Company Overview: Over the Wire Holdings Limited is a provider of telecommunications, cloud and information technology solutions. The Company has an integrated product suite of services, including data networks and Internet; voice; cloud and managed services, and data center co-location. It offers custom built, private connections to construct a fully managed wide area network (WAN). It provides power redundant, rack space in its data centers as part of its managed collocation offerings. Its AWS Direct Connect services provide a private connection directly into Amazon Web Services hosted environment. It provides a range of infrastructure as a service (IaaS) options, utilizing virtual machines (VM's), physical machines and utility disk. Its backup as a service (BaaS) is a privately hosted cloud backup system for businesses. Its platform as a service (PaaS) offering allows business to utilize a fully outsourced infrastructure platform for computing needs.


OTW Details

Growth Attributable to Acquisitions and Synergies: Over the Wire Holdings Limited (ASX: OTW) is a provider of telecommunications, cloud and IT solutions. The company has a network presence with Points of Presence (POPs) in all major Australian capital cities, Auckland, and New Zealand. The company has an integrated product suite of services covering Data Networks, Voice, Cloud and Managed Services & Data centre co-location. Over the period covering FY15 to FY18, the company witnessed 49.2% top-line CAGR growth with FY15 revenue amounting to $16.15 million and FY18 revenue amounting to $53.68 million. In addition, the company reported 41.1% bottom-line CAGR growth with FY15 profits amounting to $1.97 million and FY18 profits amounting to $5.53 million.

During the fiscal year 2018, the company witnessed an uplift across all the key metrics, including revenue, EBITDA and NPAT. In the period, the company was primarily focused on delivering growth in the New South Wales and Victorian markets. Statutory revenue from New South Wales reported an increase of 60% and that from Victoria reported an increase of 133%. Coming to the revenue growth across all product categories,the highest revenue growth during the year was witnessed by Data Networks, increasing 85% on the prior year. Voice revenue increased by 31%, Cloud and Managed Services by 50% and Data Centre Co-Location by 4% on a Y-o-Y basis. During the year, the company reported an overall organic growth of 20%. Going forward, the company intends to achieve annual organic growth of 20% from the various acquisitions done in the recent past. The company has reshuffled its verticals based on the products, for better alignment with the purchasing decisions made by businesses. OTW looks forward for further acquisition in coming years to support its revenue growth. The company aims to serve the customer with better and improved products, for that matter, it is further developing its offerings related to SD-WAN, cyber security and mobility.


Financial Summary (Source: Company Reports)

H1FY19 Financial Highlights: During the first half, the company generated total revenue amounting to $34.3 million, up 43% on prior corresponding period revenue of $24.1 million. EBITDA for the period was reported at $7.5 million, up 53% in comparison to the prior corresponding period EBITDA of $4.9 million. The company witnessed a rise of 45% in NPAT, from $2.2 million in H1FY18 to $3.2 million in H1 FY19. Gross profit margin for the period increased to 55%, from 54% in the prior corresponding period. EBITDA margin for the period also witnessed an improvement from 21% in pcp to 22% in H1FY19. Receipts from customers in the half amounted to $37.6 million in comparison to $26.4 million in the prior corresponding period.

Net debt during the period decreased from $6.2 million to $4.0 million. Including deferred consideration, there was an increase in net debt from $8.2 million to $9.9 million, following the inclusion of $6 million potential earn out payments for Comlinx and Access Digital. In April 2019, the company paid an interim dividend of 1.25 cents per share.


Key Financial Highlights (Source: Company Reports)

Product-Wise Revenue Growth: During 1H19, the company witnessed a rise in demand across all the product categories, such as- (a) Data Networks revenue during the period, amounted to $17.7 million, up 40% in comparison to the prior corresponding revenue of $12.6 million, (b) Voice revenue for the period witnessed a rise of 21% on the prior corresponding period, at $8.1 million in H1FY19 and $6.7 million in 1HFY18, (c) Cloud and Managed Services revenue stood at $7.0 million for the period, up 111% in comparison to pcp revenue of $3.3 million. During the period, the company also acquired plant & equipment worth $1.3 million for Cloud platform expansion, and (d) Data Centre Co-Location reported a revenue amounting to $1.5 million, up 7% on prior corresponding period revenue of $1.4 million.


Growth in Product Divisions (Source: Company Reports)

Future Revenue Categorisation: Going forward, the company will begin categorising revenue into 4 new product categories, that will better align with the purchasing decisions made by businesses. The new product categories will include Data Networks, Voice, Hosting (combining Cloud and Data Centre Co-Location), and Security & Managed Services. The company provided the below comparison of the old and new categories based on H1FY19 revenues to prepare for the transition in future reporting periods.


Revenue Re-categorisation (Source: Company Reports)

Synergistic Acquisitions for overall growth: The company completed three strategic acquisitions, including that of VPN Solutions in FY18 & Access Digital and Comlinx in November 2018. This synergistic agreement will help to increase the top-line growth of the company in years to come on the back of cross-selling opportunities in the market.

(a) Lucrative Acquisition with VPN SolutionsPty Ltd: During FY18, the company acquired 100% of the shares in VPN Solutions Pty Ltd, that delivers managed networks to approximately 150 business customers. The key purpose underlying the acquisition was to expand the geographical footprints into the New South Wales and South Australian markets. The acquisition also provided the company with access to a high-quality customer base that, in turn, opened doors to cross sell and interstate expansion. The company achieved synergies from the acquisition in FY18, with further cost savings to be delivered in FY19. The acquisition was completed for a total upfront consideration of $14.97 million.
 
(b) Strategic Acquisition with Access Digital: In November 2018, the company completed the acquisition of 100% of the shares in Access Digital for a total consideration of $13.05 million. Out of the total consideration, $10.44 million was paid in cash and $2.61 million was paid in OTW shares at an issue price of $4.60 per share. Based on a number of performance measures being achieved, vendor was also entitled to receive a deferred consideration of up to $14.50 million in cash in November 2019. $1.3 million of the revenue in the first half was attributable to the acquisition of Access Digital. The acquisition helped the company expand its presence into the South Australian market along with cross-selling opportunities through access to existing Access Digital customers. The deal has the potential for significant addressable near-term synergies and margin expansion.
 
(c) Deal with Comlinx to Provide Synergies: The company acquired 100% of the shares in Comlinx for a total upfront consideration of $16 million. $12.80 million of the payment was made in cash and $3.20 million in OTW shares at an issue price of $4.60. The vendor was also entitled to receive further deferred cash consideration of up to $4 million in September 2019, based on the achievement of certain performance measures. Comlinx helped generate revenue to the extent of $2.1 million in the first half of FY19. The acquisition will help OTW accelerate its move into the provision of Software Defined WAN solutions. The acquisition is expected to offer synergies in the current financial year, with further cost savings in the next financial year. 

Growth Strategy: The company is aiming at >20% organic growth each year. The strategy in place to achieve the stated growth target involves continued geographical expansion into New South Wales and Victoria. The action plan also involves leveraging Access Digital’s strong presence in South Australia. It will focus on selling more products and services to existing customers by leveraging its broad product set. In addition, the company looks to further accelerate cross-selling opportunities & broaden its target market and potential business customers, through Comlinx’s expanded product offering. It is also looking forward to more acquisitions of suitable businesses that deliver a strategic fit, readily achievable synergies and add shareholder value.
 

Top 10 Shareholders: The top 10 shareholders have been highlighted in the table, which together form around 66.93% of the total shareholding. Omeros (Michael Nictarios) holds the maximum interest in the company at 26.40%, followed by Paddon (Brent Evans) with a percentage holding of 23.55%.
 

Top 10 Shareholders (Source: Thomson Reuters)

Key Metrics: During H1FY19, the company had a gross margin of 90.5%, which is higher than the industry median of 73.6%. The company’s net margin improved in comparison to the prior corresponding period, from 9.0% in H1FY18 to 9.2% in H1FY19. ROE stood at 7.6% in 1HFY19.


Key Ratios (Source: Thomson Reuters)

Outlook: The company is looking forward to the organic growth of 20% annually supported by strategic acquisitions to add long-term value to the business. It will continue investing in sales and marketing & cross selling to existing customers. Furthermore, it is looking at future acquisitions along with realisation of synergies from VPN Solutions & integration of Comlinx and Access Digital acquisitions. The company aims at continuously improving its products and expects to further develop its offerings in SD-WAN, cyber security and mobility. In addition, the company plans to adopt a complete customer centric approach to enhance their experience and in turn, attracting more customer traffic for growth. It plans for continued integration of systems to ensure seamless customer experience and will also work on enhancing the customer portal to serve them better.


Key Valuation Metrics (Source: Thomson Reuters)

Valuation Methodology:
 Method 1: EV/EBITDA-Based Valuation Approach:

EV/EBITDA-Based Valuation (Source: Thomson Reuters)
 
Method 2: EV/Sales Multiple Approach (NTM):

EV/Sales Multiple Based Valuation (Source: Thomson Reuters)

Note: All forecasted figures and peers have been taken from Thomson Reuters, *NTM-Next Twelve Months

Historical P/E Band (Source: Company Reports, Thomson Reuters)

Stock Recommendation: The stock of the company generated returns of 2.29% and 1.44% over a period of 1 month and 3 months, respectively. The company ended H1FY19 with remarkable results attributable to increase in revenue, profits, EBITDA and growth margins. The period saw strong growth in profitability delivered organically and through quality acquisitions. During the period, the company also witnessed the continued strong conversion of EBITDA to cash with cash & cash equivalents at the end of the period amounting to $8.4 million. In addition, the business reported growth across all the product divisions with the highest revenue increase in Cloud/Managed Services segment. Based on historical data, the company has delivered consistent growth in revenue and profitability from the period starting 2015 to H1FY19. Furthermore, the recent acquisitions are also expected to be EBITDA and EPS accretive while offering access to new markets, cross-selling opportunities, near-term synergies and margin expansion. Considering the decent fundamentals and outlook, we have valued the stock using Relative valuation method, EV/EBITDA and EV/Sales multiple and 3.5-year average P/E multiple to FY20E consensus EPS of ~$0.21 and have arrived at the target price upside of lower double-digit growth (in %). Currently, the stock is trading slightly below the average of 52 week high and low prices of around $4.49 with a PE multiple of 34.10x. Hence, considering aforesaid facts and current trading level, we give a “Buy” recommendation on the stock at the current market price of $4.84 per share (down 1.626% on 19 July 2019).

 
OTW Daily Chart (Source: Thomson Reuters)

Disclaimer
 
The advice given by Kalkine Pty Ltd and provided on this website is general information only and it does not take into account your investment objectives, financial situation or needs. You should therefore consider whether the advice is appropriate to your investment objectives, financial situation and needs before acting upon it. You should seek advice from a financial adviser, stockbroker or other professional (including taxation and legal advice) as necessary before acting on any advice. Not all investments are appropriate for all people. Kalkine.com.au and associated pages are published by Kalkine Pty Ltd ABN 34 154 808 312 (Australian Financial Services License Number 425376). The information on this website has been prepared from a wide variety of sources, which Kalkine Pty Ltd, to the best of its knowledge and belief, considers accurate. You should make your own enquiries about any investments and we strongly suggest you seek advice before acting upon any recommendation. Kalkine Pty Ltd has made every effort to ensure the reliability of information contained in its newsletters and websites. All information represents our views at the date of publication and may change without notice. To the extent permitted by law, Kalkine Pty Ltd excludes all liability for any loss or damage arising from the use of this website and any information published (including any indirect or consequential loss, any data loss or data corruption). If the law prohibits this exclusion, Kalkine Pty Ltd hereby limits its liability, to the extent permitted by law to the resupply of services. There may be a product disclosure statement or other offer document for the securities and financial products we write about in Kalkine Reports. You should obtain a copy of the product disclosure statement or offer document before making any decision about whether to acquire the security or product. The link to our Terms & Conditions has been provided please go through them and also have a read of the Financial Services Guide. On the date of publishing this report (mentioned on the website), employees and/or associates of Kalkine Pty Ltd do not hold positions in any of the stocks covered on the website. These stocks can change any time and readers of the reports should not consider these stocks as personalised advice.