Company Overview: Spirit Technology Solutions Ltd (ASX: ST1) is engaged in the provisioning of IT&T services, which includes Telecommunication services, Cloud services, Managed IT services and Cyber Security services. ST1 also provides internet and network services such as business fibre, fixed wireless, managed routers, and private networks. The company derived revenues in FY21 from SMB market (10%), Mid-Market (45%), Enterprise (13%) and Essential Services (32%).

ST1 Details

Diversified Business Model to Aid Business Growth: The company operates an “one-stop-shop” for the customer, which happens to be the preferred business model for many businesses. This was mainly backed by the acquisition of Nexgen and Intalock in FY21, which allows ST1 to provide a full solution for modern-day businesses. The digital requirements of modern businesses have ramped-up the requirements for the distributed workforce, high bandwidth/fast speed requirement, migration to cloud-based digital tools, online sales/support, integrate and manage many devices type. For deriving revenue growth in FY22 and FY23, the company would be mainly focused on cross-sell spirit product range and larger deal sizes & contract length.

Q1FY22 Financial Summary:  

• During the quarter ended 30 September 2021 (Q1FY22), the company witnessed strong results despite three months of lockdown, evident by the growth of 98% in revenue to $30.9 million on a YoY basis.
• Despite the seasonally low quarter, ST1 recorded a positive underlying EBITDA of $2 million.
• The company received $5.1 million of capital from the sale of consumer assets, which would be utilised for funding acquisitions, driving organic growth or to meet deferred acquisition payment.
• The said divestment of business is in line with its strategy to focus on becoming a leading and fully integrated technology provider of modern digital workplaces to the business market, from SMB to corporates.
• Spirit had a cash balance of $12.3 million and $7.0 million in its CBA debt facility as on 20 October 2021.

FY21 Financial and Operational Summary:

• During FY21, the company has repositioned from a small Internet Service Provider to a full-service technology company.
• ST1 posted growth of 200% in revenue and other income to $104.5 million, aided by strong performances in new business sales in the mid-corporate markets and SMB market.
• The company witnessed a turnaround in the bottom line to underlying Net Profit Before Tax (UNPBT) to $4.5 million from losses of $0.49 million in FY20.
• The growth in financials indicates execution to strategy, with scale building and profitable margins from the effective integration of acquisitions and bundling of services.

Revenue & UNPBT (Source: Analysis by Kalkine Group)

Change in Directors’ Interest: On 11 January 2022, Mark Dioguardi has made a change to holdings in the company by acquiring 103,844 fully paid ordinary shares and disposing 103,844 Performance rights.

Top 10 Shareholders: The top 10 shareholders together form around 44.61% of the total shareholding, while the top 4 constitute the maximum holding. Regal Funds Management Pty. Ltd and Crazy Diamond Pty. Ltd are holding a maximum stake in the company at 9.35% and 8.38%, respectively, as also highlighted in the chart below:

Top 10 Shareholders (Source: Analysis by Kalkine Group)

Key Metrics: ST1 recorded a current ratio of 0.65x in FY21 as compared to the industry median of 0.56x. On the leverage side, the company recorded a debt-to-equity ratio of 0.13x during the year against the industry median of 0.43x.

Revenue & Leverage Profile (Source: Analysis by Kalkine Group)

Key Risks:

• Cybersecurity Risk: The company’s business could be impacted by the risk arising from the failure in maintaining cybersecurity.
• Regulatory Risk: The company is exposed to a more complex regulatory environment; any failure in the compliances could lead the business to fines, penalties, etc.
• Cost Pressure and Supply Risk: The company’s business is exposed to costs pressures and supply- side challenges like labour shortages and chip manufacturing delays.

Outlook: ST1 expects growth in sales demand in Q2 and across 2HFY22, and it is already witnessing recovery in the SMB market. The company believes that it is well-placed to capitalise on the ongoing structural changes occurring to the modern workplace in terms of cyber risk, remote worker needs, demand for data, cloud, and shortage of IT skills. The company has also identified acquisition targets throughout B2B Telco and Cloud. In addition, the company is seeking divestment options for the fixed wireless towers, and it expects to update the market in Q3FY22. The near-term objective of the company revolves around extracting further revenue and cost synergies from the opportunity of providing additional products and services to its existing customers.

Valuation Methodology: P/E Multiple Based Relative Valuation (Illustrative)

Source: Analysis by Kalkine Group

*% Premium/(Discount) is based on our assessment of the company’s NTM trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks.

Stock Recommendation: The stock of ST1 is currently trading near to its 52-week low level of 0.210, offering a decent opportunity for accumulation. The stock has been corrected by ~20.68% in the past six months, respectively. The stock has been valued using a P/E Multiple based illustrative relative valuation method and arrived at a target price of low double-digit upside (in % terms). The company can trade at a slight premium to its peers’ average P/E multiple, considering the recovery in the SMB market and rising demand for service, etc. For the purpose of valuation, peers such as Uniti Group Ltd (ASX: UWL), TPG Telecom Ltd (ASX: TPG), Spark New Zealand Ltd (ASX: SPK), and others have been considered. Considering the expected upside in valuation, growing revenue, turnaround in the bottom line, positive underlying EBITDA, decent liquidity position, optimistic long-term outlook, current trading levels, and key risks associated with the business, we recommend a ‘Speculative Buy’ rating on the stock at the current market price of $0.225, as on 14 January 2022, 10:50 AM (GMT+10), Sydney, Eastern Australia.

ST1 Daily Technical Chart, Data Source: REFINITIV 

Note: The purple line reflects the RSI (14-day period)

Note 1: The reference data in this report has been partly sourced from REFINITIV.

Note 2: Investment decision should be made depending on the investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the Valuation has been achieved and subject to the factors discussed above.

Technical Indicators Defined: - 

Support: A level where-in the stock prices tend to find support if they are falling, and downtrend may take a pause backed by demand or buying interest. 

Resistance: A level where-in the stock prices tend to find resistance when they are rising, and uptrend may take a pause due to profit booking or selling interest.

Stop-loss: It is a level to protect further losses in case of unfavourable movement in the stock prices.

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