Superloop Limited

SLC Details

Signing of Binding Agreement: Superloop Limited (ASX: SLC) is primarily in the construction and operation of telecommunications infrastructure across the Asia Pacific region. Recently, the company has inked a binding agreement with Columbia Capital and DigitalBridge Investment Management, the investment management arm of DigitalBridge Group Inc. (NYSE: DBRG)

• As per the terms of the agreement, SLC would sell Superloop (Hong Kong) Limited and certain selected assets from Superloop (Singapore) Pte Ltd for a consideration of $140 million.
• The sale price indicates a 30% premium or $32 million above the $108 million carrying value of the assets on 18^th October 2021.
• The company would have a more focused business, with a significant net-cash position, and excellent balance sheet capacity to invest in organic growth and pursue accretive, strategically aligned M&A opportunities in its chosen customer segments after the completion of the transaction.

FY21 Financial Summary:

• Decent Growth in Revenue: For the year ended 30^th June 2021, the company recorded revenue amounting to $110.7 million against $107.6 million in FY20. This growth was backed by the strong growth in underlying recurring fibre connectivity revenue.
• Achieved EBITDA Guidance: SLC also achieved EBITDA guidance of $18.0 million - $18.5 million and stood at $18.2 million, reflecting growth of 108% year over year on an underlying basis.
• Improvement in Operating Expenses: On a YoY basis, the company witnessed an improvement of 17% in operating expenses, and capital expenditure were stable at $14.6 million.

Revenue Trend (Source: Analysis by Kalkine Group)

Key Risks:

• Funding Risk: The company’s business requires regular capital expenditure for the maintenance of telecommunications and IT infrastructure and need to have access to enough capital to fund this expenditure. Hence, an unavailability of funding could impact the business performance.
• Cyber Security Risk: SLC is exposed to risks arising from the breach in data security and may impact its operational health.

Outlook:

• During FY22, the company would make investments in brand and product awareness and customer experience and would also focus on disciplined capex investment in order to ramp up EBITDA growth and shareholder value creation.
• SLC would also focus on M&A and capital recycling opportunities in the upcoming year.
• For FY22, the company is expecting underlying EBITDA (Pre-Monetization of HK/SG) in the range of $30 million - $32 million.
  

Valuation Methodology: EV/Sales 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: During FY21, the company successfully executed first year of multi-year accelerated growth strategy. The company is well-positioned with a decent balance sheet, evident by Pro Forma Gearing Ratio of 7.5% and Pro Forma Leverage Ratio of 1.4x at the end of FY21. The stock of SLC has provided returns of ~30.25% and 40.33% in the past one month and three months, respectively. The stock of SLC is trading near to its 52-week high level of $1.315. The stock has a support and resistance level of $1.167 and $1.316, respectively. The stock has been valued using an EV/Sales multiple-based illustrative relative valuation and arrived at a target price with a correction of high-single-digit (in % terms). The company can trade at a slight discount to its peers’ average EV/Sales multiple, considering the negative net margin, negative ROE, and funding risk, etc. For the purpose of valuation, peers such as Spirit Technology Solutions Ltd (ASX: ST1), 5G Networks Ltd (ASX: 5GN), and MNF Group Ltd (ASX: MNF) have been considered. Considering the expected correction, recent stock price rally in the past months, current trading level, and key risks associated with the business, we suggest investors to book profit and give a ‘Sell’ rating on the stock at the current market price of $1.305 as on 01 November 2021, 11:43 AM (GMT+10), Sydney, Eastern Australia

SLC Daily Technical Chart, Data Source: REFINITIV 

Note: The purple colour line in the chart depicts RSI (14-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.

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