Stocks’ Details

5GN Networks Limited

Acquisition Agreement Inked: 5GN Networks Limited (ASX: 5GN) is a telecommunications provider operating in Australia. It offers data centre, internet broadband and cloud infrastructure services to mid-market corporate sectors. As of 19 April 2021, the market capitalisation of the company stood at ~$139.39 million. On 18 March 2021, 5GN announced the issue of 360k fully paid ordinary shares without disclosure under section 708A (5)(e) of the Corporations Act on 17 March 2020. The issuance of shares was following the purchase and sale agreement with vendors. On 17 March 2021, 5GN announced signing a contract to acquire 100% share capital of Intergrid Group Limited (IGL) for a purchase price of $30.3 million. This price is payable via $2.5 million cash and $0.5 million 5GN shares. The company will fund the transaction from its available cash reserves. 5GN anticipates the realisation of synergies worth $0.5 million per year in the first 12 months of the business integration.

A Sneak-Peak at the 1HFY21 Results: The company reported a revenue of $37.3 million, up by 47% YoY for 1HFY21 due to shifting towards higher-margin annuity revenue flows. 5GN registered the highest growth in EBITDA (up 105% YoY) and operating cash flows (up 45% YoY) in 1HFY21. During the period, 5GN completed the acquisition of Webcentral Group Limited (ASX: WCG), thereby enabling entry into the SMB market and access to a customer base of 330k. It reported completion of many strategic projects during the period. 5GN paid a fully franked final dividend of 1 cent per share for FY20. It held a cash reserve of $8.26 million as of 31 December 2020.

1HFY21 P&L Highlights (Source: Company Reports)

Key Risks: The company faces the risk of technological disruptions, competition from peers, expansion of services, changes in the services’ pricing, seeking large contracts and the risk of shutdowns due to pandemic.

Outlook: 5GN has a sales pipeline of $4.7 million of new and renewed revenue secured in the first half (>80% of revenue is contracted). The company will continue to fund future acquisitions from its existing cash reserves. It also expects to repay a large amount of the WCG debt over the next year. With WCG’s acquired software development capability, 5GN plans to construct a relative online sales channel to implement automation and deliver services to its wholesale customers. The company is also investing in the cloud infrastructure to connect its data centres to more than 80 data centres spanning Sydney, Brisbane, Adelaide, Melbourne, and Perth.

Valuation Methodology: EV/Sales Multiple Based Relative Valuation (Illustrative)

Data Source: Refinitiv, Thomson Reuters, 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 5GN gave a positive return of 30.23% in the past six months and a positive return of 27.65% in the past year. The stock is currently trading lower than the 52-weeks’ average price level of $0.82-$2.44. The stock of 5GN has a support level of ~$1.118 and a resistance level of ~$1.278. We have valued the stock using the Enterprise Value to Sales based illustrative relative valuation method and have arrived at a target price of low double-digit upside (in % terms). For this purpose, we have taken peers like Spirit Technology Solutions Limited (ASX: ST1), Aussie Broadband Limited (ASX: ABB), MNF Group Limited (ASX: MNF). We believe that the company can trade at some discount than its peer median, considering its increased net loss after tax for 1H21, higher debt and relatively lower cash balance in 1HFY21, and the risks associated with the pandemic restrictions and acquisition synergies to be absorbed from WCG and IGL businesses. Considering the current trading levels, decent financial results for 1HFY21 (rise in earnings and cashflows), expansion of customer base and synergies from the recent acquisitions, the current sales pipeline, growth and investment in data centres, and valuation and key risks associated with the business, we give a ‘Speculative Buy’ rating on the stock at the current market price of $1.20, down by 1.640% on 19 April 2021.

Playside Studios Limited

Launch of II Title in Toy Warfare Franchise: Playside Studios Limited (ASX: PLY) is a video games developer including self-distributed games based on original IP and games developed in alliance with Warner Bros., Nickelodeon, and Disney Studios. As of 19 April 2021, the market capitalisation of the company stood at ~$120.95 million. On 18 March 2021, PLY announced launch of second title - “Toy Warfare” in its Warfare franchise, available in more than 170 countries on Google Play Store and Apple App Store. PLY has also declared the roll-out of “Idle Area 51” and Garbage Truck 3D in more than 170 countries on the Apple App Store. For both titles, PLY plans to implement the user acquisition strategy and improve monetisation metrics. It had projected the launch of these titles on the Google Play Store by March- end.

Licence Agreement for Legally Blonde Films: On 10 March 2021, PLY announced entering a mobile platform games multi-year license contract with Metro Goldwyn Mayer Studios Inc (MGM) to co-develop and release a new video game based on Legally Blonde and its sequel (feature films). The games will be freely available on Android and iOS handsets. PLY plans to integrate the branding and movie themes into a mobile title to be developed during the remaining 2021.

A Look at the 1HFY21 Results: The company reported a revenue of $5.85 million, up by 90% YoY during 1HFY21 from the Playside Original IP Revenue, Work for Hire Revenue, and other income. The company received $0.83 million gain from the Government Grants (up to $0.69 million on pcp) for the R&D Incentive and Export Market Development. It reported a statutory loss in EBITDA of $1.62 million for 1HFY21. On 17 December 2020, PLY got listed on the ASX post raise of $15 million via an Initial Public Offering (IPO). PLY’s Animal Warfare, a PlaySide Original IP title, obtained more than 6 million downloads as of 31 December 2020. It recorded cash receipts of $ 4.91 million during 1HFY21.

In February 2021, PLY inked a key partnership contract with Click Management Pty Ltd (“Click”), “LazarBeam”, and “Fresh” to jointly develop a new PC title to be released during FY21. It held a cash reserve of $16.07 million as of 31 December 2020.

1HFY21 Result Highlights (Source: Company Reports)

Key Risks: The company is exposed to the risk of change in the consumers’ preference for games, applications, change in technology and software glitches, the impact of COVID-19 causing a delay in international studio projects.

Outlook: The company is developing its “next-generation” (PlayStation 5 and Xbox Series X) console title and working on its release in late FY21. It also remains on track to make a strategic investment in the infrastructure and people to upscale for a pipeline of titles to be launched in 2HFY21.

Stock Recommendation: The stock of PLY gave a negative return of 14.47% in the past month and a negative return of 17.72% in the past three months. The stock is currently trading slightly lower than the 52-weeks’ average price level of $0.26-$0.49. The stock of PLY has a support level of ~$0.314 and a resistance level of ~$0.334. On a TTM basis, the stock of PLY is trading at an EV/Sales value multiple of 2.7x lower than the industry (Technology) median 6.3x, thus seems undervalued. Considering the current trading levels, growth in revenue from Original IP Games, the launch of new titles, new partnership agreements with MGM, Norris Nuts, valuation on a TTM basis, and decent outlook for “next generation” console title, and risks of pandemic restrictions along with probable project delays, we give a ‘Speculative Buy’ rating on the stock at the current market price of $0.325, down by 1.516% on 19 April 2021.

Spacetalk Limited

Launch of B2B2C Channel for LIFE Smartphone Watch: Spacetalk Limited (ASX: SPA) is a developer and marketer of wearables. It offers GPS devices, smartwatch, and kids’ phone. As of 19 April 2021, the market capitalisation of the company stood at ~$25.63 million. On 19 April 2020, SPA announced the roll-out of Spacetalk LIFE Smartphone Watch and the Spacetalk App for adults in collaboration with ACH Group via a B2B2C distribution model. The company also plans to enable the new Artificial Intelligence (AI) Empowered Fall Detection Alert free for all LIFE devices from 31 May 2021. It will also market the product through retail. JB Hi-Fi will start a new marketing promotion campaign for LIFE as a safe wearable device. Harvey Norman Holdings Limited will also begin the device promotion through its stores - offline and online (April 26, 2021).

Launch of Spacetalk Adventurer (STA) on Telstra’s Devices: On 30 March 2021, SPA announced the grant of technical approval from Telstra Corporation Limited (ASX: TLS) and the closure of the complete device testing for configuring Adventurer on TLS’ network frequency bands. The STA launch on TLS’ wearables devices was planned for 13 April 2020 via online and retail stores in Australia. TLS and SPA are working on panning out a monthly SIM service plan, particularly for the SPA customers, and enabling new mobile service subscribers to the TLS’ network.

$3 Million Term Loan Drawn Down: On 26 March 2021, SPA notified the market of its drawn down of $3 million term loan out of the $5 million loan facility deal inked with PURE Asset Management Pty Limited (PAMPL). It will deploy the funds to purchase inventory, brand investment, geographic expansion activities, and working capital needs. As per the loan usage requirements, SPA has issued an option for 11 million shares exercisable at 30 cents per share to PAMPL.

A Look at the 1HFY21 Results: The company reported record revenue for the half-year of $8.25 million, up by 9% YoY for 1HFY21 amidst COVID-19 shutdowns and reduced shopping spends witnessed. Its revenue from wearables grew to $17.1 million, up by 13% YoY with growth in both device and App revenue. Its EBITDA increased by 36% on pcp, and net loss after tax improved by 77% YoY to $0.6 million in 1HFY21. SPA held a cash reserve of $1.6 million and stood debt-free as of 31 December 2020.

1HFY21 Highlights (Source: Company Reports)

Key Risks: The company is exposed to the risk of consumer spending, changes in the income and preferences of consumers, overall subdued retail environment due to the pandemic restrictions and lockdowns restraining visits to the retail stores.

Outlook: For 2HFY21, SPA plans to expand its product portfolio (Kids, Adventurer and Life) and sales channels (retail stores, mobile network operators (MNOs) and new geographies) to drive revenue growth. With the new Country Head in the UK, SPA is planning for a retail store launch and bring MNOs onboard. In the USA, it has the go-to market planned for CY21.

Stock Recommendation: The stock of SPA gave a positive return of 11.11% in the past six months and a positive return of 25% in the past nine months. The stock is currently trading slightly above the 52-weeks’ average price level of $0.082-$0.225. The stock of SPA has a support level of ~$0.134 and a resistance level of ~$0.176. Considering the current trading levels, decent financial performance of 1HFY21, expansion of distribution through TLS and ACH partnerships, growth outlook for new geographies and product suite, we give a ‘Hold’ rating on the stock at the current market price of $0.150, down by ~3.226% on 19 April 2021.

Comparative Price Chart (Source: Refinitiv, Thomson Reuters)

Note: 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.

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