Netcomm Wireless Ltd (ASX: NTC) improved its earnings forecasts for the entire fiscal year of 2015, last month. The group now estimates an EBITDA of over $7 million, against its earlier estimates of over $5.2 million. The firm’s revenues are expected to reach of over $73 million in 2015. Management said that it will be able to achieve this EBITDA guidance in spite of making further investments of over $1.8 million to build its capabilities. Consequently, the shares of NTC surged over 8.4%. (For the period June 15^th to July 17^th).
 
Disappointing First Half Results

The group delivered a lower than expected earnings performance during the first half of 2015, posting a slight revenue increase of 0.15% to $30.52 million, as compared to $30.47 million in 1H14. The Ericsson NBN contract during the period had offset the revenues contributed by Ericsson smart metering contract in the earlier period. On the other hand, EBITDA increased 16% on a year over year basis to $2.3 million. NTC invested over $1.2 million for workforce and infrastructure to boost its M2M capabilities. Even then the group’s net profit after tax surged 124.5% to $0.36 million, as compared to $016 million in 1H14. Meanwhile, M2M business represented 44% of total sales during the period, against 48% in the corresponding period of 2014. But, management reported in June that the volumes from the Ericsson-NBN Rural Broadband contract have been growing more than estimated from the last few months. Accordingly, the group’s M2M revenues are expected to grow as a proportion of total revenues, going forward.


Revenue mix (Source: Company Reports)
 
Focus on M2M market
 
On the other hand, NTC is targeting the rapidly growing M2M market. The Global market size for M2M applications is expected to reach $66.4 billion by 2016, and surge to $147.8 billion by 2020. Accordingly, the group is making efforts to improve its M2M mix in its revenues, by entering into partnerships and investing in its M2M capabilities. Netcomm Wirelessis targeting the worldwide M2M and Rural Broadband opportunities instead of just the Australian markets. The group intends to derive revenues from USA, Europe, Middle East and Japan, rather than just Australia. Accordingly, NTC has entered into an agreement with Arrow Electronics to boost its M2M products distribution in North America. The group also partnered with Tele2 to strengthen European presence. NTC partnered with Singtel in March, while Hitachi also chose Netcomm to supply the ICT component for their smart energy project in May. Meanwhile NetComm Wireless reported that it would be a part of NBN Co and Ericsson run LTE TDD 3.5GHz fixed wireless trial carried out to develop wireless coverage and capacity in Australia. NBN gave a positive response to the firm’s Wireless Network Termination Devices as they performed better than estimated.
 

M2M market growth (Source: Company Reports)
 
Netcomm Wirelessalso launched four products for the M2M market and intends to derive revenues from them by next year.  Medical Hub (NTC n-Hub) is designed to address the growing demand for M2M healthcare solutions. The NTC n-Hub links Bluetooth and Wi-Fi enabled mHealth devices and has the capability to connect to all major cellular networks worldwide. The group also launched 4G Wi-Fi M2M Router and 4G LTE Light Industrial M2M Router to address the highly complex M2M deployments. The Vodafone MachineLink3G Plus is a router for quick and easy global M2M deploymentsthrough Vodafone’s network coverage.
 
 
 
Medical Hub (Source: Company Reports)
 
Conservative Balance Sheet

With regards to the balance sheet, NetComm Wireless used $2.51 million cash for investing purposes mainly for the new product developments. NTC was able to increase the net cash by 39.4% to $4.78 million, from $4.31 million in 1H14. Other assets rose by 7.8% on a year over year basis to $36.1 million, mainly due to increase in inventories. Subsequently, the borrowing costs rose 62.3% yoy to $7.72 million, primarily to fund the increase in inventory. The net debt rose to 2.94 as of December 2014, as compared to 0.45 in June 30, 2014. Therefore, the company rose $14 million from HSBC to fund its ongoing working capital financing needs as well as to track international growth opportunities. NTC intends to decrease its cost of debt through the new finance facility.



Outlook

The rapidly growing M2M market and the increased volumes from Ericsson-NBN Rural Broadband contract drove the shares of NetComm Wireless, wherein the stock delivered a year to date returns of over 47.9%. We believe that the group will be able to further build the rollout of the NBN in Australia in the coming months. This increase coupled with the growing New Zealand broadband business will help NTC to deliver a solid earnings for the fiscal year 2016. The ongoing relationships with top 20 carriers coupled with international M2M partnerships will support the stock further.

Based on the foregoing, we give a “BUY” recommendation to NetComm Wireless at the current price levels of  $0.915

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