1,543.0
1,689.4
1,820.8
1,908.3
Net Debt
1,029
1,040
996
895
3,757.1
2,212.1
2,095.4
1,978.7
1,862.0
Net Debt / Equity
44.7%
43.8%
40.6%
35.2% 2.2
80.9
89.0
89.0
89.0
89.0
Net Debt / EBITDA (x)
3.1
2.8
2.6
4,360.3
3,844.1
3,873.8
3,888.6
3,859.3
EBIT interest cover (x)
-34.0
3.1
3.3
3.8
4,694.0
4,171.6
4,196.7
4,318.1
4,372.5
Invested Capital
3,477
3,471
3,467
3,456
Enterprise Value
2,877
2,897
2,865
2,764 Jun-20E
4.0
13.7
105.4
102.9
97.9
289.0
254.8
231.7
301.5
316.3
107.6
128.3
128.3
128.3
128.3
Growth ratios
Jun-17A
Jun-18E
Jun-19E
400.6
396.8
465.4
532.7
542.5
Revenue
119.1%
4.8%
-0.7%
5.7%
872.4
1,065.8
949.0
926.5
881.5
Operating costs
145.1%
-7.6%
-4.3%
4.9%
EBITDA
246.8
405.9
405.9
405.9
405.9
1,119.2
1,471.7
1,354.9
1,332.4
1,287.4
EBIT
54.7%
10.3%
3.2%
6.5%
-1104.8%
-111.3%
2.0%
10.8%
1,519.7
1,868.5
1,820.4
1,865.1
1,829.9
0.0
0.0
0.0
0.0
0.0
Underlying NPAT
49.8%
-8.1%
2.5%
9.0%
Underlying EPS
-17.6%
-8.3%
1.9%
57.2
-1,494.4
-1,494.4
-1,494.4
8.7%
-1,494.4
Operating cash flow
-3.1%
76.8%
21.0%
3,117.0
3,797.5
3,870.7
7.1%
3,947.4
4,037.0
Free cash flow
-216.1%
-86.4%
507.3%
128.3%
3,174.3
2,303.1
2,376.3
2,452.9
2,542.6
Margin analysis
Jun-17A 41.8% 18.4% -76.4% 33.4% 8.4% 6.6% 13.2% -40.0%
Jun-18E 40.0% 19.4% 8.2% 31.0% 7.3% 5.9% 11.4% 4.5%
Jun-19E 40.0% 20.1% 8.4% 31.0% 7.6% 5.8% 10.2% 4.6%
Jun-20E 40.0% 20.3% 8.8% 31.0% 7.8% 6.2% 10.0% 5.1%
Gross profit EBITDA Margin EBIT margin Tax rate NPAT margin ROE ROTE ROIC
SOURCES: MORGANS, COMPANY REPORTS
35
Telecommunications│Australia│Equity research│February 1, 2018
NEXTDC (NXT, ADD, A$6.39 PT) Reporting date: to be confirmed but typically late February. Earnings guidance: NXT have guided to FY18 revenue $146-154m (including ~$4m interest income); EBITDA of A$56-61m and capex of $220-240m. This guidance excludes any impact from the Asia Pacific Data Centres (APDC) dispute. Investment view: We view NXT as an attractive way for people to invest in a number of strong structural growth thematics including connectivity between Cloud Computing operators, Big Data, Artificial Intelligence, connected devices and more broadly growing digitisation and mobility. Based on the current data centres alone NXT looks fairly fully valued however we see significant upside on filling the Generation 2 facilities which will triple NXT’s facility size and, in our view, could quadruple EBITDA. We think when the facilities are full EBITDA could be A$250-300m which could justify A$10 per share (on 12x EBITDA) or A$14 per share if we apply 16x EV/EBITDA (and using A$600m net debt). At this junction in time there are a number of uncertain elements including mix (wholesale versus retail), capex and revenue per MW, time to fill, potential changes from the competitive landscape, and market valuations which means the final number is unknown. Noteworthy items
It is possible that after several disappointing years P1 and C1 could positively surprise as their appeal has been improved with the installation of Amazon Points of Presence in both and a revamp of C1.
Collectively the Generation 1 facilities are ~75% utilised so we think the focus will be on NXT’s ability to fill the new and much larger M2 and B2 (as well as build progress on S2 which is due to go live in 1H19 and is already 17% sold).
Some investors have been discouraged due to an absence of M2 contract wins but given NXT has contracted around 35MW of capacity any deal would need to be around 2MW to be “material”. It is possible that NXT has signed a number of 1 MW deals in M2 and has not needed to disclose these. That said our forecasts do not include any material contributions from MW deals in M2 in FY18 or FY19 so should this not be the case we are not overly concerned.
We expect power costs to jump 43% yoy to A$13m or 19% of revenue due to by higher power prices and higher power draw (higher customer usage). We expect NXT to roughly absorb 50% of the higher power costs over the year and pass the balance onto customers.
We expect Generation 1 data centre specific EBITDA to increase in excess of A$10m as the facilities fill but this some of this will be absorbed by higher costs associated with generation 2 facilities which are being built or turned on (B2 and M2 facility costs came online in 1H18).
No quantifiable costs for APDC have been disclosed on this but we expect NXT’s purchase of AJD stock and legal costs surrounding the dispute to total around A$60m in 1H18.
36
Telecommunications│Australia│Equity research│February 1, 2018
Result expectations Figure 45: 1H18 result expectations 1H15 Operating revenue Direct costs Gross profit Gross profit margin Operating costs EBITDA EBITDA margin Depreciation EBIT Net Interest Expense PBT Tax NPAT (reported)
2H15
1H16
2H16
1H17
2H17
1H18
1H18 / 1H18/ 1H17 2H17 79.0 23% 12% 17.7 92% 41% 61.3 13% 6% 77.6% 29.6 17% 6% 31.7 9% 7% 40.1% -11% -4% 15.3 18% 2% 16.4 7% 13% 9.5 68% 10% 7.0 -35% 18% 0.0 7.0 -35% 18%
2H18
28.0 2.5 25.5 91.1% 22.5 3.0 10.7% 7.0 -4.0 1.9 -5.8 0.0 -5.8
30.7 3.1 27.6 90.0% 22.6 5.0 16.3% 7.2 -2.2 2.2 -4.4 0.0 -4.4
42.1 3.7 38.5 91.3% 27.1 11.4 27.0% 7.5 3.8 3.2 0.6 0.0 0.6
47.2 5.6 41.5 88.1% 25.2 16.3 34.6% 10.2 6.1 5.0 1.1 0.0 1.1
56.0 7.0 48.9 87.4% 25.0 23.9 42.7% 10.8 12.6 5.1 7.6 0.0 7.6
61.6 9.6 52.0 84.5% 27.6 24.4 39.7% 12.5 11.9 7.8 4.1 0.0 4.1
68.9 13.5 55.4 80.4% 29.3 26.2 38.0% 12.7 13.4 8.5 4.9 0.0 4.9
Operating cashflow Capex Free Cash Flow Adjusted cash flow conversion Capex / revenue Capex / depreciation
0.7 -10.0 -9.4 56% 36% 144%
1.9 -13.0 -11.1 72% 42% 180%
5.9 -37.4 -31.5 72% 89% 496%
20.6 -49.9 -29.3 145% 106% 488%
24.9 -84.6 -59.6 105% 151% 783%
24.3 -59.0 -34.7 140% 96% 471%
25.1 -150.0 -124.9 129% 218% 1178%
26.3 -78.0 -51.7 113% 99% 511%
1% 77% 109% 22% 44% 51%
3% 154% 260% -8% 127% 150%
Net Debt Equity Shares on issue Annualised statistics Net Debt / EBITDA EBIT / Equity + Net Debt EBITDA / Gen 1 capex EBIT / Gen 1 capex Gen 1 capex
-2.9 218.1 196.9
7.0 214.9 198.0
-67.1 331.3 249.5
-31.8 333.1 250.6
-115.5 501.8 289.9
-72.4 506.5 291.0
115.6 511.4 291.1
169.8 518.4 291.2
-200% 2% 0%
-260% 1% 0%
-0.5 -4% 30% -40% 20.0
0.7 -2% 26% -11% 39.0
-3.0 3% 30% 10% 75.0
-1.0 4% 24% 9% 134.2
-2.4 7% 27% 14% 174.5
-1.5 5% 22% 11% 226.0
2.2 4% 18% 9% 297.0
2.7 5% 21% 11% 308.0
-191% -34% -36% -37% 70%
-249% -22% -19% -14% 31%
SOURCES: MORGANS, COMPANY REPORTS
Key FY18 result focus points:
Capex – we forecast A$150m of DC build capex in 1H18 comprising of A$70m on Gen 1 installs (in order of size of spend this covers S1, M1 and C1), A$40m on B2 and M2 fitouts and A$40m on the S2 building (not land is owned by a third party but NXT owns and funds the building and data centre).
We expect NXT to add around 900 cross connections in 1H18 which would take the total to ~7,000 or around 6% of total revenue.
We forecast Active MWs to increase by 1.5 to 34MW. This comprises of B2+0.6MW, P1 + 0.4MWs, S1 +0.3MW, and C1 +0.2MWs.
We forecast contracted MWs to increase by 7 to 37MW (including the 5MW NXT signed in S2 in late December 2017).
We estimate P1 is ~35% active (from 27% in 2H17) and C1 is 8% active (from 6% in 2H17).
37
Telecommunications│Australia│Equity research│February 1, 2018
Figure 46: Sales for the halves and contracted utilisation New sales contracted B1 sales contracted M1 sales contracted S1 sales contracted P1 sales contracted C1 sales contracted B2 sales contracted M2 sales contracted S2 sales contracted Total sales contracted B1 utilisation of Max power M1 utilisation of Max power S1 utilisation of Max power P1 utilisation of Max power C1 utilisation of Max power Gen 1 utilisation of Max power B2 utilisation of Max power M2 utilisation of Max power S2 utilisation of Max power Total utilisation of Max power
2H15 178 4,500 2,400 300 38 0 0 0 7,416 91.0% 77.0% 43.4% 13.0% 3.8% 48.8% 0.0% 0.0% 0.0% 17.1%
1H16 270 125 560 80 45 0 0 0 1,080 93.2% 86.2% 52.2% 15.0% 3.8% 55.5% 0.0% 0.0% 0.0% 19.4%
2H16 50 1,400 1,686 120 0 0 0 0 3,256 94.0% 88.7% 67.3% 18.3% 4.8% 62.5% 0.0% 0.0% 0.0% 21.8%
1H17 16 380 3,250 200 47 0 0 0 3,893 93.0% 92.7% 79.0% 25.0% 8.3% 69.3% 0.0% 0.0% 0.0% 24.2%
2H17 -20 600 300 400 170 0 0 0 1,450 93.1% 94.7% 86.0% 31.7% 9.4% 73.6% 0.8% 0.0% 16.7% 29.8%
1H18 F 0 300 300 400 50 100 300 5,000 6,450 93.1% 94.7% 87.8% 38.3% 13.5% 75.6% 10.4% 1.0% 16.7% 31.7%
2H18 F 0 0 300 400 200 1,150 0 300 2,350 93.1% 94.7% 89.7% 45.0% 17.7% 77.6% 16.7% 2.1% 16.7% 33.4%
SOURCES: MORGANS, COMPANY REPORTS
Figure 47: Active utilisation (NXT sold 5MW in S2 which is not shown fully on this chart as it takes 2.5 year for full ramp-up)
SOURCES: MORGANS, COMPANY REPORTS
Risks and rewards NXT is a very capital intensive business so the ability to access funding (debt and or equity) on an ongoing basis, lower its cost of capital and fund future expansion is the key operational risk, in our view. NXT current sits of substantial cash and liquids. We expect net debt to increase from -$72m (net cash) in FY17 to A$170m of net debt in FY18 as NXT builds its new facility (and excluding AJD). NXT is utilising A$300m of bonds but have not yet drawn the A$300m of senior debt which it has access to from NAB. The Generation 1 building currently generates ~A$60m of EBIT after corporate overheads and this is without Perth and Canberra having a meaningful impact. We now also have an idea of NXT’s ideal gearing range, which helps investors understand NXT’s selffunding capacity. Another short term risk relates to NXT and TGP’s ongoing dispute with respect to Asia Pacific Data Centre which owns the land and buildings in Sydney, Melbourne and Perth where NXT’s DC’s operate. We expect the resolution of this dispute could be some time away and could be in the form of an alternative owner of the Asia Pacific Data Centre assets (rather the TGP). This could be NXT or an friendly or unfriendly party but we expect a change of ownership
38
Telecommunications│Australia│Equity research│February 1, 2018
would necessitate a friendly relationship with NXT and the eventual owner, however this is not guaranteed. Given NXT is considered an infrastructure investment by many, its valuation is susceptible to swings around bond rates. Higher interest rates mean the same dollar of earnings 10 years out is worth less in today’s dollars. Consequently while NXT’s cashflow and earnings do not swing around on interest rate movements, its equity value does, in the eyes of some investors. Consequently rising interest rates are, in our view, a share price risk for NXT. Perversely NXT is now lowering its cost of debt as the business has dramatically matured over the last five years and as such its cost of capital is and should continue to decline in the face of rising interest rates. This aside, the key share price risk (upside and downside) relates to the rate of sales and whether it plateaus, slows or accelerates. Faster customer demand (in the form of racks and/or whitespace) would lead to share price appreciation due to a higher fill rate (and NXT now being able to fund). Conversely, slower demand may disappoint relative to market expectations. In our view, while NXT is likely to win a substantial number of whitespace deals over the course of FY18, this style of deal typically takes 12-36 months to ramp up to paying 100%, and hence we caution about too much optimism with respect to FY19. We are very optimistic about the medium term as are Frost and Sullivan, which forecast the APAC data centre market to grow at a 14.7% CAGR from 2016 to 2022. Changes to forecasts Forecast changes predominately reflect updating our model to include the 5MW higher sales and capex in S1 which consequently edges FY19 depreciation higher. Otherwise we have made immaterial forecast changes but do highlight that our forecasts do not include APDC related costs which will mean reported numbers may track slightly lower once the costs are known. Figure 48: Changes to forecasts and valuation 2018F 2018F % 2019F 2019F old revised change old revised % change 148.1 147.9 -0.2% 183.8 184.2 0.2% 57.9 57.9 -0.1% 75.4 75.9 0.7% 11.8 11.9 0.7% 16.1 15.4 -4.1% 4.0 4.1 2.0% 5.6 5.3 -5.4% 19.9 19.9 -0.2% 25.9 26.1 0.7% 291.0 291.2 0.1% 291.4 291.4 0.0% -228.0 -228.0 0.0% -111.0 -135.0 21.6% $6.58 $6.73 2.2% $5.27 $5.37 1.8% 29x unchanged na 75% 75% $6.25 $6.39 2.2% 0% 0% na $6.25 $6.39 2.2%
Revenue EBITDA NPAT EPS EBITDA per share Shares on issue CAPEX DCF EV/EBITDA DCF weighting Weighted valuation Premium / (discount) Price target
SOURCES: MORGANS, COMPANY REPORTS
39
Telecommunications│Australia│Equity research│February 1, 2018
Figure 49: NXT financial summary Profit and Loss
Total Operating Revenue Gross profit Operating Costs EBITDA Depreciation & Amortisation EBIT Net Interest Pre-tax Profit Tax Reported Profit Exceptional items Normalised Profit
Jun-18E Jun-19E
Jun-20E
NEXTDC - valuation details
Jun-16A
Jun-17A
89.3
117.8
147.9
184.2
217.7
Share Price
$5.70
79.5 51.7 27.7
101.1 53.2 47.8
116.7 58.8 57.9
146.9 71.0 75.9
171.9 72.0 99.8
Price Target Total shareholder return Recommendation
$6.39 12.1% ADD
-17.8
-23.3
-28.0
-35.0
-40.8
10.0
24.5
29.9
40.9
59.0
-8.2 1.8
-12.8 11.7
-18.0 11.9
-22.0 18.9
0.0 1.8
0.0 23.0
0.0 11.9
0.0 1.8
11.3 * 11.7
TBA 11.9
Market Cap A$1,658.7m
WACC
9.6%
Weighting Valuation DCF
75%
$6.73
-17.5 41.5
EV/EBITDA Weight valuation
25%
$5.37 $6.39
-3.4 15.4
-10.9 30.6
Premium / discount (%) Price Target
0.0 15.4
0.0 30.6
NB FY18 guidance excludes any impact from AJD / Asia Pacific Data Centre FY18 guidance revenue $146-154m (inc ~$4m interest income) EBITDA $56-61m, Capex $220-240m * FY17 includes a one-off tax benefit which is non-cash
Cash flow statement Jun-16A Jun-17A Jun-18E Jun-19E Jun-20E EBITDA 27.7 47.8 57.9 75.9 99.8 Net interest -7.3 -9.5 -18.0 -22.0 -17.5 Tax 0.0 0.0 0.0 -3.4 -10.9 Changes in working capital 1.9 10.9 11.5 9.1 -6.6 Operating cash flow 22.3 49.3 51.4 59.6 64.7 Capex -87.3 -143.6 -228.0 -135.0 -83.0 Free Cash Flow -65.0 -94.3 -176.6 -75.4 -18.3 Acquisitions and divestments 0.0 0.0 0.0 0.0 0.0 Other Investing cash flow -2.1 -5.0 -65.6 -5.0 -5.0 Investing cash flows -89.4 -148.6 -293.6 -140.0 -88.0 Increase / decrease in Equity 120.3 146.5 0.0 0.0 0.0 Increase / decrease in Debt 100.0 38.0 0.0 0.0 0.0 Other financing cash flows -14.7 0.0 0.0 0.0 0.0 Financing cash flows 205.6 184.5 0.0 0.0 0.0 Balance Sheet Jun-16A Jun-17A Jun-18E Jun-19E Jun-20E Cash and Deposits 191.4 368.3 126.2 45.8 22.5 Debtors 18.1 16.2 10.8 6.7 15.6 Inventory 12.0 11.3 11.8 14.6 17.1 Other current assets 302.7 434.3 634.3 736.4 780.8 Total Current Assets 524.2 830.1 783.1 803.5 836.1 Fixed Assets 0.0 0.0 0.0 0.0 0.0 Investments 0.0 0.0 0.0 0.0 0.0 Goodwill & Intangibles 4.3 8.5 74.1 76.9 79.7 Other non-current assets 1.8 13.8 13.8 13.8 13.8 Total Non-Current Assets 6.1 22.3 87.9 90.7 93.4 TOTAL ASSETS 530.2 852.4 871.0 894.2 929.5 Short Term Debt 0.0 0.0 29.6 29.6 29.6 Creditors 27.0 38.6 45.3 53.1 57.9 Other current liabilities 2.7 0.3 0.3 0.3 0.3 Total Current Liabilities 29.7 38.9 75.2 83.0 87.8 Long Term Debt 159.5 296.0 266.4 266.4 266.4 Other Non current liabilities 7.9 11.0 11.0 11.0 11.0 Total Non-Current liabilities 167.4 306.9 277.4 277.4 277.4 TOTAL LIABILITIES 197.1 345.9 352.6 360.3 365.1 Issued capital 375.5 524.5 524.5 524.5 524.5 Retained earnings -45.9 -22.9 -11.0 4.4 35.0 Other reserves and FX 3.5 5.0 5.0 5.0 5.0 TOTAL EQUITY 333.1 506.5 518.4 533.9 564.4
Key metrics / multiples
0.0% $6.39 Jun-17A
Jun-18E
Jun-19E
P/E EPS growth (normalised) EV / EBITDA Price / Book Value Price / Assets
141.8 422.5% 33.2 3.3 1.9
139.7 1.5% 31.6 3.2 1.9
107.6 29.9% 25.2 3.1 1.9
Operating cash flow yield
3.0%
3.1%
3.6%
n.m.
-10.6%
-4.5%
42.3% Jun-17A
20.8% Jun-18E
31.1% Jun-19E
Free cash flow yield EBITDA per share growth
Per share data Diluted shares on issue
291.0
291.2
291.4
Normalised EPS (A$)
0.04
0.04
0.05
EBITDA per share
0.16
0.20
0.26
Book value per share Asset value per share
1.74 2.93
1.78 2.99
1.83 3.07
Jun-17A
Jun-18E
Jun-19E
296.0 -72.4
296.0 169.8
296.0 250.2
Gross Debt / Assets
35%
34%
33%
Gross Debt / Equity Net Debt / EBITDA (x) EBITDA interest cover (x)
58% -1.5 3.7
57% 2.9 3.2
55% 3.3 3.5
Gearing Gross Debt Net Debt
Gross Debt / Equity
58%
57%
55%
445.1 Jun-17A
699.7 Jun-18E
793.2 Jun-19E
32.0% 72.5% 145.8%
25.5% 20.9% 21.8%
24.6% 31.2% 36.9%
Margin analysis
Jun-17A
Jun-18E
Jun-19E
Gross profit margin EBITDA Margin EBIT margin
85.8% 40.6% 20.8%
78.9% 39.1% 20.2%
79.8% 41.2% 22.2%
Invested Capital
Growth ratios Revenue EBITDA EBIT
NPAT margin EBITDA / Invested Capital ROIC (EBIT / IC) ROE Cash flow conversion
Contracted utilisation Brisbane (B1+ B2 in 1H18) Melbourne (M1+ M2 in 1H18) Sydney (S1 + S2 in 1H19) Canberra
9.9%
8.0%
8.4%
10.7%
8.3%
9.6%
5.6%
4.3%
5.2%
2.3% 122.9%
2.3% 120.0%
2.9% 112.1%
Jun-17A
Jun-18E
Jun-19E
2.1 13.9 13.5
3.3 14.6 19.1
4.3 16.6 20.2
0.4
0.7
1.3
Perth TOTAL MW contracted
1.5 31.4
2.3 40.0
3.0 45.4
Contracted / installed MW Contracted / Max MW
87% 33%
78% 32%
73% 36%
SOURCES: MORGANS, COMPANY REPORTS
40
Telecommunications│Australia│Equity research│February 1, 2018
SpeedCast (SDA, HOLD, A$5.62 PT) Earnings guidance: SDA is a December year end so this will be its full year result. Management noted they are comfortable with consensus pro-forma EBITDA of US$122m EBITDA. This excludes HCR integration costs as well as UltiSat acquisition costs and earnings (UltiSat settled on 1 November 2017.) Reporting date: Wednesday 27th February. Investment view Around 12 months ago we added SDA to our high conviction buy list on the view that achievement of earnings would result in a substantial share price rerating. The only catch was we moved to a Hold when SDA unexpectedly made another acquisition in July 2017. Our view was they should concentrate on integrating the HCR acquisition which doubled the size of the business. Now that 2017 has concluded it appears that HCR was largely integrated in FY17 as there have been no market revisions, the oil price has been very strong and SDA reiterated earnings confidence in November 2017. All three are positives for the SDA share price which has rallied around 45% over the last 12 months. In our view there is further upside potential on an Oil and Gas (O&G) recovery but we await confirmation that the cashflow from the business (and SDA’s net debt position) are in-line with expectations and the integration is progressing well. Noteworthy items
Cashflow and Net Debt – we remain focused on SDA’s operating cashflow and the implications for net debt. The Harris Cap Rock (HCR) acquisition doubled the size of the business (in terms of earnings and share count) so we are conscious of ensuring that this acquisition has been de-risked through deep integration and cashflow generation. Including UltiSat (which SDA acquired in November 2017) SDA expect Net Debt of around US$369m.
In 2H17 UltiSat should contribute two months of earnings or US$2m of EBITDA to SDA but this is likely to neutralised by around US$2m in deal costs. So the net impact is likely to be zero in FY17 and then US$12m plus of EBITDA in FY18 (as it contributes 12 months and has no deal costs but ~US$1m in integration costs).
We expect SDA to declare a 5cps (AU) final dividend representing a payout ratio of ~25% of underlying cash NPATA per share in 2H17.
US tax rates – as we understand it around 85% of SDA’s revenue is US$ and an increasing part of their business is with America customers so we would expect upside on lower US tax rates but await clarification from SDA on this point.
41
Telecommunications│Australia│Equity research│February 1, 2018
Result expectations Figure 50: FY17 result expectations US$
FY17 / FY16 153% 369% 205%
2H17 / 1H17 24% 53% 31%
134% 158% 53% 32%
278% 128% 123% 107%
70.1 -30.6 39.5
157% 346% 93%
-12% 180% -65%
360* 290.3
369.0 302.7
2% 4%
11% 0%
94% 50%
184% 59%
61% 51%
7% 23%
-4% 7%
1% 16%
1H16A
2H16 A
1H17A
2H17F
FY16
FY17 F
Revenue EBITDA (reported) EBITDA (pro-forma / underlying) One-offs NPAT (reported) NPATA (pro-forma / underlying) NPATA per share (pro-forma / underlying) DPS (AUD) DPS (USD using 70c FX) Payout ratio (US$ div / NPATA per share)
101.5 19.1 17.0 -2.1 5.8 8.2 6.8 3.7 2.6 38%
116.5 5.0 23.0 18.0 -17.5 11.0 6.7 2.4 1.7 25%
246.3 41.3 52.8 11.5 -5.7 15.1 6.4 2.4 1.7 26%
304.3 63.0 69.2 6.2 10.2 34.4 14.3 5.0 3.5 24%
218.0 22.2 40.0 17.8 -13.1 19.2 13.5 5.6 3.9 29%
550.6 104.3 122.0 17.7 4.5 49.5 20.7 7.4 5.2 25%
Operating cashflow Capex Free cashflow
11.2 -5.4 5.8
16.1 -7.6 8.5
37.3 -8.0 29.3
32.8 -22.5 10.2
27.3 -6.9 20.5
Net Debt Book value equity
95.7 32.0
360* 290.3
333.0 302.7
369.0 302.7
Adjusted cash flow conversion vs reported EBITDA DPS (in USD) / NPATA
82% 77%
532% 51%
112% 54%
ROE (Reported NPAT x 2 / Book value equity) 36% -12% -4% ROE (PF NPAT x 2 / Book value equity) 51% 8% 10% * Adjusted to include the HCR acquisition which technically settled in Jan 2017
SOURCES: MORGANS, COMPANY REPORTS
Key FY17 result focus points
Cashflow – we forecast operating cashflow of US$71m and free cashflow of US$39m for FY17 (after interest and tax but before the paying for the UltiSat acquisition and dividends).
Including UltiSat SDA expects Net Debt of around US$369m. In absolute terms this is up US$13m yoy but relative to EBITDA is down from >3.0x to 2.8x (on SDA’s guidance). Management noted at the 1H17 result that they expect cashflow to result in net debt dropping below 2.5x during 1H18.
Debt and Goodwill will move around with currency (A$ mostly) as FX impacts the mark-to-market of debt and goodwill. We understand that around 85% of SDA’s revenue is US denominated so currency volatility should be less significant this year than in previous years.
Roughly speaking every 1 cent increase in the AUD relative to the USD takes ~1.5% off the valuation. Our last valuation was A$4.77 (based on an AUD/USD of 0.76) but this drops to A$4.47 if we mark-to-market at 81c. Our house forecast is for AUD/USD to remain at 76c in CY18 (as it was for CY17).
Earnings – we understand that SDA’s organic EBITDA growth was ~3% in 1H17. Underlying EBITDA was US$52m but the exit rate was US$60m.
Harris CapRock and the oil price o
When SDA acquired HCR it paid 7x historical EV/EBITDA and HCR’s trailing revenue (to 30 June 2016) was US$363m. Revenue continued on a downward trajectory in FY17 and SDA noted (at their 1H17 result) that a ~20% decline was in the ballpark.
o
We forecast HCR will generate US$290m of revenue for SDA FY17 (a 20% decline). We also forecast a 10% decline in FY18. HCR revenue was ~US$400m at the peak so there is upside on a prolonged recovery, although SDA are quick to caution that this is a long lead business, so don’t expect an uplift until 2H18 at the earliest.
42
Telecommunications│Australia│Equity research│February 1, 2018
o
In August 2017 SDA increased HCR synergy expectations from US$24m to US$30m. This US$30m is expected to be delivered by the end of CY2018 (i.e. seen in totality in FY19).
o
Management noted that in mid November 2017 they were >90% through the HCR integration. They had originally targeted 96% integration by the end of October but delayed their account system rollout to 1 January 2018 to make for a smoother migration (instead moving systems at the start of the new financial year which makes for a much simpler migration).
SDA’s capex runs well below depreciation as SDA migrates HCR from being asset heavy (an asset builder) to asset light (a reseller business). Capex was 4% of revenue in 1H17 but guided to 5-6% of revenue for the full year FY17 so we expect capex to revenue of ~7% in 2H17.
Outlook from the 1H17 was for comfort in FY17 consensus PF EBITDA of US$122m (plus UltiSat). Looking into FY18 SDA commented that they expect “strong growth in FY18 EBITDA” and expected net debt to reduce to EBITDA of 2.5x by 30 June 2018. (1H17 presentation page 16)
We forecast FY18 PF EBITDA of US$149m comprising of: o
an FY17 exit rate of US$122m;
o
plus US$9m of HCR synergies (announced at the HCR acquisition);
o
plus an additional US$6m HCR synergies (1H17 presentation page 17);
o
plus US$12m from the UltiSat acquisition;
o
We don’t expect any UltiSat deal costs to fall into FY18 (since it settled in November 2017) but netting PF EBITDA lower (on a reported basis) will be costs associated with synergy extraction from both HCR and UltiSat. We will look for clarification of costs to extract synergies.
Baker-Hughes global rig count starting to creep higher… With the benefit of hindsight SDA appears to have acquired HCR very close to bottom of the stick (and on a reasonably cheap multiple). Since it completed the acquisition the oil price and Baker-Hughes global rig count have both headed meaningfully higher. Figure 51: Baker-Hughes global rig count (LHS) and Brent Oil Global Spot (USD; RHS) Harris Caprock acquisition
4000 3500
200.00 180.00 160.00
3000
140.00 2500
120.00 100.00
2000
80.00
1500
60.00 1000
40.00 500 0 1990
20.00 0.00 1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014
2016
2018
SOURCES: BAKER-HUGHES, FACTSET
43
Telecommunications│Australia│Equity research│February 1, 2018
Changes to forecasts We have rolled forward our valuation from FY17 to FY18 and updated house FX rates for our earnings. We note that the AUD has been strong relative to the USD (over 80c for a while now). Our house forecast is for 76c in CY2018 but should this get revised higher i.e. 80c then this represents downside risk to our valuation (as the US$ earnings convert to less in AU$). Figure 52: Changes to forecasts and valuation 2017 old 550.6 104.3 31.1 49.5 20.7 1.9 7.4 241.7 $2.14 $5.11 $3.62 0.76 $4.77
Revenue EBITDA EBIT Normalised NPAT Norm EPS Reported EPS DPS Shares on issue EV/EBITDA valuation DCF Weighted valuation USD to AUD conversion
Price target
2017 new 550.6 104.3 31.1 49.5 20.7 1.9 7.4 241.7 $3.09 $5.45 $4.27 0.76 $5.62
% change 2018 old 2018 new % change 0.0% 608.5 610.5 0.3% 0.0% 152.4 152.9 0.4% 0.0% 76.3 76.9 0.7% 0.0% 62.1 62.5 0.6% 0.0% 25.7 25.9 0.6% 0.0% 16.9 17.0 1.0% 0.0% 8.7 8.7 0.6% 0.0% 44.3% Rolled forward to FY18 6.8% Rolled forward to FY18 17.9% 0.0% Rolled forward to FY18 (unchanged) 17.9% SOURCES: MORGANS, COMPANY REPORTS
Risks and rewards In prior notes we highlighted our view was that the investment market (and us) were uncertain about the earnings profile and/or defensiveness of SDA and that the key operational risks for SDA relates primarily to successful integration of the HCR acquisition to create surplus free cash flow, pay down debt and de-risk the business for equity holders. History is littered with acquisitive company that did not fully integrate acquisitions and pay down debt. This remains, in our view, the key upside and downside risk for SDA’s share price. If the company sticks to its goal stated at the 1H17 result “no additional material acquisitions are expected in the near term” and focuses on integration, organic growth and deleveraging this has the potential to create, in our view, substantial equity value. Failure to do so could have the opposite impact. To-date the company appears to have integrated a number of acquisitions successfully (although it’s difficult to tell as we haven’t had a clean /acquisition free set up results for a number of years and one-offs complicate matters). Failure to successfully integrate acquisitions (to realise synergies and economies of scale) and/or to extract the expected EBITDA and cashflow could result in disappointment. Conversely successful integration and/or a recovery in customer spend, especially with respect to the higher oil & gas price/ expenditure could create substantial upside risk.
44
Telecommunications│Australia│Equity research│February 1, 2018
Figure 53: SDA financial summary Profit and loss (US$m)
SpeedCast - valuation details
Dec-15A
Dec-16A
Dec-17E
Dec-18E
Dec-19E
167.6 22.9
218.0 22.2
550.6 104.3
610.5 152.9
621.2 159.5
Share Price Share Price
Depreciation
-7.4
-11.6
-44.4
-44.9
-45.5
Upside
Amortisation & impairments EBIT Net Interest Income Pre-tax Profit Tax Reported Profit (ex one-offs) one-offs & other adjustments Normalised Cash Profit
-7.7 7.8
-11.6 -1.0
-28.8 31.1
-31.2 76.9
-32.5 81.5
DCF
-3.6
-7.8
-23.2
-22.0
-20.6
EV/EBITDA multiple
4.3
-8.7
7.9
54.8
60.9
Weight valuation
-2.3 2.0
-4.3 -13.1
-3.5 4.5
-13.7 41.1
-15.2 45.6
USD / AUD conversion rate Premium / Discount to valuation
12.8
32.3
45.0
21.4
21.4
Price Target
14.8
19.2
49.5
62.5
67.0
Key metrics/ multiples
Revenue EBITDA
SDA comfortable with FY17 consensus F (PF EBITDA of US$122m) FY15 FY16 FY17
Pro-forma EBITDA Pro-forma NPATA Pro-forma NPATA per share
Cash flow statement
29.3
40
14.8 12.3
19.2 13.5
Dec-15A
Dec-16A 27.3
Operating cash flow 17.9 Maintenance capex -2.0 Free Cash Flow (pre expansion) 15.9 Total capex (inc expansion) -6.9 Free Cash Flow 11.0 Acquisitions and divestments -61.9 Other Investing cash flow -1.3 Investing cash flows -70.1 Increase / decrease in Equity 0.0 Increase / decrease in Debt 58.6 Divs & other fin cash flows -5.8 Financing cash flows 52.8 Balance Sheet Dec-15A Cash And Deposits 15.1 Debtors 43.3 Other current assets 5.2 Total Current Assets 63.6 Fixed Assets 26.2 Investments 0.2 Goodwill & Intangibles 96.7 Other non-current assets 3.1 Total Non-Current Assets 126.2 TOTAL ASSETS 189.8 Short Term Debt 0.0 Creditors 50.7 Other current liabilities 2.7 Total Current Liabilities 53.4 Long Term Debt 99.4 Other Non current liabilities 9.8 Total Non -Current liabilities 109.1 TOTAL LIABILITIES 162.6 Issued capital 0.0 Retained earnings -56.5 Other reserves and FX 83.7 TOTAL EQUITY 27.2
122
Dec-17E 70.1
149
Dec-18E 99.7
Dec-19E 113.2
Market Cap A$1,319.7m Market Cap US$1,002.98
2.9%
WACC
10.0%
Multiple n.a.
Weighting 50.0%
Valuation US$5.45
7
50.0%
US$3.09 US$4.27
A$5.62 0.76 0% A$5.62
Dec-15A
Dec-16A
Dec-17E
Dec-18E
33.7 17.0%
30.7 9.9%
20.0 53.1%
16.0 25.0%
EV / EBITDA
29.9
41.6
13.2
8.8
Price / Book Value Equity yield Operating cash flow yield Free cash flow yield Dividend yield
22.1 2.5% 1.8% 1.1% 1.2%
3.4 1.9% 2.7% 2.0% 1.0%
3.3 4.9% 7.0% 3.9% 1.4%
3.0 6.2% 9.9% 6.3% 1.6%
P/E Norm EPS growth
FY18
A$5.46 US$4.15
Per share data
-2.5
-5.2
-5.3
-5.4
Dec-15A
Dec-16A
Dec-17E
Dec-18E
24.8
64.9
94.4
107.8
Diluted shares on issue
145.3
239.0
241.7
241.7
-6.9 20.5
-30.6 39.5
-36.6 63.0
-37.3 76.0
Normalised EPS (US$) Normalised EPS (A$)
0.123 0.162
0.135 0.178
0.207 0.272
0.259 0.340
-94.0 0.0 -100.8
-478.8 415.0 -94.4
-20.0 0.0 -56.6
-7.5 0.0 -44.8
Dividends per share (A$) 0.067 Payout ratio (DPS / Norm EPS) 41% Result quality Dec-15A
0.056 31% Dec-16A
0.074 27% Dec-17E
0.087 26% Dec-18E
274.6 276.2 -6.6 544.2
0.0 43.7 -9.4 34.3
0.0 -35.0 -14.5 -49.5
0.0 -40.0 -17.2 -57.2
Cash flow conversion FCF vs. EBITDA FCF / Equity
102.8% 48.1% 40.5%
183.6% 92.0% 7.0%
60.9% 37.9% 13.1%
88.5% 41.2% 19.1%
Gearing
Dec-15A
Dec-16A
Dec-17E
Dec-18E
Dec-16A
Dec-17E
Dec-18E
Dec-19E
Net Debt
84.24
-66.55
369.00
340.47
447.7 77.2 5.8 530.7
47.4 100.0 19.0 166.5
41.0 132.4 20.2 193.5
52.2 143.7 20.5 216.4
Net Debt / Equity 309.3% Net Debt / reported EBITDA (x) 3.67 Net Debt / PF EBITDA (x) 2.88 EBITDA interest cover (x) 6.44
-22.9% -2.99 -1.66 2.86
121.9% 3.54 3.02 4.50
103.4% 2.23 2.29 6.94
44.8 0.2 171.4 5.7
98.0 0.2 576.7 21.4
89.7 0.2 565.5 21.4
81.5 0.2 540.5 21.4
EBIT interest cover (x) Invested Capital Enterprise Value
-0.12 205.1 925.2 Dec-16A
1.34 681.9 1372.0 Dec-17E
3.49 687.3 1343.5 Dec-18E
222.1
696.3
676.9
643.6
Revenue
42.4%
30.1%
152.6%
10.9%
752.8
862.8
870.4
860.1
Operating costs
-12.4%
49.5%
139.7%
-33.5%
0.0 64.4 8.4 72.7
41.6 101.2 8.0 150.9
38.1 117.2 8.0 163.3
34.1 118.4 8.0 160.6
EBITDA EBIT NPAT EPS growth
2074.5% 158.9% -60.9% -107.4%
-3.1% -112.2% 29.7% -510.6%
369.2% -3354.2% 157.7% 127.5%
46.6% 147.1% 26.4% 809.6%
381.2 8.6 389.8
374.8 34.5 409.3
343.3 34.5 377.8
307.3 34.5 341.8
Operating cash flow Free cash flow
63.7% 150.9%
52.3% 85.4%
156.7% 93.4%
42.2% 59.4%
462.5
560.1
541.1
502.3
Margin analysis
Dec-15A
Dec-16A
Dec-17E
Dec-18E
0.0 -57.2 347.5 290.3
0.0 -67.3 369.9 302.7
0.0 -67.3 396.6 329.3
0.0 -67.3 425.0 357.7
EBITDA Margin EBIT margin Tax rate NPAT margin ROIC ROE
13.7% 4.7% 53.4% 8.8% 7.1% 54.3%
10.2% -0.4% -49.3% 8.8% -0.5% 6.6%
18.9% 5.7% 43.7% 9.0% 4.6% 16.3%
25.0% 12.6% 25.0% 10.2% 11.2% 19.0%
Growth ratios
2.20 110.8 687.1 Dec-15A
SOURCES: MORGANS, COMPANY REPORTS
45
Telecommunications│Australia│Equity research│February 1, 2018
Superloop (SLC, ADD, A$2.81 PT) Earnings guidance: SLC has not provided FY18 earnings guidance. Reporting date: Monday 26 February 2018. Investment view: We recently upgraded our SLC recommendation to an Add for the following reasons: 1) Singapore (SG) delivered 165% yoy organic revenue growth which proves customer demand and signals that SLC should generate healthy returns on its substantial asset base; 2) we expect Hong Kong (HK) should follow a similar trajectory, albeit hopefully faster given SLC’s proof point in SG and likely overlapping customers in SG and HK; 3) core network completion (ex the submarine capable) allowing SLC to sell to its strategy; and 4) our view that track record in Singapore combined with a larger and more experienced sales team should see SLC’s revenue growth accelerate. Key to the result will be the sales traction experienced in the 1H. Figure 54: 1H18 results expectations A$m
1H16
2H16
1H17
2H17
1H18F
2H18F
1H18 / 1H17
1H18 / 2H17
Revenue
1.9
5.1
8.2
51.6
55.1
64.7
571.8%
6.7%
COGS
-1.5
-3.6
-5.1
-22.9
-21.9
-27.8
327.7%
-4.4%
Gross profit
0.5
1.5
3.1
28.7
33.2
36.9
977.4%
15.6%
OPEX - reported
-3.8
-3.8
-9.9
-17.8
-20.9
-19.5
110.4%
17.8%
Reported EBITDA
-3.3
-2.3
-6.9
10.9
12.3
17.4
-278.5%
12.0%
OPEX - underlying
-4.0
-3.6
-5.3
-17.5
-20.9
-19.5
296.3%
19.5%
Underlying EBITDA
-3.5
-2.1
-2.2
11.2
12.3
17.4
-656.9%
9.4%
NPAT
-3.9
-3.2
-2.0
0.7
2.2
5.5
-210.9%
197.3%
Gross profit margin EBITDA margin
25%
29%
38%
56%
60%
57%
-180%
-42%
-27%
22%
22%
27%
Operating Cash Flow
-4.3
-2.7
-4.2
9.4
6.6
16.8
-257.1%
-29.8%
Capex
-21.4
-13.6
-26.1
-26.9
-17.8
-40.2
-32.0%
-33.9%
-63.1%
-36.2%
Free Cash Flow
-25.7
-16.3
-30.3
-17.5
-11.2
-23.5
Adjusted cash flow conversion
130%
118%
68%
83%
69%
113%
Capex / revenue
1100%
269%
318%
52%
32%
62%
Capex / depreciation
5749%
1490%
2236%
728%
408%
806%
Net Debt
-35.1
-45.9
-3.1
22.6
12.5
36.0
-501.6%
-44.4%
Equity
100.9
119.7
337.3
333.5
369.9
375.3
9.7%
10.9%
Shares on issue
118.4
135.2
157.1
210.7
230.2
231.2
46.6%
9.2%
5.0
10.9
0.7
1.0
0.5
1.0
Annualised statistics Net Debt / EBITDA NPAT / Equity EBIT / Equity + Net Debt
-0.1
-0.1
0.0
0.0
0.0
0.0
-12%
-10%
-5%
2%
2%
4% SOURCES: MORGANS, COMPANY REPORTS
Noteworthy items from recent AGM
Investors were expecting a trading update at SLC AGM late last year but no specifics were provided. Consequently we believe investors are looking for clarity on both sales traction and costs.
We expect a stronger 2H EBITDA skew as AGM commentary indicated costs may be higher in 1H18 due to more complexity and costs associated with integrating the BGL acquisition and the launch of SLC’s residential broadband offering “Superloop +”. In the shorter term more complexity in integration is a challenge but in the medium term this is also an opportunity as simplification has the potential to extract substantially higher cost savings than originally anticipated.
46
Telecommunications│Australia│Equity research│February 1, 2018
Sales traction: Management noted that 1Q18 was a ‘record sales result from the sales team’, with sales growth occurring across all regions. It was also noted that some existing customers from Singapore had now taken services in Hong Kong, and that Australia was performing well.
Business restructure/rebrand: Superloop is undertaking a business simplification and rebranding, which is expected to occur over the next 12 months. BigAir is becoming “Superloop +” and a residential offering called “Superbb” has also been launched. We understand that all of Superbb’s 40k residential customers come from the BigAir Community Broadband business (internet for student accommodation) and from recent acquisitions of NuSkope and Gx2. CEO, Bevan Slattery, noted that SLC will not be launching the residential offering as a mass market solution (i.e. don't expect a big increase in cost, a big sales campaign or rapid uptake in customers). Instead, we expect an organic progression of the business with sales likely to be referral based.
Figure 55: SLC – overview of headwinds and tailwinds (from AGM presentation)
SOURCES: COMPANY REPORTS
Changes to forecasts: We have made the following changes to our forecasts which largely relate to the incorporation of the Gx2 acquisition recently made and attempting to quantify any additional spend on SLC’s residential Broadband offering. Our FY18 normalised cash adds back deal costs on acquisitions and non-cash amortisation of acquired customer intangibles. Figure 56: Changes to forecasts Revenue Gross profit OPEX EBITDA EBIT Reported NPAT Cash NPAT Reported EPS Normalised / cash EPS Shares on issue DPS DCF Weighted valuation Premium / (discount) Price target
2018 old 119.8 69.3 39.7 29.6 12.7 7.9 14.9 3.6 6.6 225.2 0.7 $2.81 $2.81 0% $2.81
2018 new 119.8 70.1 40.5 29.6 12.4 7.7 15.3 3.5 6.7 230.2 0.7 $2.81 $2.81 0% $2.81
% change 0.0% 1.1% 2.0% -0.1% -2.3% -2.7% 2.7% -3.8% 0.8% 2.2% -4.9% 0.3% 0.3% n.m. 0.3%
2019 old 135.1 79.5 41.2 38.3 19.5 12.9 19.7 5.7 8.7
2019 new 136.0 80.6 41.3 39.3 19.6 13.0 20.3 5.6 8.7
% change 0.7% 1.4% 0.3% 2.6% 0.5% 0.6% 2.8% -1.5% 0.5%
SOURCES: MORGANS, COMPANY REPORTS
47
Telecommunications│Australia│Equity research│February 1, 2018
Valuation
Our DCF valuation and price target remains at $2.81 (unchanged). We recently upgraded our SLC recommendation to an Add for the following reasons: 1) Singapore (SG) delivered 165% yoy organic revenue growth which proves customer demand and signals that SLC should generate healthy returns on its substantial asset base; 2) we expect Hong Kong (HK) should follow a similar trajectory, albeit hopefully faster given SLC’s proof point in SG and likely overlapping customers in SG and HK; 3) core network completion (ex the submarine capable) allowing SLC to sell to its strategy; and 4) our view that track record in Singapore combined with a larger and more experienced sales team should see SLC’s revenue growth accelerate. These four items should prove SLC can deliver attractive returns on its impressive asset base. We retain our Add recommendation and A$2.81 price target. The key risk/reward for SLC remains its ability to monetise the assets through an improving sales trajectory. Risks and rewards The core Hong Kong network including submarine cable TKO Express became operational in 2H17. Incremental capex is likely to be ongoing as SLC progressively builds and expands on the core networks but we expect this is debt and cash flow funded by SLC (acquisition and new regions aside). SLC became EBITDA positive in 2H17 and this gives it the ability to utilise cashflow and debt to fund network expansion (including the submarine cable and small expansions as we understand them to be today). With the major AU, SG and HK capex paid for, the last remaining chunk of capex (as we understand it) is the submarine cable. We forecast A$22m capex in FY18, A$14m in FY19 and A$5m in FY20. We also note that SLC’s recent IRU with VOC has the potential to meaningfully increase the synergies on the BGL acquisitions where a large part of the cost base relates to paying third parties for telco access. SLC’s ability to lower third party carrier costs looks likely to surprise on the upside but we await confirmation from SLC to better understand the upside risk and timing here. We think the key risk/reward for SLC relates to customer demand and its impact on the rate of organic sales generated (i.e. SLC’s ability to monetise the investment in networks) and generating organic EBITDA growth. With the network now reaching three key countries, founder Bevan Slattery’s strategic vision is coming closer to realisation. Should SLC achieve sales at a faster rate than we expect, this is likely to create upside to our valuation and should this occur more slowly there is downside risk.
48
Telecommunications│Australia│Equity research│February 1, 2018
Figure 57: SLC financial summary
Superloop - valuation details
Jun-16A
Jun-17A
Jun-18E
Jun-19E
Jun-20E
Revenue
7.0
59.8
119.8
136.0
146.5
Share Price
COGS
5.1
28.0
49.7
55.4
57.5
Price Target
$2.81
Gross Profit
1.9
31.8
70.1
80.6
89.0
Total shareholder return
21.1%
Total Operating Costs
-7.6
-27.7
-40.5
-41.3
-43.7
EBITDA
-5.6
4.1
29.6
39.3
45.3
Depreciation
-1.3 -0.6 -7.5
-4.9 -4.2 -4.9
-9.3 -7.8 12.4
-11.2 -8.5 19.6
-13.4 -8.6 23.4
0.4 -7.2
-0.7 -5.7
-2.2 10.2
-2.3 17.3
-2.4 21.0
Key metrics / multiples
0.0 -7.2
4.4 -1.2
-2.6 7.7
-4.3 13.0
-5.3 15.8
EV / Revenue EV / EBITDA
0.0 -7.2
3.1 1.8
7.6 15.3
7.3 20.3
7.3 23.1
P/E PEG
Profit and loss
Amortisation & impairments EBIT Net Interest Income Pre-tax Profit Tax Reported Profit Exceptionals &/or non-cash A Normalised / Cash Profit
Price / Net Tangible Assets Operating cash flow yield Free cash flow yield Dividend yield
Jun-16A -5.6 0.4 0.0 -1.4
Jun-17A 4.1 -0.7 0.3 0.3
Jun-18E 29.6 -2.2 -2.6 -1.0
Jun-19E 39.3 -2.3 -4.3 -3.2
Jun-20E 45.3 -2.4 -5.3 0.1
Operating cash flow
-6.7
3.9
23.9
29.5
37.8
Diluted shares on issue
Maintenance capex
-0.2 -6.9
-0.4 3.6
-0.5 23.4
-0.5 28.9
-0.5 37.3
Normalised EPS (A$) Norm EPS growth
Free Cash Flow (post expansion)
-35.0 -41.7
-53.0 -49.0
-58.0 -34.1
-37.2 -7.7
-20.9 16.9
Acquisitions, divestments & IRU's
-4.6
-64.3
-13.0
-1.7
-1.3
0.0 -39.6
0.0 -117.3
0.0 -71.0
0.0 -38.8
0.0 -22.2
EBITDA Net interest Tax Changes in working capital
Free Cash Flow (pre expansion)
Total capex (inc expansion)
Other Investing cash flow Investing cash flows
Per share data
Dividends per share (A$)
Result quality Cash flow conversion FCF vs. NPAT
Increase / decrease in Equity
71.8
75.7
34.2
0.0
0.0
Increase / decrease in Debt Other financing cash flows
0.0 -2.5
-48.4 0.0
15.0 0.0
14.0 0.0
-10.0 0.0
Financing cash flows
69.3
27.3
49.2
0.0
0.0
Jun-16A
Jun-17A
Jun-18E
Jun-19E
Jun-20E
45.9 1.4 0.5 47.7
7.1 10.5 5.6 23.3
9.2 11.5 5.6 26.3
13.8 14.9 5.6 34.3
18.0 16.7 5.6 40.2
66.9 0.0
147.6 0.0
196.3 0.0
222.3 0.0
231.2 0.0
12.4 0.0 79.2
235.5 2.2 385.4
240.7 2.2 439.2
233.8 2.2 458.3
226.6 2.2 460.0
TOTAL ASSETS
127.0
408.7
465.5
492.6
500.2
EBIT
Short Term Debt
0.0 26.5 3.9 30.4
4.5 26.5 3.9 34.8
5.9 26.6 3.9 36.4
4.9 28.5 3.9 37.3
Cash NPAT Norm EPS Operating cash flow
Total Current Liabilities
0.0 6.6 0.5 7.1
Long Term Debt & hybrids
0.0
29.6
40.2
52.8
43.8
Margin analysis
Other Non current liabilities Total Non -Current liabilities
0.1 0.1
15.1 44.8
15.1 55.3
15.1 67.9
15.1 58.9
Gross profit EBITDA Margin
TOTAL LIABILITIES
7.2
75.2
90.2
104.3
96.2
0.2 -11.7 131.2 119.7
-4.9 -12.9 351.3 333.5
-4.9 -5.2 385.5 375.3
-4.9 7.8 385.5 388.3
-4.9 23.5 385.4 404.0
Balance Sheet Cash And Deposits Debtors Other current assets Total Current Assets Fixed Assets Investments Goodwill & Intangibles Other non-current assets Total Non-Current Assets
Creditors Other current liabilities
Reserves Retained earnings Contributed equity TOTAL EQUITY
WACC
10.0%
Weighting Valuation DCF Premium / (discount) Price Target
Price / Book Value
Our exceptionals forecast adds back one-offs and non-cash amortisation on acquisitions Cash flow statement
$2.33 Market Cap A$536.3m
FCF / Equity
Gearing
100.0%
$2.81 0% $2.81
Jun-17A
Jun-18E
Jun-19E
8.6 126.2
4.8 19.3
4.3 14.9
200.1 1.7
35.0 0.1
26.7 0.8
1.5
1.4
1.4
5.0 0.7% -9.1% 0.2%
4.0 4.5% -6.4% 0.3%
3.5 5.5% -1.4% 0.5%
Jun-17A
Jun-18E
Jun-19E
210.7
230.2
232.2
0.012 118.3%
0.067 471.3%
0.087 31.4%
0.005
0.007
0.011
Jun-17A
Jun-18E
Jun-19E
107.3% -2664.0%
96.7% -222.6%
91.8% -38.0%
1.1%
6.2%
7.5%
Jun-17A
Jun-18E
Jun-19E
Gross Debt Net Debt Net Debt / Equity
29.66 22.56 6.8%
44.66 35.46 9.4%
58.66 44.85 11.6%
Net Debt / EBITDA (x) EBIT interest cover (x) Invested Capital Enterprise Value
5.5 -6.9 355.7 513.5
1.2 5.7 411.8 571.8
1.1 8.5 436.4 585.8
Growth ratios
Jun-17A
Jun-18E
Jun-19E
Revenue Operating costs EBITDA
755.0% 266.1% 172.2%
100.3% 46.1% -627.7%
13.5% 2.1% -32.8%
34.3%
351.4%
-58.0%
125.7% 118.3% -41.0%
732.1% 471.3% 505.5%
-32.5% 31.4% 23.3%
Jun-17A
Jun-18E
Jun-19E
53.1% 6.8%
58.5% 24.7%
59.3% 28.9%
EBIT margin
-8.3%
10.4%
14.4%
NPAT margin ROE (cash NPAT) ROIC (EBIT)
3.1% 0.6% -1.4%
12.8% 4.1% 3.0%
14.9% 5.2% 4.5%
SOURCES: MORGANS, COMPANY REPORTS
49
Telecommunications│Australia│Equity research│February 1, 2018
Megaport (MP1, ADD, A$4.44 PT) Earnings guidance: MP1 has recently disclosed its 2Q financials so we expect no surprises. Key to the result will be management’s commentary on its new product, Megaport Cloud Router and traction on the US. Reporting date: Wednesday 21 February 2018. Investment view: We have recently upgraded our medium-term forecasts and now forecast MP1 to generate an exit run rate EBITDA of A$43.5m in 2021. We have applied 15.8x to EBITDA and discount this back into today’s dollars which results in our A$4.44 valuation (unchanged). We retain our Add recommendation. MP1 now has the key pieces of the puzzle in place including connectivity to 5 of the top 5 Global Cloud Providers (IBM Cloud was added to the Megaport fabric in late 2018). Risks and rewards now largely come down to execution and generating cashflow to fund MP1’s growth programs. Figure 58: Financial snapshot Dec-15 Locations Ports Customers Services Period end monthly revenue (A$1,000) Average Revenue Per Port Annualised revenue run-rate (A$m) Active Ports per DC Active Ports per customer Services per customer Services per port VXC's VXC's per port
46 504 253 940 $221 $438 $2.6 11.0 2.0 + 1.9 436 0.9
Jun-16
Dec-16
84 736 314 n/a $308 $455 $3.7 8.8 2.3 n/a n/a n/a n/a
141 1,479 621 2,768 $909 $615 $10.9 10.5 2.4 4.5 1.9 1,289 0.9
Jun-17 165 1,829 738 3,764 $1,220 $667 $14.6 11.1 2.5 5.1 2.1 1,686 0.9
Dec-17 A 185 2,259 860 5,041 $1,600 $707 $19.2 12.2 2.6 5.9 2.2 2,155 1.0
SOURCES: MORGANS, COMPANY REPORTS
Noteworthy items from recent December quarterly
Customer demand continues to accelerate (VXCs and revenue were both up 22% qoq); Revenue continues to track higher and cash burn lower;
VXCs (customer usage) is growing at double the rate of customers which proves to that MP1 is adding value to existing customers (as customers are clearly using more MP1 services/Virtual Cross Connects); and
MP1's DC footprint and service providers also continue to accelerate (MP1 added IBM Cloud this quarter and now have all of the Tier 1 Global Cloud Providers on their platform). This makes MP1's offering increasingly attractive for those looking to connect to the Cloud.
More details on the quarterly
MP1's financial results were stronger than we had expected with higher revenue and lower burn. Revenue was up 22% qoq to an annualised rate of A$19.2m, while cash burn dropped from A$9m in the September quarter to A$7m in the December quarter and is likely to hold at similar level in Q3FY18. MP1 ended the period (31 December 2017) with net cash of A$21m.
The blended qoq revenue growth was 22% but this obviously consists of three regions and we understand that North American revenue growth is tracking at a much higher rate than this. Revenue per port hit a record high of $707 per month and this was one of the major drivers of the revenue uplift (not disregarding the fact that MP1 continue to add more locations and more customers).
In terms of data centre locations North America accounts for 41% of the footprint, Europe 31% and Asia 28%. To date Asia (mostly Australia) has been the strongest region but our expectation is that North America will be the big driver going forward (as it is a much larger market but MP1 entered 50
Telecommunications│Australia│Equity research│February 1, 2018
it later). The potential in North America remains substantial so we are pleased to hear good progress is being made in terms of new DCs added and customer uptake. Recent announcement of Megaport Cloud Router
We expect management will provide further commentary at the result around the potential addressable market and scope of its new product, Megaport Cloud Router (MCR).
This product simplifies connecting between Clouds which increases the addressable market (as less technical skills are required to use MCR). For those that understand the difference between dark fibre and a managed service, this is a reasonable example of the product differences. In both instances different customers want different connections and the two are complementary (customers typically use one of the two, not both). IT smart customers would likely have data centre space and an IT department to manage Cloud Connectivity (and other things). However newer cloud only companies could be infrastructure light, have no IT department and connect cloud to cloud using MCR.
We view this new product as being complementary to MP1’s existing product range and consequently think its opens MP1 to a wider addressable market (i.e. this will generate more revenue for MP1). We also expect further evolution over time as MP1 continues to bring new connectivity solutions to the market. Quantifying the revenue upside is difficult, but we expect the new layer 3 market is multiples larger than the layer 2 market (there are many more companies without IT departments and dedicated infrastructure than with) so we expect the revenue potential for MP1 is multiples higher.
51
Telecommunications│Australia│Equity research│February 1, 2018
The path to being EBITDA positive The figure below demonstrates an example of MP1’s progression to being EBITDA positive. These are not Morgans' estimates (we do not publish shortterm earnings forecasts for MP1). The figure shows the leverage assuming a 18% revenue CAGR qoq, which is largely in line with historical. As we have mentioned above, MP1’s new product MCR should meaningfully increase the addressable market for MP1 which we believe could meaningfully increase the potential revenue growth over time. We expect that MP1’s cost (COGS and opex) will not meaningfully increase over time due to MP1 having already paid for capacity and the current business opex (employee etc) should be relatively fixed despite revenue increases. Figure 59: An example/illustrative path to MP1 being EBITDA positive using 18% revenue CAGR (not MorgansE) (A$m pa) 100.0 80.0 60.0 40.0 20.0 0.0
-20.0 -40.0 -60.0
Revenue
Cost
Capex
Burn
Cash at bank
SOURCES: MORGANS, COMPANY REPORTS
Changes to forecasts: Nil. Valuation We do not publish short-term forecasts so we have made no changes. Our valuation is based on medium-term forecasts, which we revised following the release of MP1’s December 2017 quarterly and new product launch. We forecast MP1 to generate an exit run rate EBITDA of A$43.5m in 2021. We have applied 15.8x to EBITDA (peers have derated from 16.1x) and we discount this back into today’s dollars which results in our A$4.44 valuation (unchanged). Figure 60: MP1 valuation (unchanged) Valuation at June 21 Revenue COGS + OPEX Annualised EBITDA EV/EBITDA multiple applied Enterprise value + Net cash Equity Value Fully diluted shares on issue Value per share (in the future)
Jun-21 $105.5 $61.9 $43.5 15.8x $688.1 $0.0 $688.1 104.6 $6.58
Time value adjsting the above valuation per share Value at maturity NPV (using a 14% WACC)
Jun-18 $0.00 $4.44
Jun-19 $0.00
Jun-20 $0.00
Jun-21 $6.58
SOURCES: MORGANS, COMPANY REPORTS
52
Telecommunications│Australia│Equity research│February 1, 2018
Risks and rewards The valuation driver for MP1 continues to be strategic progress and sales. Progress towards improving both and ultimately cash generation are becoming more of a focus. Downside risk relates to the possibility of lower-than-anticipated customer demand for MP1 services resulting in lower revenue growth and therefore cash generation not occurring as quickly as expected. This would lower our valuation and market valuations and could necessitate additional capital to fund the business. Conversely a faster or larger-than-expected rollout could also necessitate additional funding requirements, but for good reason. The other key risk relates to competitive response but at this junction in time we are not overly concerned with the competitive landscape and note that by June 2018 MP1 will operate the largest DC connectivity platform in the world (again). MP1 has run head to head with the two largest DC operators in the world, being Equinix and Digital Realty who report operating 190 and 180 data centres respectively in January 2018 (from 156 and 150 around six months ago). Digital Realty has a strategic relationship with Megaport and is a substantial shareholder in the company so their relationship is symbiotic. We do note that Equinix appears to have launched an elastic connectivity product that is partially competitive with MP1 and offered from within its own facilities. Equinix calls this “Equinix Cloud Exchange or ECX Fabric”. We expect this to be limited to a small number of locations initially but has the potential to be rolled out to most of Equinix’s facilities over time. We do not expect this to be rolled out into the smaller data centres around the world (as they are considered competitive to Equinix) and note that Equinix only operates in the Tier 1 cities or financial market hubs. We believe this smaller footprint is ultimately a big opportunity for MP1. For more details refer here. We expect the January 2018 resignation of Equinix’s long standing CEO, Steve Smith, may also distract Equinix’s focus on this new but small product offering. From an upside perspective MP1 continues to talk about “demand driven expansion”. This could create upside risk due to potentially accelerating the DC rollouts in a more cost effective manner either as MP1 fine tunes its equipment build and rollout program (to reduce setup costs per site and fast track revenue) or if data centre partners partially fund MP1’s setup and/or operating costs. Other upside risk relates to the potential for ongoing strategic deals (sites, acquisitions &/or partners) to fast-track MP1’s global expansion and the possibility of better-than-expected customer uptake in North America and Europe. We remain focused on the key performance indicators (as illustrated on the front page of this research). These precede profitability and are Data Centre sites, customers, revenue per port and gross profit per geographic location.
53
Telecommunications│Australia│Equity research│February 1, 2018
Over The Wire (OTW, ADD, A$3.33 PT) Earnings guidance: no earnings guidance has been provided. Reporting date: likely to be Tuesday 20 February 2018 Investment view: We view OTW as a good long term investment. The company has strong organic growth (~20% pa revenue growth), generates attractive returns on capital (~30%), has low capital requirements and highly committed co-founders. In addition to the upside from organic growth OTW tends to complement this with strategic value creating acquisitions. OTW’s share price tends to move mostly around acquisitions and given they just recently completed the VPN Networks acquisition we think it is unlikely, although not impossible, that OTW undertakes another acquisition within the next six months. Consequently, for now the focus will be on organic growth and OTW’s progress is continuing to geographically expand the business. Noteworthy items
OTW paid around A$15m on 1 November 2017 to settle the acquisition of VPN Networks. In 1H18 we expect VPN deal costs to be offset by the two months of earnings it contributes. In addition to its normal 2H skew (due to earnings growth), OTW will have a substantially stronger 2H earnings skew as VPN will start contributing (we forecast a 39% 1H / 61% 2H skew).
New product releases. OTW tends to bring to market new products (or a broadened product range) to continue servicing its customers and selling them more products per customer. Once such example is that in late FY17 OTW launched its own hosted PBX (voice as a service). We see this as having the potential to accelerate voice revenue growth for the business.
We expect margins to edge lower due the changed mix from M&A.
54
Telecommunications│Australia│Equity research│February 1, 2018
Result expectations Figure 61: 1H18 result expectations 1H16 11.0 4.4 6.6 4.1 2.4 0.4 0.1 2.0 0.0 1.9 0.5 1.4 4.5 0.0
2H16 12.6 6.2 6.5 3.5 3.0 0.5 0.3 2.2 0.0 2.2 0.7 1.4 3.1 1.0
1H17 14.0 5.4 8.5 5.5 3.1 0.6 0.3 2.1 0.0 2.1 0.5 1.6 4.2 0.8
2H17 20.3 9.6 10.7 6.6 4.3 0.9 0.5 2.9 0.2 2.7 0.7 2.0 5.9 1.3
1H18 F 22.6 10.5 12.1 7.7 4.4 1.1 0.9 2.5 0.2 2.3 0.7 1.6 5.6 1.0
2H18 34.5 16.7 17.8 10.9 6.9 1.0 1.2 4.7 0.4 4.3 1.3 3.0 9.6 1.5
Gross profit margin EBITDA margin Tax rate Payout ratio
60% 22% 26% 0%
51% 23% 34% 32%
61% 22% 26% 18%
53% 21% 26% 21%
53% 19% 30% 18%
52% 20% 30% 16%
Operating cash flow Capex Free cash flow
1.7 -0.6 1.1
3.3 -1.1 2.2
0.7 -0.8 -0.1
4.4 -0.9 3.5
1.9 -1.0 0.9
5.9 -1.5 4.4
106% 5% 160%
110% 9% 225%
80% 6% 133%
127% 4% 99%
64% 4% 91%
109% 4% 142%
6.5 -5.0 14.7 43.5
7.0 -6.7 16.2 43.5
6.3 -6.1 17.3 43.5
5.5 -1.6 19.0 43.5
4.7 13.2 20.1 43.9
-1.0 19% 41% 23%
-1.1 18% 46% 46%
-1.0 18% 38% -2%
-0.2 21% 33% 40%
1.5 16% 15% 6%
Revenue COGS Gross profit OPEX EBITDA Depreciation Amortisation EBIT Net interest expense PBT Tax NPAT EPS DPS
Adjusted cashflow conversion Capex / revenue Capex / depreciation Cash Net Debt Equity Shares on issue Annualised statistics below Net Debt / EBITDA ROE EBIT / Invested Capital FCF / Invested Capital
1H18 / 1H17 62% 93% 42% 40% 44% 68% 212% 16% 602% 7% 25% 1% 32% 33%
1H18 / 2H17 12% 10% 13% 16% 2% 21% 61% -14% 44% -18% -5% -22% -6% -20%
174% 16% 790%
-56% 12% -73%
5.7 9.2 22.7 43.9
-24% -315% 16% 1%
-14% -932% 5% 1%
0.7 27% 30% 28%
-249%
-915%
SOURCES: MORGANS, COMPANY REPORTS
Key FY18 result focus points
Operating cash flow in 1H17 was weak due to some timing issues and we expect a stronger operating cash flow result in 1H18. This may be slightly impacted by working capital movement on the VPN Networks acquisition.
We expect net debt to spike in 1H18 at ~A$13m as OTW paid ~A$15m for VPN and debt funded the acquisition. Given OTW’s strong cash generation we expect debt to be paid down at around A$4m pa going forward.
Geographically speaking: o
NSW delivered the strongest organic revenue growth in FY17 (+58%yoy) to account for around 16% of revenue (the 3rd largest contributor). We expect NSW to move to the 2 nd largest contributor in H218.
o
VIC revenue grew by +45% in FY17 and will likely deliver impressive revenue growth in 2H18 as VPN accelerates growth.
Changes to forecasts and valuation
We have not changed our forecasts but have rolled forward our valuation by six months. Given OTW’s strong earnings growth this has driven a ~15% upgrade to our valuation and price target.
55
Telecommunications│Australia│Equity research│February 1, 2018
Figure 62: Changes to forecasts and valuation Revenue EBITDA EBIT Reported NPAT Cash / Normalised NPAT Reported EPS Cash / Normalised EPS DPS EV/EBITDA DCF Weighted valuation Premium / (discount) Price target
2018 old 57.1 11.4 7.2 4.6 6.5 10.6 14.9 2.50 $2.26 $3.26 $2.76 0.0% $2.76
2018 new 57.1 11.4 7.2 4.6 6.5 10.6 14.9 2.50 $2.67 $3.99 $3.33 0.0% $3.33
% change 0.0% 0.0% 0.0% 0.2% 0.1% 0.2% 0.1% 0.0% 17.9% 22.5% 20.6% na 20.6%
2019 old 2019 new % change 67.2 67.2 0.0% 14.3 14.3 0.0% 9.6 9.6 0.0% 6.4 6.4 0.0% 8.6 8.6 0.0% 14.7 14.7 0.0% 19.7 19.7 0.0% 3.00 3.00 0.0% Rolled forward & multiple unchanged at 10x Rolled forward
SOURCES: MORGANS, COMPANY REPORTS
Risks and rewards In our view the key operational risks for OTW relate to:
Continuing to grow at an impressive organic rate (through revenue acceleration and cost control); and
Successful integration of current and ongoing acquisitions.
We note that to-date the company has integrated a number of acquisitions successfully and these have delivered value to shareholders. However, failure to successfully integrate acquisitions (to realise synergies and economies of scale) or to extract the expected EBITDA and cashflow could result in disappointment from equity markets. Management plays a key role in operating OTW (winning key contracts and integrating the acquired businesses). Management also owns substantial equity in the business so is highly incentivised to ensure a smooth integration and fast paced growth. From a share price perspective the key share price risk relates to the market’s willingness to pay a premium for OTW scrip. We attribute this to:
OTW’s ability to grow organically at a rapid pace;
The upside from potential acquisitions;
Management’s considerable equity ownership; and
The fact that OTW is not at risk of NBN related margin pressure (unlike most of its peers).
Collectively these mean OTW trades at a premium to peers. Should investor sentiment change (as seen last year with consumer facing telcos) and OTW reverts to the telco long-term telco average of 6x, then it would take about two years of growth for earnings to justify the current share price. We think this is a pessimistic and unlikely scenario but nonetheless it remains the key downside risk for OTW’s share price. Further shareholder value creation could come in the form of: Successful achievement of organic growth; and Successful completion and integration of attractively priced value enhancing acquisitions.
56
Telecommunications│Australia│Equity research│February 1, 2018
Figure 63: OTW financial summary Profit and loss
Over The Wire - valuation details
Jun-16A
Jun-17A
Jun-18E
Jun-19E
Jun-20E
Revenue Gross Profit
23.6
34.2
57.1
67.2
77.4
Share Price
13.0
19.2
29.9
35.0
40.0
Price Target
Total Operating Costs
-7.6
-11.8
-18.5
-20.8
-23.5
EBITDA Depreciation Amortisation & impairments EBIT Net Interest Income Pre-tax Profit Tax Reported Profit Exceptional items Cash / Normalised Profit Gross dividends Cash flow statement
EBITDA Net interest Tax Changes in working capital Operating cash flow Maintenance capex Free Cash Flow (pre expansion) Total capex (inc expansion) Free Cash Flow Acquisitions and divestments Other Investing cash flow Investing cash flows Increase / decrease in Equity Increase / decrease in Debt Other financing cash flows Financing cash flows Balance Sheet Cash And Deposits Debtors Other current assets Total Current Assets Fixed Assets Investments Goodwill & Intangibles Other non-current assets Total Non-Current Assets TOTAL ASSETS Short Term Debt Creditors Other current liabilities Total Current Liabilities Long Term Debt & hybrids Other Non current liabilities Total Non -Current liabilities TOTAL LIABILITIES Reserves Retained earnings Contributed equity TOTAL EQUITY
$3.00 Market Cap A$130.5m $3.33
Recommendation
TSR
11.8%
ADD
5.4
7.4
11.4
14.3
16.5
-0.9
-1.5
-2.1
-2.2
-2.5
DCF
WACC / multiple Weighting Valuation
-0.4
-0.8
-2.1
-2.4
-2.4
EV / EBITDA - 12 mths F
4.2
5.0
7.2
9.6
11.6
Weight valuation
$3.33
-0.1
-0.2
-0.6
-0.5
-0.2 Price Target
$3.33
4.1
4.9
6.6
9.1
11.4
-1.2
-1.3
-2.0
-2.7
-3.4
2.8
3.6
4.6
6.4
8.0
Key metrics / multiples
0.4
0.6
1.9
2.2
2.2
P / E (Norm)
3.2
4.2
6.5
8.6
10.1
Norm EPS growth
-0.4
-0.9
-1.1
-1.3
-1.5
PEG
10.5%
50.0%
$3.99
10
50.0%
$2.67
Jun-17A
Jun-18E
31.2
20.1
Jun-19E 15.2
6.2%
55.2%
32.1%
5.1
0.4
0.5
EV / EBITDA Price / Book Value Price / Net Tangible Assets
17.5 6.9 101.5
12.3 5.8 -16.0
9.5 4.7 -49.0
Jun-16A 5.4
Jun-17A 7.4
Jun-18E 11.4
Jun-19E 14.3
Jun-20E 16.5
-0.1
-0.2
-0.6
-0.5
-0.2
Operating cash flow yield
1.5%
6.0%
8.3%
-0.8
-2.7
-2.0
-2.7
-3.4
Free cash flow yield
0.2%
4.1%
6.0%
0.4
-2.5
-1.0
-0.2
0.0
Dividend yield
0.7%
0.8%
1.0%
5.0
1.9
7.8
10.8
12.8
-0.3
-0.3
-0.5
-0.6
-0.7
Per share data
Jun-17A
Jun-18E
Jun-19E
4.7
1.6
7.3
10.2
12.1
Diluted shares on issue
43.5
43.5
43.5
-1.7
-1.7
-2.5
-3.0
-3.5
Earnings per share (A$)
0.08
0.11
0.15
3.3
0.2
5.4
7.8
9.4
Normalised EPS (A$)
0.10
0.15
0.20
-6.7
-7.4
-15.2
-2.1
0.0
DPS (A$)
0.020
0.025
0.030
Jun-17A
Jun-18E
Jun-19E
65.8%
91.4%
98.5%
0.0
0.0
0.0
0.0
0.0
-8.4
-9.1
-17.6
-5.1
-3.5
9.6
0.0
0.0
0.0
0.0
-1.2
3.3
11.0
-5.9
-6.0
FCF vs. NPAT
5.7%
82.6%
90.9%
0.0
-0.8
-1.0
-1.2
-1.4
FCF / Equity
8.4%
32.3%
36.7%
8.3
2.5
10.0
-7.1
-7.4
Gearing
Jun-17A
Jun-18E
Jun-19E
Jun-16A
Jun-17A
Jun-18E
Jun-19E
Jun-20E
Net Debt
-1.58
9.19
4.68
7.0
5.5
5.7
4.3
6.2
Net Debt / Equity
-8.3%
40.5%
16.8%
1.8
3.2
6.3
6.9
7.9
Net Debt / EBITDA (x)
-0.21
0.81
0.33
0.3
0.8
0.6
0.6
0.6
EBIT interest cover (x)
27.7
12.4
19.0
9.1
9.6
12.7
11.9
14.8
Invested Capital
23.1
14.4
23.4
3.5
4.8
5.2
6.0
6.9
Enterprise Value
128.9
139.8
135.2 Jun-19E
0.0
0.0
0.0
0.0
0.0
8.6
17.7
30.8
30.5
28.1
0.3
0.0
0.0
0.0
0.0
12.4
22.6
36.0
36.5
21.6
32.1
48.7
0.1
2.2
1.5
2.4
4.9
2.0
1.1
4.6
Result quality Cash flow conversion
Growth ratios
Jun-17A
Jun-18E
Revenue
44.9%
67.0%
17.7%
35.0
Operating costs
54.9%
56.7%
12.0%
48.3
49.8
EBITDA
36.6%
54.1%
25.8%
0.9
0.3
EBIT
21.4%
42.5%
34.1%
6.8
7.1
8.2
norm. NPAT
28.8%
55.2%
32.1%
1.1
1.1
1.1
EPS growth
6.2%
55.2%
32.1%
8.2
9.4
9.2
9.6
Operating cash flow
-61.1%
301.6%
38.4%
0.3
1.7
13.4
8.1
2.7
0.6
0.3
0.3
0.3
0.3
Margin analysis
Jun-17A
Jun-18E
Jun-19E
0.8
2.0
13.7
8.4
3.0
Gross profit
56.1%
52.3%
52.1%
5.4
13.1
26.0
20.5
15.5
EBITDA Margin
21.5%
19.9%
21.2%
0.0
0.0
0.0
0.0
0.0
EBIT margin
14.7%
12.6%
14.3%
4.9
7.7
7.7
7.7
7.7
NPAT margin
12.2%
11.4%
12.7%
11.3
11.3
14.9
20.1
26.6
ROE
22.0%
28.6%
30.8%
16.2
19.0
22.7
27.8
34.4
ROIC
21.8%
49.7%
41.2%
SOURCES: MORGANS, COMPANY REPORTS
57
Telecommunications│Australia│Equity research│February 1, 2018
Comparable company peer tracker Australian telco peer tracker Figure 64: Telco compco (as at 29 January 2018)
SOURCES: MORGANS, COMPANY REPORTS; FACTSET AS AT 7 AUGUST 2017
58
Telecommunications│Australia│Equity research│February 1, 2018
Figure 65: EBITDA momentum remains broadly positive (as 31 January 2018)
SOURCES: MORGANS, COMPANY REPORTS; FACTSET AS AT 31 January 2018
59
Telecommunications│Australia│Equity research│February 1, 2018
International data centre peer tracker Figure 66: Share price and gearing metrics of peers (note NXT AJD offer isn’t included in the current gearing metrics) Name Equinix, Inc. Digital Realty Trust, Inc. CyrusOne, Inc. CoreSite Realty Corp. InterXion Holding NV QTS Realty Trust, Inc. Switch, Inc. (Nevada) Internap Corp. Average Median NextDC Ltd. NEXTDC vs sector median
Mkt Cap (US$) $ $ $ $ $ $ $ $
34,547 22,938 5,370 3,724 4,390 2,527 600 346
$
1,337
Enterprise value FY1 EBITDA FY2 EBITDA FY1 EBITDA FY2 EBITDA FY1 EV/EBITDA FY2 EV/EBITDA (US$) growth growth margin margin $ 43,133 20.9 17.6 24.0% 18.7% 47.1% 48.3% $ 29,294 21.0 16.3 19.0% 27.0% 58.1% 58.9% $ 7,451 20.2 16.9 32.6% 19.1% 54.8% 55.1% $ 4,760 18.3 16.3 23.0% 12.2% 54.2% 54.4% $ 5,280 19.2 17.0 36.3% 13.2% 45.4% 46.0% $ 4,028 19.5 17.3 12.3% 13.3% 46.4% 46.8% $ 1,439 7.4 6.5 3.4% 13.7% 51.3% 51.1% $ 831 9.1 8.8 11.0% 4.1% 32.6% 34.1% 17.0 14.6 20.2% 15.2% 48.7% 49.3% 19.4 16.6 21.0% 13.5% 49.2% 49.7% $ 1,479 25.3 24.0 19.3% 33.5% 40.2% 43.3% 1.3x 1.4x 0.9x 2.5x 0.8x 0.9x
SOURCES: MORGANS, FACTSET PRICED AT 31 January 2018
Figure 67: EBITDA momentum
SOURCES: MORGANS, FACTSET PRICED AT 31 January 2018
Data centre ecosystem density rankings According to Cloud Scene collectively NEXTDC retains the largest number of Australian service providers within its Data Centres and holds the #1 ranking (by service providers inside its data centres) in Melbourne, Brisbane, Perth and Canberra. Interestingly NEXTDC dropped to 3rd place in Sydney (from #2 in February 2017) with 80 service providers in S1 while Equinix retained the #1 ranking with 205 service providers in its facilities. Global Switch expanded its ecosystem to grow from #3 to #2 position in Sydney.
60
Telecommunications│Australia│Equity research│February 1, 2018
Figure 68: Data Centre service provider count (aka ecosystem density)
Vocus
Macquarie Telecom
Global Switch
Equinix
NEXTDC
0
50
100 SYD
150 MLB
200 BNE
PTH
250
300
350
400
CNB
SOURCES: CLOUD SCENE, MORGANS, COMPANY REPORTS
Figure 69: Australian data centre count
SOURCES: CLOUDSCENE
61
Telecommunications│Australia│Equity research│February 1, 2018
International satellite operator peer tracker Figure 70: Share price and gearing metrics of peers (as at 29 January 2018) Name RigNet, Inc. Eutelsat Communications SA Intelsat SA Harris Corp. Inmarsat Plc SES SA Globalstar, Inc. Iridium Communications, Inc. ORBCOMM, Inc. ViaSat, Inc. Rockwell Collins, Inc. Thaicom Public Co. Ltd. Average Median SpeedCast International Ltd. SpeedCast vs sector median Name RigNet, Inc. Eutelsat Communications SA Intelsat SA Harris Corp. Inmarsat Plc SES SA Globalstar, Inc. Iridium Communications, Inc. ORBCOMM, Inc. ViaSat, Inc. Rockwell Collins, Inc. Thaicom Public Co. Ltd. Average Median SpeedCast International Ltd. SpeedCast vs sector median
Mkt Cap (US$) $ $ $ $ $ $ $ $ $ $ $ $
323 5,068 357 17,421 3,110 5,812 1,360 1,254 856 4,510 22,828 423
$ 1,064
FY1 FY2 FY1 FY2 Enterprise FY1 FY2 EBITDA EBITDA EBITDA EBITDA value (US$) EV/EBITDA EV/EBITDA growth growth margin margin $ 347 12.6 10.3 -12.4% 21.9% 13.8% 15.1% $ 8,565 6.4 6.2 0.9% 2.3% 76.3% 77.1% $ 13,996 8.5 8.6 0.0% -1.9% 76.9% 76.1% $ 21,322 14.8 13.5 3.5% 8.4% 23.5% 24.2% $ 5,048 6.8 6.7 -6.4% 3.1% 53.4% 52.2% $ 14,843 9.0 9.0 7.6% -0.9% 65.1% 65.8% $ 1,998 78.4 68.9 21.1% 13.7% 24.3% 25.5% $ 2,973 11.5 10.7 3.4% 5.9% 59.1% 57.4% $ 1,060 22.3 16.3 0.3% 36.7% 19.0% 23.3% $ 5,289 20.0 13.8 -21.7% 43.4% 16.6% 20.6% $ 29,851 14.1 12.9 37.5% 10.0% 23.8% 25.2% $ 519 4.0 4.0 -12.2% -1.1% 41.1% 57.1% 17.4 15.1 1.8% 11.8% 41.1% 43.3% 12.0 10.5 0.6% 7.2% 32.7% 38.8% $ 1,380 11.5 9.0 201.7% 24.5% 22.6% 23.6% 1.0x 0.9x 325.9x 3.4x 0.7x 0.6x
SP move SP move 1 SP move 3 SP move 6 SP move FY1 ND / FY1 DPS FY2 DPS 1 week month months months 12 month EBITDA yield yield -1.9% -7.0% -2.0% 2.1% -5.0% -6.9% -10.7% 0.0% -3.3% -3.4% 1.5% 0.7% -3.0% -2.6% 2.0% -0.7x
18.4% -6.0% -11.5% 3.2% 2.3% -3.0% -17.6% 8.5% 13.2% 3.5% 2.8% 0.6% 1.2% 2.6% 4.7% 1.9x
-0.3% -10.5% -37.1% 7.0% -12.1% -7.8% -34.5% 0.8% 2.5% 19.9% 3.0% -12.6% -6.8% -4.0% 40.3% -9.9x
-4.3% -20.3% -12.3% 27.7% -33.6% -35.8% -42.6% 23.7% -1.0% 16.3% 22.5% -18.7% -6.5% -8.3% 57.2% -6.9x
-13.9% 23.5% -10.4% 42.5% -13.6% -23.9% -34.9% 23.7% 37.3% 21.0% 53.3% -34.9% 5.8% 5.3% 56.7% 10.7x
1.0 3.0 8.2 2.2 2.8 3.0
0.0% 6.8% 0.5% 1.5% 8.3% 11.0%
0.0% 7.1% 0.0% 1.7% 8.5% 11.1%
5.8 4.2 3.5 2.7 1.7 3.5 3.0 3.0 1.0x
0.0% 0.0% 0.0% 1.1% 2.6% 2.9% 1.1% 1.5% 1.4x
0.0% 0.0% 0.0% 1.1% 4.3% 3.1% 1.1% 2.1% na
SOURCES: MORGANS, COMPANY REPORTS; FACTSET AS AT 29 JANUARY 2018.
Figure 71: EBITDA momentum remains broadly positive (as at 29 January 2018) EBITDA momentum (US$) RigNet, Inc. Eutelsat Communications SA Intelsat SA Harris Corp. Inmarsat Plc SES SA Globalstar, Inc. Iridium Communications, Inc. ORBCOMM, Inc. ViaSat, Inc. Rockwell Collins, Inc. Thaicom Public Co. Ltd. Average Median SpeedCast International Ltd.
-7 days -14 days -30 days -90 days -190 days -275 days 2.8% 2.8% 2.8% 12.8% -20.1% -16.4% 1.2% 3.6% 4.6% 2.5% 9.1% 14.1% 0.0% 0.0% -0.3% 0.4% -0.3% 1.9% 0.0% 0.0% 0.0% -1.5% -5.2% -12.9% 0.0% -0.2% -0.2% -0.3% -1.3% -7.2% 1.5% 3.7% 4.7% 0.8% 0.7% 1.6% 0.0% 0.0% 0.0% 0.0% 4.5% -6.7% 0.0% 0.0% -0.1% 0.0% 2.1% -0.7% 0.0% 0.0% 0.0% -3.7% -11.2% -16.6% 0.0% 0.0% 1.8% -5.8% -16.8% -27.9% -0.2% -0.2% 0.2% -2.5% -0.4% 46.5% 1.8% 2.9% 4.0% -1.7% -14.7% -19.9% 0.6% 1.0% 1.4% 0.1% -4.5% -3.7% 0.0% 0.0% 0.1% -0.1% -0.8% -7.0% -0.2% -0.2% -0.2% 0.6% -1.2% 6.7% SOURCES: MORGANS, COMPANY REPORTS; FACTSET AS AT 29 JANUARY 2018
62
Telecommunications│Australia│Equity research│February 1, 2018
Asian telco operator peer tracker Figure 72: Superloop - share price and gearing metrics of peers (as at 31 January 2018)
Name
Mkt Cap (US$)
Hutchison Telecommunications Hong Kong Holdings $ Ltd. 2,400 SmarTone Telecommunications Holdings Ltd. $ 1,609 PCCW Ltd. $ 5,504 China Mobile Ltd. $ 265,905 M1 Ltd. $ 1,626 StarHub Ltd. $ 4,768 CITIC Telecom International Holdings Ltd. $ 1,311 NetLink NBN Trust $ 3,050 Singapore Telecommunications Ltd. $ 54,972 Average Median Superloop Ltd. $ 532 Superloop vs sector median Name
FY1 FY2 FY1 FY2 Enterprise FY1 FY2 EBITDA EBITDA EBITDA EBITDA value (US$) EV/EBITDA EV/EBITDA growth growth margin margin $ 3,244 7.9 16.7 -12.5% -44.2% 21.9% 16.7% $ 1,798 5.2 5.3 -4.1% -3.8% 25.2% 24.4% $ 11,404 5.7 5.4 1.1% 4.0% 32.4% 33.0% $ 175,504 3.4 3.2 14.1% 5.1% 36.2% 36.4% $ 1,997 7.1 7.5 -0.9% -4.9% 28.0% 27.0% $ 5,464 9.1 9.4 -2.3% -1.9% 26.3% 26.3% $ 2,400 7.1 6.9 3.4% 2.9% 28.1% 27.9% $ 3,460 18.9 15.1 -8.6% 24.6% 84.8% 70.6% $ 63,949 13.2 13.0 8.7% 0.6% 29.3% 28.8% 8.6 9.2 -0.1% -1.9% 34.7% 32.3% 7.1 7.5 -0.9% 0.6% 28.1% 27.9% $ 438 14.7 10.6 258.2% 38.7% 23.8% 28.4% 2.1x 1.4x na 68.3x 0.8x 1.0x
SP move 1 SP move 1 SP move 3 SP move 6 SP move FY1 ND / FY1 DPS FY2 DPS week month months months 12 month EBITDA yield yield
Hutchison Telecommunications Hong Kong Holdings Ltd. -1.2% SmarTone Telecommunications Holdings Ltd. -2.2% PCCW Ltd. -0.9% China Mobile Ltd. -0.5% M1 Ltd. -2.2% StarHub Ltd. -2.3% CITIC Telecom International Holdings Ltd. -1.6% NetLink NBN Trust -0.6% Singapore Telecommunications Ltd. -1.7% Average -1.5% Median -1.6% Superloop Ltd. -1.3% Superloop vs sector median 0.8x
-3.0% -6.8% -4.0% 0.2% 1.9% 1.0% 9.3% -2.0% -1.4% -0.6% -1.4% -3.7% 2.6x
6.1% -11.5% -0.9% -1.5% 1.0% 8.2% -0.7% -0.3% -6.9% -0.7% -0.7% -4.9% 7.4x
10.8% -12.0% 1.5% -2.7% 5.9% 10.0% -3.6% 5.0% -8.6% 0.7% 1.5% -9.7% -6.3x
15.9% -21.3% -11.4% -13.3% -9.0% -1.9% -14.6% -6.9% -7.8% -10.2% -6.8% 0.7x
-4.8 0.4 2.5 -1.6 1.8 1.2 2.9 1.9 0.5 1.5 0.9 0.6x
2.1% 4.6% 5.2% 6.2% 4.5% 4.4% 4.8% 2.5% 4.5% 4.3% 4.5% 0.3% 0.1x
1.6% 4.3% 5.0% 3.4% 4.0% 4.3% 4.8% 4.7% 4.1% 4.0% 4.3% 0.4% 0.1x
SOURCES: MORGANS, COMPANY REPORTS; FACTSET AS AT 29 JANUARY 2018.
63
Telecommunications│Australia│Equity research│February 1, 2018
Figure 73: EBITDA and EPS trajectory (as at 31 January 2018)
EBITDA momentum (US$) -7 days -14 days -30 days -90 days -190 days -275 days Hutchison Telecommunications Hong Kong Holdings Ltd. 0.0% -1.4% -0.7% -13.2% -15.4% -19.3% SmarTone Telecommunications Holdings Ltd. 0.0% -0.9% 0.0% -1.9% -10.2% -17.7% PCCW Ltd. 0.0% 0.0% 0.0% -2.3% -4.3% 1.5% China Mobile Ltd. 1.0% 2.6% 3.7% 3.8% 8.2% 8.2% M1 Ltd. 2.3% 2.8% 4.0% 9.1% 6.8% 8.9% StarHub Ltd. 0.6% 1.4% 2.7% 3.8% 7.6% -1.4% CITIC Telecom International Holdings Ltd. 0.0% -1.7% 0.7% -6.8% NetLink NBN Trust 0.6% 1.4% 22.1% 25.9% Singapore Telecommunications Ltd. 0.6% 1.4% 3.0% 3.4% 7.0% 7.7% Average 0.6% 0.9% 4.4% 3.0% 0.1% -2.4% Median 0.6% 1.4% 2.9% 3.4% 3.8% 0.1% Superloop Ltd. 0.9% 3.3% 3.6% 1.9% 6.9% 5.3% EPS momentum (US$) -7 days -1d days -30 days -90 days -190 days -275 days Hutchison Telecommunications Hong Kong Holdings Ltd.-20.2% -24.0% -20.1% -34.0% -40.0% -42.6% SmarTone Telecommunications Holdings Ltd. 1.6% 0.9% 1.8% -6.5% -19.0% -26.1% PCCW Ltd. 6.9% 3.8% 3.8% 0.1% -15.9% 2.9% China Mobile Ltd. 2.1% 3.8% 4.9% 5.1% 8.7% 6.6% M1 Ltd. 4.9% 5.0% 5.5% 15.4% 2.7% 0.4% StarHub Ltd. 0.9% 1.7% 3.6% 5.4% 10.0% -6.7% CITIC Telecom International Holdings Ltd. 0.0% 0.2% 5.7% -11.1% NetLink NBN Trust 6.6% 7.4% 8.7% -4.6% Singapore Telecommunications Ltd. 1.0% 1.0% 1.9% 0.4% 0.5% -1.8% Average 0.4% -0.1% 1.3% -2.0% -5.9% -9.8% Median 1.6% 2.8% 3.7% 0.2% 1.6% -4.3% Superloop Ltd. 24.5% 2.7% 6.6% -11.3% -15.0% -29.6% SOURCES: MORGANS, COMPANY REPORTS; FACTSET AS AT 31 JANUARY 2018.
64
Telecommunications│Australia│Equity research│February 1, 2018
Telco sector short interest levels Broadly speaking short interest in the telecommunications sector has declined over the last 12 months. Notable changes include NEXTDC (the most shorted telco) seeing its short interest decrease 1% to 8%, SDA shorts increased by 2% yoy to 3%, and TPG Telecom shorts increased 1% to 5%. Figure 74: Telco sector short interest
SOURCES: MORGANS, ASIC
65
Telecommunications│Australia│Equity research│February 1, 2018
Fixed line net adds Size of the market. Figure 75: Size of the market (1,000 NBN and ADSL services in operation) Dec-13 ADSL / Legacy NBN active ADSL + NBN
Jun-14
Dec-14
Jun-15
Dec-15
Jun-16
Dec-16
Jun-17
Dec-17
Jun-18
Dec-18
6,086
6,187
6,231
6,131
6,036
6,013
5,543
5,034
4,094
3,377
2,457
131
211
322
486
736
1,099
1,653
2,443
3,383
4,100
5,020
6,217
6,398
6,553
6,617
6,772
7,112
7,196
7,477
7,477
7,477
7,477
ADSL / Legacy ... hoh net adds …
44
-100
-95
-23
-470
-509
-940
-717
-920
145
-56
-195
-118
-493
-979
-1,449
-1,657
-1,637
... hoh net adds …
111
164
250
363
554
790
940
717
920
… yoy net adds …
191
275
414
613
917
1,344
1,730
1,657
1,637
… yoy net adds …
101
NBN active
SOURCES: MORGANS, COMPANY REPORTS, NBN Co, ABS
66
Telecommunications│Australia│Equity research│February 1, 2018
Market share movements by carrier based on our forecasts. Figure 76: NBN subs/ net adds (1,000) CUMULATITVE NBN SUBS Telstra
Dec-13
Jun-14
Dec-14
Jun-15
Dec-15
Jun-16
Dec-16
Jun-17
0
0
85
93
211
500
792
1,176
Dec 17 F 1,618
50
80
126
194
276
388
561
719
902
Optus
0
0
26
54
88
136
192
279
392
VOC / M2
0
0
0
74
60
69
113
178
257
Other
81
131
85
71
101
6
-5
91
214
Active NBN subs
131
211
322
486
736
1,099
1,653
2,443
3,383
TPG & iiNet
CUMULATIVE NBN SUBS MKT SHARE
Dec-13
Jun-14
Dec-14
Jun-15
Dec-15
Jun-16
Dec-16
Jun-17
Dec 17 F
Telstra
n/a
n/a
n/a
19.1%
28.7%
45.5%
47.9%
48.1%
47.8%
TPG & iiNet
n/a
n/a
n/a
39.9%
37.5%
35.3%
33.9%
29.4%
26.7%
Optus
n/a n/a
n/a n/a
n/a n/a
11.1% 0
12.0% 0
12.4% 0
11.6% 0
11.4% 0
11.6%
n/a n/a
n/a n/a
n/a n/a
14.6% 1
13.7% 1
0.5% 1
-0.3% 1
3.7% 1
6.3%
VOC / M2 Other Active NBN subs
NET ADDS NBN vs 6 MONTLY AGO
0 1
Dec-13
Jun-14
Dec-14
Jun-15
Dec-15
Jun-16
Dec-16
Jun-17
Telstra
n/a
n/a
n/a
8
118
289
292
384
Dec 17 F 442
TPG & iiNet
n/a
n/a
n/a
68
82
112
173
158
183
Optus
n/a
n/a
n/a
28
34
48
56
87
113
Vocus
n/a
n/a
n/a
74
-14
9
44
65
79
Other
n/a
n/a
n/a
-14
30
-95
-11
96
123
Total active NBN net adds for the half
n/a
n/a
n/a
164
250
363
554
790
940
NET NBN ADDS hoh MARKET SHARE
Dec-13
Jun-14
Dec-14
Jun-15
Dec-15
Jun-16
Dec-16
Jun-17
Telstra
n/a
n/a
n/a
4.9%
47.2%
79.6%
52.7%
48.6%
Dec 17 F 47.0%
TPG & iiNet
n/a
n/a
n/a
41.6%
32.8%
30.9%
31.2%
20.0%
19.5%
Optus
n/a n/a
n/a n/a
n/a n/a
17.1% 45.2%
13.6% -5.6%
13.2% 2.5%
10.1% 7.9%
11.0% 8.2%
12.0%
n/a n/a
n/a n/a
n/a n/a
-8.8% 100%
12.0% 100%
-26.2% 100%
-2.0% 100%
12.2% 100%
13.1%
Vocus Other NET ADDS hoh MARKET SHARE
8.4% 100%
SOURCES: MORGANS, ACCC, NBN Co, COMPANY REPORTS
67
Telecommunications│Australia│Equity research│February 1, 2018
Market share movements by carrier based on our forecasts. Figure 77: Legacy (ADSL and HFC) subs / net adds (1,000) CUMULATITVE LEGACY SUBS
Dec-13
Jun-14
Dec-14
Jun-15
Dec-15
Jun-16
Dec-16
Jun-17
Dec 17 F
Telstra
2,847
2,956
2,958
3,052
3,054
2,879
2,677
2,369
1,899
TPG & iiNet
1,633
1,657
1,684
1,648
1,592
1,499
1,338
1,182
928
Optus
985
954
988
1,040
1,044
945
933
895
827
VOC / M2
385
414
438
411
411
460
429
369
322
Other
236
206
163
-20
-65
230
166
219
118
6,086
6,187
6,231
6,131
6,036
6,013
5,543
5,034
4,094
Jun-15
Jun-15
Jun-15
Jun-15
Dec-15
Jun-16
Dec-16
Jun-17
Dec 17 F
46.8%
47.8%
47.5%
49.8%
50.6%
47.9%
48.3%
47.1%
46.4%
TPG & iiNet
26.8%
26.8%
27.0%
26.9%
26.4%
24.9%
24.1%
23.5%
22.7%
Optus
16.2%
15.4%
15.9%
17.0%
17.3%
15.7%
16.8%
17.8%
20.2%
VOC / M2
6.3%
6.7%
7.0%
6.7%
6.8%
7.7%
7.7%
7.3%
7.9%
Other
3.9%
3.3%
2.6%
-0.3%
-1.1%
3.8%
3.0%
4.4%
2.9%
Active NBN subs
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
NET ADDS ADSL vs 6 MONTLY AGO
Active Legacy subs
CUMULATIVE ADSL SUBS MKT SHARE Telstra
Dec-13
Jun-14
Dec-14
Jun-15
Dec-15
Jun-16
Dec-16
Jun-17
Dec 17 F
Telstra
n/a
109
2
94
2
-175
-202
-308
-470
TPG & iiNet
n/a
24
27
-36
-56
-93
-161
-156
-254
Optus
n/a
-31
34
52
4
-99
-12
-38
-68
Vocus
n/a
29
24
-27
0
49
-31
-60
-47
Other
n/a
-30
-43
-183
-45
295
-64
53
-101
Total Legacy net adds for the half
n/a
101
44
-100
-95
-23
-470
-509
-940
Dec-13
Jun-14
Dec-14
Jun-15
Dec-15
Jun-16
Dec-16
Jun-17
Dec 17 F
NET Legacy ADDS hoh MARKET SHARE Telstra
n/a
n/a
n/a
4.9%
47.2%
79.6%
52.7%
48.6%
49.0%
TPG & iiNet
n/a
n/a
n/a
41.6%
32.8%
30.9%
31.2%
20.0%
20.0%
Optus
n/a n/a
n/a n/a
n/a n/a
17.1% 45.2%
13.6% -5.6%
13.2% 2.5%
10.1% 7.9%
11.0% 8.2%
10.7%
n/a n/a
n/a n/a
n/a n/a
-8.8% 100%
12.0% 100%
-26.2% 100%
-2.0% 100%
12.2% 100%
11.9%
Vocus Other NET ADDS hoh MARKET SHARE
8.4% 100%
SOURCES: MORGANS, ABS, NBN Co, COMPANY REPORTS
68
Telecommunications│Australia│Equity research│February 1, 2018
TIO complaints Telecommunications Industry Ombudsman (TIO) complaints remain elevated with all except Pivotel experiencing increases in Q4 CY2017. For the last 12 months Optus has received the highest number of complaints. Figure 78: Telecommunications Industry Ombudsman (TIO) mobile complaints per 10k services
SOURCES: TIO, ITWIRE, MORGANS
69
Telecommunications│Australia│Equity research│February 1, 2018
Queensland Brisbane
New South Wales +61 7 3334 4888
Stockbroking, Corporate Advice, Wealth Management
Sydney
Victoria +61 2 9043 7900
Stockbroking, Corporate Advice, Wealth Management
Melbourne
Western Australia +61 3 9947 4111
Stockbroking, Corporate Advice, Wealth Management
West Perth
+61 8 6160 8700
Stockbroking, Corporate Advice, Wealth Management
Brisbane: Edward St
+61 7 3121 5677
Armidale
+61 2 6770 3300
Brighton
+61 3 9519 3555
Brisbane: Tynan Partners
+61 7 3152 0600
Ballina
+61 2 6686 4144
Camberwell
+61 3 9813 2945
Perth
+61 8 6462 1999
Brisbane: North Quay
+61 7 3245 5466
Balmain
+61 2 8755 3333
Domain
+61 3 9066 3200
Adelaide
+61 8 8464 5000
Bundaberg
+61 7 4153 1050
Bowral
+61 2 4851 5555
Geelong
+61 3 5222 5128
Norwood
+61 8 8461 2800
Cairns
+61 7 4222 0555
Chatswood
+61 2 8116 1700
Richmond
+61 3 9916 4000
Caloundra
+61 7 5491 5422
Coffs Harbour
+61 2 6651 5700
South Yarra
+61 3 8762 1400
Gladstone
+61 7 4972 8000
Gosford
+61 2 4325 0884
Southbank
+61 3 9037 9444
Gold Coast
+61 7 5581 5777
Hurstville
+61 2 8215 5079
Traralgon
+61 3 5176 6055
Ipswich/Springfield
+61 7 3202 3995
Merimbula
+61 2 6495 2869
Warrnambool
+61 3 5559 1500
Kedron
+61 7 3350 9000
Mona Vale
+61 2 9998 4200
Mackay
+61 7 4957 3033
Neutral Bay
+61 2 8969 7500
Milton
+61 7 3114 8600
Newcastle
+61 2 4926 4044
Australian Capital Territory
Noosa
+61 7 5449 9511
Orange
+61 2 6361 9166
Canberra
Redcliffe
+61 7 3897 3999
Port Macquarie
+61 2 6583 1735
Rockhampton
+61 7 4922 5855
Scone
+61 2 6544 3144
Northern Territory
Spring Hill
+61 7 3833 9333
Sydney: Level 7 Currency House
+61 2 8216 5111
Darwin
Sunshine Coast
+61 7 5479 2757
Sydney: Grosvenor Place
+61 2 8215 5000
Tasmania
Toowoomba
+61 7 4639 1277
Sydney Reynolds Securities
+61 2 9373 4452
Townsville
+61 7 4725 5787
Wollongong
+61 2 4227 3022
South Australia
Hobart
+61 2 6232 4999
+61 8 8981 9555
+61 3 6236 9000
Disclaimer The information contained in this report is provided to you by Morgans Financial Limited as general advice only, and is made without consideration of an individual’s relevant personal circumstances. Morgans Financial Limited ABN 49 010 669 726, its related bodies corporate, directors and officers, employees, authorised representatives and agents (“Morgans”) do not accept any liability for any loss or damage arising from or in connection with any action taken or not taken on the basis of information contained in this report, or for any errors or omissions contained within. It is recommended that any persons who wish to act upon this report consult with their Morgans investment adviser before doing so. Those acting upon such information without advice do so entirely at their own risk. This report was prepared as private communication to clients of Morgans and is not intended for public circulation, publication or for use by any third party. The contents of this report may not be reproduced in whole or in part without the prior written consent of Morgans. While this report is based on information from sources which Morgans believes are reliable, its accuracy and completeness cannot be guaranteed. Any opinions expressed reflect Morgans judgement at this date and are subject to change. Morgans is under no obligation to provide revised assessments in the event of changed circumstances. This report does not constitute an offer or invitation to purchase any securities and should not be relied upon in connection with any contract or commitment whatsoever.
Disclosure of interest Morgans may from time to time hold an interest in any security referred to in this report and may, as principal or agent, sell such interests. Morgans may previously have acted as manager or co-manager of a public offering of any such securities. Morgans affiliates may provide or have provided banking services or corporate finance to the companies referred to in the report. The knowledge of affiliates concerning such services may not be reflected in this report. Morgans advises that it may earn brokerage, commissions, fees or other benefits and advantages, direct or indirect, in connection with the making of a recommendation or a dealing by a client in these securities. Some or all of Morgans Authorised Representatives may be remunerated wholly or partly by way of commission.
Regulatory disclosures Analyst owns shares in the following mentioned company(ies): Megaport Limited, NEXTDC, Over The Wire, Superloop Morgans Corporate Limited was a joint lead manager and underwriter to the placement of shares in Megaport Limited and received fees in this regard. ; Morgans Corporate Limited was lead manager to the placement & SPP of shares in Superloop Limited and received fees in this regard.
Recommendation structure For a full explanation of the recommendation structure, refer to our website at http://www.morgans.com.au/research_disclaimer
Research team For analyst qualifications and experience, refer to our website at http://www.morgans.com.au/research-and-markets/our-research-team
Stocks under coverage For a full list of stocks under coverage, refer to our website at http://www.morgans.com.au/research-and-markets/company-analysis/ASX100-Companies-under-coverage and http://www.morgans.com.au/research-and-markets/company-analysis/EX-100-Companies-under-coverage
Stock selection process For an overview on the stock selection process, refer to our website at http://www.morgans.com.au/research-and-markets/company-analysis
www.morgans.com.au If you no longer wish to receive Morgans publications please contact your local Morgans branch or write to GPO Box 202 Brisbane QLD 4001 and include your account details. 12.12.17
70