Company Overview: NetComm Wireless Limited is engaged in the development of fixed wireless broadband, wireless machine-to-machine (M2M)/Industrial Internet of Things (IoT), and Fiber and Cable to the distribution point technologies. The Company operates through two segments: Broadband Business and Machine to Machine Business. The Broadband business segment supplies communication devices, which range from entry level gateways to high-performance devices that supports triple play services covering high-speed data transmission, multi high definition (HD)/4K Internet Protocol television (IPTV) and over-the-top video streaming, as well as voice over Internet protocol (VoIP) phone calls. The M2M business segment specializes in the development of technologies sold to telecommunications carriers, core network providers, system integrators, governments and enterprise customers around the world. The M2M business also includes network terminating devices designed to advance global network performance.


NTC Details

Product Innovation – a Key driver for the business: NetComm Wireless Limited (ASX: NTC) is a small cap company with a market capitalization of $172.67 Mn as of July 10, 2018. It is a leading developer of wireless Machine-to-Machine (M2M) and 4G rural broadband fixed-wireless device in the fixed and mobile broadband technologies space. Its products and solutions range from empowering telecommunications carriers, system integrators, to core network providers developed to improve their network performance; and support the connected products and services of the users in the wireless M2M and fixed wireless markets. It has two main business segments i.e., Machine to Machine (M2M) Business and Broadband Business. The fixed broadband business focusses on Australia and New Zealand (ANZ) region and provides a stable base that allows the Company to expand into larger global markets. It has a strong presence in Australia, the US, the UK, New Zealand and Japan. The company had invested $23 Mn in FY17 on planned initiatives. Resultantly, the company experienced good traction to generate sales from its newly launched product such as 4G LTE Intelligent Fixed Wireless Access unit, Network Connection Device (NCD), MachineLink 4G, and VDSL/ADSL N300 Wi-Fi Gateway with VoIP (NF10WV) to support video streaming, triple play data and VoIP services to VDSL and nbn network configuration. We expect that the growth momentum will be witnessed at the back of product innovation resulting in topline growth in the long term.

 

Reinvesting for Growth (Source: Company Reports)

Expanding Partner Base at a Global level: The company has plans to scale up its business through expanding its footprint across the globe through a partnership with Network operators, Internet service providers (ISP), systems integrators and value-added distributors. Over the period, the company has built a robust partnership with many big global telco companies like AT&T, Ericsson, NBN, Telstra, Vodafone, Singtel, Deutsche Telekom, Verizon Wireless, Spark, Nokia, Qualcomm, ThingWorx, and Cumulocity. We expect that the longstanding relationship with marquee partners in the domestic and international market will support growth momentum in years ahead.


Global broadband network partnerships (Source: Company Reports)

Expansion of Fibre-to-the-Curb Footprint – a Catalyst for Growth: The National Broadband Network (NBN Co) has recently announced that it will increase the roll-out of its fibre-to-the-curb (FTTC) footprint by 440,000 additional homes, bringing the total rollout plan to around 1.5 million homes by 2020. To the extent, we expect NTC remains the sole vendor of distribution point units or network connection devices to the NBN as they have worked closely with nbn to support their FTTC project and enhance the effectiveness of their rollout. This is the positive movement of the company and provides real benefits in term of receiving further orders over the coming years.

Agreement with Bell Canada – a Key Positive Development: The company has inked a product purchase deal with Bell Canada for the supply of intelligent Fixed Wireless Access technology devices. We expect that this is a key positive development for the company. The limited detail on potential scope has been released by NTC at this stage, but this deal potentially starts forming a bridge of earnings for NTC between its current major contracts and their ongoing maintenance phases - giving the line of sight to potentially much higher levels of earnings consistency and recurrence for NTC. Bell Canada is Canada's largest communications company and will use NTC's technology to deliver high-speed broadband services to select rural communities starting in Ontario and Quebec. As per the agreement, there are no firm volume commitments, but the company has noted that it anticipates generating significant revenues in the coming financial years under the contract and anticipates initial deliveries will occur in FY19. The contract follows from a 4-month in-field trial that was completed.

Expanding nbn fixed wireless activations and coverage: The group enhanced their Fixed Wireless coverage to 573k as of February 2018, from June 2015. The take-up rate rose to 38.2%, showing rising market penetration as the rollout progresses. The connections were activated up to 219k premises. NBN slated to launch new 100mbps service during 2018. The group’s Fixed Broadband business comprises over 20% of the overall group revenue. However, the global shut down of copper lines hurt the fixed line (ADSL) broadband. On the other hand, the Boston Consulting Group concludes that Fixed Wireless is the best solution which has a total addressable market size of $80 Bn. The group is pursuing multiple global Fixed Wireless opportunities, which has a major focus on the US and Europe. Moreover, the group is positioning itself for new growth businesses which serve the fixed wireless, DPU and M2M markets to offset the slowdown in sales of powerline devices and ADSL filters. The nbn deployment and the need to upgrade Customer Premises Equipment, is revamping the momentum.


Increasing nbn fixed wireless activations and coverage (Source: Company Reports)

Financial Highlights: The group posted a revenue growth of 89% to $88.6 Mn in 1HFY18 as compared to the prior corresponding period (pcp). The revenue was primarily driven by the execution of its key projects during the same period. Further, the Group’s revenue from its high growth M2M business contributed to 85% of the total Group revenue; and was up by 107 per cent ($75.1 Mn) on pcp basis. The period also saw revenue from the Company’s traditional Broadband business recover and the same was up by 27% as it implemented initiatives to reinvigorate the business. Reflecting the growth in revenue and the Company’s ability to scale, EBITDA recorded growth of 13 times to $9.2 million in 1HFY18 on pcp basis. Group’s NPAT increased to $3.7 million, compared to the prior period loss of $(1.7) million. The cash reserve’s balance and unused debt facilities as on 31 December 2017 stood at $13.1 million and at $20 million, respectively. Net Tangible asset per share as of 31 December 2017 was 34.70 cents as compared to 37.84 cents as on 31 December 2016. The current ratio and quick ratio stood at 1.85x and 1.37x, respectively in 1HFY18 which are moderately up as compared to the industry median.


1HFY18 Financial Highlights (Source: Company Reports)

During the year, the group secured $20 Mn worth of 3 years “committed” finance facilities with its current banking partner HSBC and it replaced the previous $15 Mn facilities which were non-committed in nature. The facilities were not utilized as on 31 December 2017. Over the significant growth period of six months ending on 31 December 2017, the company had just $0.4m in net cash outflows from its Cash Flows from Operating activities, and these were $6.5 Mn negative as compared to cash inflows of $6.1 Mn which were reported in 1H17. Total Shareholder Equity of $79.8 Mn increased by 6% or by $4.2 Mn from $75.6 Mn as at 30 June 2017. The Group has provided certain guarantees amounting to $1,279,517 for rental and performance bonds as on 31 December 2017 (30 June 2017: $ 1,260,972). We expect that the decent and improving financial performance will enable the company to provide higher returns to its shareholders and increase its ability to allocate adequate funds for future growth initiatives.

Other Updates: NTC has recently settled the litigation with Corning Optical Communications Pty Ltd. The details of this settlement are confidential, however, the group confirmed that the settlement has not had, and will not have, a material impact on NetComm Wireless’ financial position.

Positive Outlook: The outlook for NetComm Wireless is strong as the Company continues its business transformation and growth. The market opportunity for Fixed Wireless, DPUs and M2M is particularly strong in Australia, North America, and Europe and the group is well positioned to capitalize on these opportunities based on the demonstrable real-world experience with Tier 1 customers and its bespoke solution methodology i.e., Listen-Innovate-Solve approach.


Bespoke Solution Methodology (Source: Company Reports)

Stock Performance: Currently, the company is in the discussion with Tier 1 Carriers in Europe, UK and North America for the delivery of solutions based on NetComm’s existing product lines. The group is optimistic about its value-deriving efforts and aims to witness strong revenue and EBITDA growth over the remainder of FY18 with the roll-out of further contracts. The balance sheet also seems to provide a good platform to support the next pillar of growth. In the meanwhile, Rooke lane Pty Ltd as trustee for Stewart for 1986 Superannuation fund changed its substantial holding from 14.7 per cent to 12.3 per cent. The stock was up by 3.51 per cent in the last one month but slipped by 2.119% on July 10, 2018 laying down an entry opportunity at low levels. The dynamics now seem to be changing to favourable ones given the initiatives at the fundamental level. Based on the aforesaid rationale, we expect that the company is poised for growth in the forthcoming periods. Hence, we give a “BUY” recommendation on the stock at the current market price of $ 1.155.
 

NTC Daily Chart (Source: Thomson Reuters)

 
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