5G Networks Limited
Acquisition Synergies to Lead Revenue Growth: 5G Networks Limited (ASX: 5GN) owns and operates its own National high-speed Data Network in Australia. The company recently announced that transaction for Melbourne Data Centre is completed. 5GN will issue $1.75 million of shares to existing shareholders of MDC with 50% being escrowed for 6 months and the remainder being escrowed for 12 months. The acquisition of Melbourne Data Centre (MDC) was set at the purchase price of $5.7 million of which $1 million to be paid in cash on completion and $1.75 million via issue of shares and $2.95 million cash to be paid over 3 years. Fund for the purpose will be arranged through a combination of cash reserves and debt. Currently, MDC is operating at 40% capacity reflects significant revenue opportunity by unlocking rapid growth of 5GN Data Centre services.
Financial Performance in 1H FY19: Group revenue for 1H FY19 came in at $23.576 million against $1.134 million in H1 FY18. The company signed new and existing customers to long-term contracts to the value of $13 million in 1H FY19. 5GN established a debt funding facility with CBA in 1H FY19 which accelerated the effective utilisation of internally generated cash flow, in addition to the final payment for the APTel acquisition ($3 million). Capital expenditure in future will be made through operational cash flow and is closely linked to customer demand, this is demonstrated with total capital spend of $398k for 1H FY19. The company has completed its nationwide high-speed network which is likely to be launched in H2 FY19.
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Driving Exponential Growth (Source: Company Reports)
What to Expect: The management has developed its strategic growth plan and according to that 5GN is expected to record annualised revenue of $50 million+ with EBITDA >7% in FY19. Going forward, the management has set the Group revenue target at $80 million and Group EBITDA target at $10 million by FY20. As a future strategy, the company will target new acquisition with focus on existing data centre providers, application development organisations and managed service providers.
Stock Recommendation: Looking at the valuation, the stock is trading at price to book value of 5.5x, higher as compared to the industry median of 2.7x, indicating overvalued at the current level. The stock is currently trading close to its 52-week high of $1.140.
Looking at the stock price performance, it has gained a 53.28% in last 1-year, 122.62% on a YTD basis and 90.82% in last 6-months. Considering the stretched valuation along with sharp run up seen in share price over the one year, the stock needs a further catalyst to push the stock for further ride.
Hence, we recommend a “Hold” rating on the stock at the current market price of $1.100 per share (up 17.647% on 24 April 2019).
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