Over the Wire Holdings Limited

OTW Details

FY21 Performance Update: Over the Wire Holdings Limited (ASX: OTW) is engaged in the provision of telecommunications, cloud, and IT solutions. It has a presence across major Australian cities and Auckland in New Zealand. The company has recently announced its FY21 results recently where it reported a decent uptick in performance.

• Revenue increased by ~29% to $112.7 million in FY21, driven by decent growth in voice and hosting services.
• There was a growth of ~38% in the recurring revenue of the company to $103.2 million in FY21, compared to $74.7 million in FY20.
• The Group commenced an investment program during the year in order to upgrade its core network.
• The customer retention rate stood at 97.8% in FY21.
• The management declared a final dividend of 2.25 cps with an ex-dividend date of 13 September 2021. It ended the period with a cash balance of $16.7 million as of 30 June 2021, compared to $10.4 million in the previous period end.

Trend in Revenue (Source: Analysis by Kalkine Group)

Key Risks: The company’s operations expose it to financial risks, which includes interest rate risk, liquidity risk and credit risk.

Outlook: The company has made a transition to become a Tier 1 voice carrier, which enables it to join an exclusive group of Tier 1 carriers in Australia that can offer full-service voice capabilities. This development enables the company to be less reliant on third-party providers and deliver savings of ~$2 million in additional earnings each year. It will look to scout for attractive acquisition opportunities to expand its business objectives. OTW also plans to deliver ~15% organic recurring revenue growth through customer centric solutions in FY22.

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: On 5 October 2021, the company has announced that it has appointed Mike Stabb as its Company Secretary, following the resignation of Simone Dejun.The stock of OTW is trading close to its 52-weeks' high level of $4.98. The stock of OTW gave a positive return of ~33.33% in the past nine months. On a technical analysis front, the stock of OTW has a support level of ~$4.27 and a resistance level of ~$4.97. 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 might trade at a slight premium to its peers’ median EV/Sales multiple, considering the optimistic outlook and decent financial performance. For this purpose of valuation, peers such as MNF Group Ltd (ASX: MNF), Spirit Technology Solutions Ltd (ASX: ST1), Chorus Ltd (ASX: CNU) and others have been considered. Considering the current high trading levels, recent rally in the stock price, increase in debt levels and the key risks associated with the business, we suggest investors to book profits and give a ‘Sell’ rating on the stock at the current market price of $4.900, as on 11 October 2021, 11:50 AM (GMT+10), Sydney, Eastern Australia.

OTW Daily Technical Chart, Data Source: REFINITIV

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

Note 2: Investment decisions 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 analysis has been achieved and subject to the factors discussed above alongside support levels provided.

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