Company Overview: Over the Wire Holdings Limited (ASX: OTW) is a technology-based company which provides IT related cloud-based telecommunications solutions. It operates throughout Australia and New Zealand. Its services include Data Networks and Internet, Voice, Data Centre co-location, Cloud and Managed Services. The company pursues to hasten growth through strategic acquisitions and strengthening geographical footprint. It offers a simplified and reliable platform to customers, via continuous engagement in building new capabilities.
 

OTW Details
 

 
Geographical Expansion, Organic Growth & Higher Customer Retention Rate are Key Catalysts: Over the Wire Holdings Limited (ASX: OTW) is involved in providing telecommunications, cloud-based IT solutions in all major Australian capital cities, which include New Zealand as well as Auckland. In the recent past, technology has changed the way people think and carry on with their day-to-day activities. The company offers reliable networks, intelligent phone systems and high levels of data security to help companies and its customers to stay productive, ensure efficiency, and keep business reputation protected. In other words, it provides an integrated suite of products and services to enhance the customers’ experience. OTW’s efforts to provide better experiences to customers have led to high levels of customer service and retention. Notably, in FY19, the company had 96% retention of its customers. The chart below depicts the company has successfully maintained its customer retention rate above 95% over a period from 2014 to 2019.
 

Customer Retention (Source: Company Reports)
 
The company’s FY19 success to effectively execute geographic expansion comes through its initiatives of quality acquisitions. Moreover, OTW delivered incredible organic growth while pursuing its expansion plans through buyouts. Notably, overall organic growth during the period increased 15% year over year. Total revenue from ordinary activities went up a whopping 49% year over year in FY19. Thanks to the higher demand from customers across all four product lines. On a geographic basis, revenues from Queensland, New South Wales, South Australia and Victoria boosted 17%, 14%, 13% and 11%, respectively. On a statutory basis, South Australia witnessed the highest growth of ~ 230%. The company’s successful integration of Access Digital and Comlinx buyout was a key positive. The Access Digital acquisition hastens the consolidated entity’s growth into the South Australian market, where as acquisition of Comlinx strengthens OTW’s foothold into the provision of Software Defined WAN (SD-WAN) solutions.
 
Going forward, the company is seeking to continuously enhance its business via organic growth through a strong sales pipeline. A debt-free balance sheet will help the company to attain its long-term objectives of expanding the business through acquisitions and delivering continued growth in shareholders’ returns. As the business holds the ability to carry out additional acquisitions, it is seeking to discover the next set of quality businesses that can perform as drivers for future growth. Furthermore, the company remains confident to provide a complete suite of telecommunications, cloud and IT Services offering to businesses, with the help of dedicated team to enhance customer experience, thus giving confidence to growth in FY20.
 
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 impetus is expected to persist in the coming years. 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.
 
The company has a track record of consistent growth in revenue, profitability and returns to shareholders. It reported a CAGR of 49% and 54.5% in revenue and EBITDA, respectively, over FY15-FY19. The company declared an interim dividend of 1.5 cents in 1HFY20, payable on 7 April 2020.
 

Past Track Record of Revenue, EBITDA, NPAT and EPS (Source: Company Reports)
 
It is worth mentioning that the company has witnessed demand from customers across all product lines. Notably in FY19, the company’s Data Networks revenue soared ~26% year over year. The company’s revenues from Cloud and Managed Services went up 217% year over year.
 
Robust Interim Results: In 1HFY20 for the Period Ended 31st December 2019, the company reported total statutory revenue of $42.9 million, rising 25% from year-ago restated revenue figure of $34.3 million, after including the impact of AASB16. In 1HF20, recurring revenue increased 5% year over year and came in at $36.6 million. EBITDA from recurring revenues increased 19%, while EBITDA margins went up by 2% year over year. The non-recurring business went down 39% year over year, owing to a significant drop in one-off revenue. The company reported EBITDA of $8.2 million, up 1% on year over year. NPATA for the period came in at $4.2 million and NPAT stood at $2.3 million. On the back of continuous investment in business development, OTW has built a strong sales pipeline for monthly recurring revenue, which increased by 39% in 1HFY20 and 58% in CY19. The company had doubled the number of sales roles during the period with increased focus on winning new business  along with an enhanced focus on further automation and self-service capability.
 

Key Highlights (Source: Company Reports)
 
Product Highlights: Product-wise, revenue from Data Networks rose 8% from the prior corresponding period and stood in at $19.1 million.  Revenues from Security & Services went up 118% year over year and came in at $9.5 million. Revenues from Voice and Hosting increased by 14% and 21%, respectively, on a year over year basis.
 
Balance Sheet $ Cash Flow Highlights: At the end of 31 December 2019, the company’s cash balance amounted to $7.4 million and net assets stood at $66.8 million. The business remained debt-free as at 31st December 2019 and is well-positioned for the next few acquisitions through debt, without exceeding a net-debt to EBITDA ratio of 1.5x. Net cash provided from operating activities in 1HFY20 came in at $4.2 million. Net cash used in investing activities and financing activities came in at $3.3 million and $3.8 million, respectively.
 
 
Cash Details (Source: Company Reports)
 
Recent Update: The company recently announced that Susan Margaret Forrester, a director of the company holding indirect shares, acquired 5,814 ordinally fully paid shares for a consideration of $17,413.81. In another update, the company stated that Mike Stabb, the CFO and Company Secretary of the company has moved into a new team to focus on mergers & acquisitions, new product enhancement and new market opportunities. It also stated that Simone Dejun will take over the role of Company Secretary, effective from 1 April 2020.
 
Top 10 Shareholders: The top 10 shareholders have been highlighted in the table which together form around 71.27% 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: Refinitiv, Thomson Reuters)
 
Key Metrics: For the half year ended 31st December 2019, the company reported a gross margin of 83.2%, which is higher than the industry median of 74.8%. 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 0.49x. 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: Refinitiv, Thomson Reuters)
 
Outlook: The COVID-19 outbreak is changing the way people perform their day-to-day lives and how they communicate with friends and family. A change in working habits has also been noticed. Cloud computing is playing a huge role, in helping companies distantly process a lot of information, and run mission critical applications and services. It is also helping employees work together from anywhere and everywhere across the world. Given the major role that cloud computing is playing during this COVID-19 led lockdown and uncertainties, OTW stands to benefit as the work from home trend continues.
 
The company is also aiming to achieve its vision and mission to enhance the financial performance of the business and the returns for its shareholders. The company is also focusing to complete several new capabilities in the coming six months. These new facilities involve adding Microsoft Teams Direct Routing service and adding mobile services on post-paid basis to OTW’s product portfolio. Further, it expects to strengthen its sales opportunity pipeline, via continued demand from customers across all product lines, thereby aiming to reach monthly recurring revenue targeted growth of 25% in around 18 months period. On the heels of acquisition synergies, the company remains committed to deliver its strategy and leverage on strong opportunities for future growth.
 

Key Valuation Metrics (Source: Refinitiv, Thomson Reuters)
 
Valuation Methodologies:
 
Method 1: Price to Earnings Multiple Based Relative Valuation (Illustrative)

Price/Earnings Based Relative Valuation (Source: Refinitiv, Thomson Reuters)
 
Method 2: Price to Cash Flow Multiple Based Relative Valuation (Illustrative)
 
Price to Cash Flow Multiple Based Relative Valuation (Source: Refinitiv, 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 34.47% in the past three months and is currently trading close to its 52-week low level of $1.830. Notably, in the last one month, the stock went up ~11.15%. The company has a market capitalisation of $149.24 million, with a P/E multiple of 15.73x and annual dividend yield of 1.21%. In 1HFY20, the company witnessed customer demand across all its product lines and continued to make relevant investments for development on the platform. Additionally, the company is also focusing on new business opportunities that can complement its current offerings and deliver enhanced customer experience. We have valued the stock using two relative valuation methods (illustrative), i.e., Price to Earnings and P/CF multiples. For the said purpose, we have considered peers like TechnologyOne Ltd (ASX: TNE), Citadel Group Ltd (ASX: CGL), Data#3 Ltd (ASX: DTL) to name a few. 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 $2.65, down 8.304% on 01 May 2020 (with partial impact from the overall drop in the market). 
 
 
OTW Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

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