Company Overview: Over the Wire Holdings Limited (ASX: OTW) is a technology company offering telecommunications, cloud and IT solutions to customers across Australia and New Zealand. Its suite of services includes, Data Networks and Internet, Voice, Hosting including Cloud and Data Centre Colocations, and Managed Services and Security. The company aims to accelerate growth through strategic acquisitions, that complement its current offerings and offer increased business across new and existing geographies. It offers a simplified and reliable platform to customers and is focused on attracting new users while maintaining the current customers base, through continuous engagement in building new capabilities.
 

OTW Details
 

 
Focused on Delivering Accelerated Organic Growth: Over the Wire Holdings Limited (ASX: OTW) is a provider of telecommunications, cloud and IT solutions. The company aims to simplify its suite of services to offer a simplified platform to its customers. It is continuously engaged in the development of new expertise to provide better experiences to customers. The above philosophy has enabled the company to maintain a high customer retention rate over the period covering 2014 – 2019. During FY19, the company was committed to delivering impressive organic growth while pursuing its expansion plans through acquisitions. The company progressed well on the integration of the acquired businesses and delivered growth in revenue and profitability. During the year, the company reported organic revenue growth of 15%, with all the regions demonstrating positive results. Queensland reported the highest organic growth of 17%, followed by New South Wales at 14%. Statutory growth was the highest across South Australia at 230%, due to accelerated expansion into the market through the acquisition of Access Digital Networks in November 2018. In November 2018, the company also acquired Comlinx, a leading provider of IT managed solutions, that expanded the company’s offerings and provided cross-sell opportunities. Since 2015, the company has been carrying out multiple acquisitions and ensured the timely realisation of synergies and cost savings through integration. 

For the year ended 30^th June 2019, the company reported total revenue from ordinary activities amounting to $79.59 million, representing an increase of 49% on prior corresponding year revenue of $53.56 million. The company witnessed demand from customers across all product lines, with Cloud and Managed Services reporting the highest increase in revenue, up 217% to $23.03 million. This was followed by an increase of 26% in Data Networks revenues, which stood at $36.96 million. EBITDA for the year came in at $20.06 million, up 64% on prior corresponding year EBITDA of $12.25 million. NPAT increased by 83% to $10.14 million, driven by effective management of expenses while increasing revenue.

During the six months ended 31^st December 2019, the company reported double-digit growth in statutory revenue, as a result of continued demand from customers across all product lines. However, profit for the half witnessed a decline due to investments made for boosting the operational efficiencies across the platform. Balance sheet at the end of the period remained strong with positive operating cashflows along with low gearing ratios.

The company is focused on driving organic growth through the acquisition of new customers and increased sales to existing customers. Moreover, with a track record of successful growth through acquisitions, the company is looking forward to more acquisitions that can be a strategic fit for the business. With an immensely dedicated team offering the right experiences to customers, the company is confident about achieving another strong year in FY20. The company has a track record of consistent growth in revenue, profitability and shareholder returns. Over the period of 2015 – 2019, the company reported a CAGR of 49% and 54.5% in revenue and EBITDA, respectively.
 

Growth Profile (Source: Company Reports)
 
Financial Performance for the Half Year Ended 31^st December 2019: During the half, the company reported total statutory revenue amounting to $42.9 million, up 25% on 1HFY19 restated revenue of $34.3 million, after incorporating the impact of AASB16. Product-wise revenue stood the highest in case of Data Networks at $19.1 million, followed by Security & Services at $9.5 million. Revenue from Security & Services witnessed the highest growth on the prior corresponding half at 118%. Recurring revenue for the period continued to grow and stood at $36.6 million, up 5% on prior corresponding period, pushing the gross margin and EBITDA margin from the recurring business, upward by 1% and 2%, respectively. The non-recurring business, that has a stronger H2 bias historically, witnessed a weaker half due to a significant drop in one-off revenue. EBITDA for the period stood at $8.2 million, up 1% on prior corresponding period EBITDA of $8.1 million. NPATA came in at $4.2 million, representing a decline of 2% on prior corresponding period value of $4.3 million. NPAT went down by 27% on the prior corresponding half and stood at $2.3 million. The Board declared an interim dividend of $0.015, to be paid on 7^th April 2020.


P&L Statement (Source: Company Reports)
 
Investments for Growth: During the half, the company made significant investments to drive growth in the recurring business. Over the period, the company increased the number of sales roles with an objective to win new customers and began offshoring of non-customer facing operational roles. With the successful delivery of operational efficiencies from the development initiatives, the company expanded its development team during the half. While the investments resulted in additional expenses of $1 million during the first half, they are expected to provide monthly recurring revenue growth of 25% in ~18 months. Investment in sales roles and expansion of the development team offer enhanced capabilities to deliver quicker cash conversion through a reduced Order-to-Cash lifecycle.
 
Balance Sheet Position: At the end of the period, the company reported a sound balance sheet position with cash and cash equivalents amounting to $7.4 million and net assets amounting to $66.8 million. The business remained debt-free as at 31^st December 2019 and is confident about funding the next few acquisitions through debt, without exceeding a net-debt to EBITDA ratio of 1.5x. This will offer a proper balance between the objectives of expanding the business through acquisitions and delivering continued growth in shareholders’ returns.
 
As the business possesses the potential to carry out additional acquisitions, it is aiming to identify the next set of quality businesses that can act as drivers for future growth. With continued investment in business development, the company has built a strong sales pipeline for monthly recurring revenue, that increased by 39% in 1HFY20 and 58% in CY19.
 
Recent Update: The company released an announcement notifying that John Francis Puttick, Chairman on the Board, acquired 17,710 ordinary shares on 2^nd March 2020, for a consideration of $56,598.90. On 3^rd March 2020, John acquired 14,985 ordinary shares for a consideration of $47,839.18. Another director named Michael Nictarios Omeros, acquired 52,000 ordinary shares for a consideration of $171,368.87.

Top 10 Shareholders: The top 10 shareholders have been highlighted in the table which together form around 68.88% of the total shareholding. Omeros (Michael Nictarios) held the maximum number of shares with a percentage holding of 25.22%, followed by Paddon (Brent Evans) holding 22.28% of the shares.
 

Top Ten Shareholders (Source: Thomson Reuters)

Key Metrics: For the half year ended 31^st December 2019, the company reported a gross margin of 83.2%, which is higher than the industry median of 74%. Debt to Equity multiple stood at 0.16x, as compared to a multiple of 0.26x in the prior corresponding half and the industry median of 0.50x. The company improved on its short-term liquidity with a current ratio of 1.02x in 1HFY20, as compared to a current ratio of 0.75x in the prior corresponding half.

Key Metrics (Source: Thomson Reuters)

Outlook: Going forward, the company is eyeing continued organic growth through a strong sales pipeline. In 1HFY20, the company reported a rise of 24% in new monthly recurring revenue won, as compared to 1HFY19. Sales pipeline for monthly recurring revenue has increased by 58% on the calendar year 2019. The above increase is expected to result in monthly recurring revenue growth of 25% within 18 months from December 2019. Another area of focus has been the expansion of the product portfolio, with new products set to be launched in the second half of FY20.
 

Key Valuation Metrics (Source: Thomson Reuters)
 
Valuation Methodology 1: Price to Earnings Multiple Based Relative Valuation 

Price/Earnings Based Relative Valuation (Source: Thomson Reuters)

Valuation Methodology 2: Price to Cash Flow Multiple Based Relative Valuation 
 
Price to Cash Flow Based Relative Valuation (Source: Thomson Reuters)

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

Stock Recommendation: The stock of the company corrected by 39.09% in the past one month and is currently trading close to its 52-week low level of $2.410.During the first half of FY20, the company witnessed customer demand across all its product lines and continued to make relevant investments for development on the platform. Newly added product capabilities and a strong recurring revenue pipeline are expected to drive organic growth in the near future. Moreover, the company is also eyeing new businesses that can complement its current offerings and deliver enhanced customer experience. We have valued the stock using two relative valuation methods, i.e., Price to Earnings multiple and Price to Cash Flow multiple. For the purpose, we have considered peers like TechnologyOne Ltd (ASX: TNE), Citadel Group Ltd (ASX: CGL) and Data#3 Ltd (ASX: DTL). As a result, we have arrived at a target price with an upside of lower double-digit in percentage terms. Considering the above factors, we give a “Buy” recommendation on the stock at the current market price of $2.510, down 6.343% on 13^th March 2020.
 

OTW Daily Technical Chart (Source: Thomson Reuters)

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