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
Agreement with NBN:NetComm Wireless Ltd (ASX: NTC) made a Master Equipment and Services Supply Agreement with nbn, for supplying the Distribution Point Units (DPUs) and related services from fiscal year of 2018. NTC would supply nbn with 1-port and 4-port DPUs which are specifically designed for the nbn Fibre-to-the-Curb (FTTC) project. NTC would install the telecommunications pits outside premises to connect fibre to the current household’s copper lines enabling nbn to remotely activate the service on request. By delivering FTTC, deliver speeds would improve up to 100/40Mbps using VDSL2 and will help attain faster speed with some new technologies that would be available. As per the nbn’s announcements, minimum of 700,000 premises would be covered with the FTTC project. On the other side, the group continued their rollout of Ericsson/nbn™ Fixed Wireless solution while deployed over 120,000 units as of June 2016. nbn™ Fixed Wireless revenue tripled during fiscal year of 2016 while the number of homes and businesses actively using the service more than doubled. Meanwhile, NTC believes that they are well positioned to target the $80 billion annual global market given the track record of successful Fixed Wireless deployment. The group sees potential opportunity from other economies who are planning to start termination of their PSTN copper networks.
 

NTC historical record (Source: Company Reports)
 
Delivered a solid M2M and fixed wireless revenue performance: NTC delivered a decent fiscal year of 2016 results, wherein the revenue rose over 15% to $85.3 million as compared to the prior corresponding period. Machine to Machine (M2M) and Fixed Wireless revenue enhanced by 76% to $59.3 million during the period driven by the ongoing ramp up of the Ericsson/nbn™ contract, which is forecasted to generate better volume in fiscal year of 2017. This M2M and Fixed Wireless business comprises over 70% of revenue in fiscal year of 2016 which is an increase from 45% in fiscal year of 2015. The group expects this shift in revenue to continue in fiscal year of 2017 given the mounting global scope for them.  On the other hand, the group’s revenue from their ‘base’ broadband business fell by $13 million to $26 million during the fiscal year. This was mainly due to the one-off revenue increase from the sale of their powerline products during fiscal year of 2015. But, NTC forecasts their base business to deliver over $30 million of annual revenue in the future. Even the EBITDA fell to $6.2 million during fiscal year of 2016 as compared to FY15. This weakness was mainly due to the group’s heavy investment of $4.3 million in staff, skills and infrastructure to win potential contracts in M2M, Fixed Wireless and Network in the coming years. NTC enhanced their staff to 143 from 110 during fiscal year of 2016. However, NTC reported an underlying EBITDA growth of 23% year on year (yoy) to $11.2 million during fiscal year of 2016 (after adding back their business reinvestment and non-cash share based payments expense).

 

M2M and fixed wireless revenue (Source: Company Reports)
 
Market opportunity: NTC is positioning itself in the Wireless M2M, or Industrial IoT market which is forecasted to hit $11 trillion by 2025. Earlier, Telstra said that they were shutting down their 2G network before the end of the year while Optus and Vodafone are following this plan for 2017. As a result, these companies are upgrading their devices, with mainly M2M devices used by utility, security and manufacturing companies. With the obvious migration of telecom players to 3G and 4G, NTC sees an opportunity. The group’s technology is in Fixed Wireless, Distribution Point and M2M and focusing on enhancing the customer experience.
 
Penetrating the US market: The group opened its first R&D facility in the US with 30 engineers in Sunrise, Florida. NTC made a Master Purchase Agreement with a major telecommunications carriers’ group for supplying Fixed Wireless devices designed to connect households and businesses to the carrier’s Fixed Wireless rural broadband network during November 2015. The group also made a Frame Purchase Agreement with Nokia for supplying Fixed Wireless devices to Nokia related to their global FastMile initiative. The deal is tosupply Fixed Wireless broadband devices for Nokia FastMile. On the other side, the group’s 4G WiFi M2M router was certified for use on the Verizon Wireless 4G LTE network and the Verizon Private Network.
 
Boosting capital position: The group strengthened their capital position via their $50 million share placement and $1 million Share Purchase Plan during fiscal year of 2016. On the other hand, NTC witnessed a small operating cash outflow of $2.6 million in fiscal year of 2016 impacted by the initial costs relating to the USA Fixed Wireless contract which was expected.  But the group had a decent cash of $36.5 million at 30 June 2016. The group has an extended finance facility via their undrawn $14 million finance facility in place with HSBC.
 
Management changes: David Stewart, the group’s CEO & Managing Director had announced about retiring from the group in December 2016. The group underwent several milestones during David’s tenure including the production of dialup modems, ADSL and VDSL2 routers, and even transitioning towards Australian M2M space. Under David’s leadership, the group got various recognitions for innovation. David also won the status of Industry Ambassador at the annual ACOMM Awards. As a result, this exit raised few concerns among investors post which the stock fell over 24.2% in the last three months (as of January 23, 2017). Nonetheless, the concerns can be put to rest given the fact that the group is still well positioned as a global leader in the Fixed Wireless and Fibre to the Distribution Point (or Fibre-to-the Curb) space and have solid contracts in hand including nbn in Australia and one from a major US telecom player.

 

Engineering Growth (Source: Company Reports)
 
Stock performance: NTC stock corrected over 37.29% (as of January 23, 2017) in the last six months, impacted by higher costs. The group is expecting to invest an additional $22 million to $23 million in fiscal year of 2017 wherein over $17 million to $18 million would be invested to enhance people and infrastructure (before any capitalisation of engineering costs). NTC forecasts to incur over $5 million in capital expenditure. NTC intends to strengthen their team by recruiting mainly engineers. The group is aiming their workforce to reach 220 employees for fiscal year of 2017 as compared to 187 as of August 2016. On the other hand, the group expects to reap benefits from their investments since the last three years and accordingly forecasts a major revenue flow for fiscal year of 2018. With a major Ericsson/NBN fixed wireless contract the group expects their ongoing rollouts to generate a further substantial value. NTC expects a trial quantity deployment from its fixed wireless project with a major US carriers’ company. NTC is open to pursue opportunities at Fixed Wireless, Fibre to the Distribution Point (FTTdp) and Machine to Machine (M2M) markets. Given the positive prospects, we believe investors need to leverage the current subdued levels of the stock as a buying opportunity. We give a “Buy” recommendation on the stock at the current price of - $1.85

 
NTC Daily Chart (Source: Thomson Reuters)

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