5G Networks Limited

5GN Details

5G Networks Limited (ASX: 5GN) is a provider of internet broadband and cloud infrastructure services to mid-market corporate industries. As of 20 July 2021, the market capitalisation of 5GN stood at ~$111.97 million.

Highlights of the Proposed Merger:

• On 16 July 2021, 5GN reported a pause in trading of its securities pending the release of the proposed merger announcement and an investor presentation detailing the strategic rationale and objectives from the merger.
• Webcentral Group Limited (ASX: WCG) and 5GN have signed an “MIA” (merger implementation agreement). Based on the terms agreed under the contract, the two companies will execute a Scheme of Arrangement (“Scheme”) for the proposed merger.
• The proposed merger will simplify sales delivery to small and medium enterprises, Government, and corporate. The combined entity will have a consolidated operating platform and realise estimated cost savings of ~2 million.
• Together, the companies are expected to have a Proforma revenue of $110-120 million, an EBITDA margin of 20% plus, and a Proforma leverage of ~0.4 times.
  

Key Takeaways of Q3FY21 (March Quarter):

• The Group posted a consolidated revenue of $26.5 million in Q3FY21, out of which WCG has contributed $14.1 million in revenue. The Group witnessed revenue growth across its core products and increased demand for Voice Bridge One Microsoft Teams product.
• 5GN recorded $4.7 million of EBITDA for Q3FY21. The company realised the EBITDA target of 20% of revenue, set for March month 2021.
• The company reported $5.5 million of annualised rent reductions in Q3FY21.
• 5GN introduced the wholesale automated service fulfilment portal in early May 2021.
• The company completed the integration of Intergrid Group Pty Limited and has recognised 50% of synergies post-incorporation.

Key Financials from FY18-FY20; (Analysis by Kalkine Group)

Key Risks:

• The company faces the risk of technology failure and foreign exchange price fluctuations, due to operations in multiple countries.
• 5GN is also exposed to integration risk and low customer demand for its services.

Outlook: The company estimates a Pro-forma revenue of $107 million in FY21. 5GN plans to focus on consolidation post the merger implementation with WCG and later with other acquisitions planned in 2021 and beyond.  

Valuation Methodology: P/E 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: The stock of 5GN gave a negative return of 21.09% in the past three months and a negative return of 26.37% in the past six months. The stock is currently trading lower than the 52-weeks’ average price level band of $0.850 - $2.440. We have valued the stock using the Price to Earnings-based illustrative relative valuation method and have arrived at a target price with a low double-digit upside (in % terms). We believe that the company can trade at some premium than its peer median, considering the combined scale, expanded customer base post-merger with WCG, revenue synergies, and decent Pro-forma EBITDA and revenue for FY21 and beyond. For this purpose, we have taken peers like Uniti Group Limited (ASX: UWL), Vocus Group Limited (ASX: VOC), Telstra Corporation Limited (ASX: TLS), and others. Considering the low trading levels, the expansion of online data centers in Q3FY21, expected Pro-forma revenue for FY21, the launch of Wholesale offering for Melbourne customers, the proposed merger with WCG, valuation, and associated risks of changes in customer demand and COVID-19 environment, we give a ‘Speculative Buy’ rating on the stock at the current market price of $0.935, as on 19 July 2021, 3: 58 PM (GMT+10), Sydney, Eastern Australia.

5GN Daily Technical Chart, Data Source: REFINITIV  

WAM Capital Limited

WAM Details

WAM Capital Limited (ASX: WAM) is a leading investment company operated by Wilson Asset Management. Wilson Asset Management manages WAM Leaders, WAM Alternative Assets, WAM Global, WAM Microcap, WAM Capital, WAM Strategic value, WAM Research, and WAM Active under its umbrella. As of 20 July 2021, the market capitalisation of WAM stood at ~$1.93 billion.

June 2021 Investment Update:

• Increase in Pre-Tax NTA: WAM Capital Limited reported 189.25 cents per share of net tangible assets (NTA) in June 2021 versus 186.55 cents per share of NTA in May 2021. WAM also reported increase in the investment portfolio for June 2021 contributed by the performance of Seven West Media (ASX: SWM) and Johns Lyng Group (ASX: JLG).
• WAM Strategic Value (WAR), one of the entities under Wilson Asset Management, has been listed on the ASX via an oversubscribed IPO with subscriptions exceeding $225 million on 28 June 2021.
• WAM Leaders Limited (ASX: WLE) recorded the highest operating profit after tax of $228.9 million in FY21. The company registered the highest increase in its investment portfolio, up by 37% YoY in FY21.
• On 13 July 2021, WLE has announced a non-renounceable Entitlement Offer on a pro-rata basis for the shareholders. Under the offer, the shareholders will receive one share for every five shares held in the company at $1.44 per share (the equivalent of NTA before tax) as of 30 June 2021. WLE had set 19 July 2021 as the record date for the offer. The company will open the offer on 22 July 2021 and close it on 6 August 2021. WLE will issue new shares under the offer on 13 August 2021.
  

Operating Income Trend from FY16-FY20; (Analysis by Kalkine Group)

Key Risks:

• The company faces various financial risks such as interest rate, liquidity, and credit risk.
• The company is exposed to regulatory changes in the Government’s monetary and fiscal policy.

Outlook:

• WAM Global Limited (WGB), one of the Wilson Asset management entities, has signed a scheme implementation agreement with Templeton Global Growth Fund Limited (ASX: TGG) in June 2021. The proposed merger is expected to make WGB one of the biggest listed investment entities globally on ASX.
• The company is optimistic about the global economic growth in the short term, recovery in the monetary policy, and local economy.

Stock Recommendation: The stock of WAM gave a negative return of 6.80% in the past nine months and a positive return of 15.26% in the past year. The stock is currently trading slightly above the 52-weeks’ average price level band of $1.875 - $2.370. On a TTM basis, the stock of WAM is trading at a price to book value multiple of 1.6x, lower than the industry (Financials) average of 2.5x, thus seems undervalued. Considering the current trading levels, increase in the investment portfolio of WAM and WLE as of 30 June 2021, listing of WAR in June 2021, a record operating profit after tax of WLE in FY21, and valuation on a TTM basis, we give a ‘Hold’ rating on the stock at the current market price of $2.190, down by ~0.455% on 20 July 2021.

WAM Daily Technical Chart, Data Source: REFINITIV  

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.

Technical Indicators Defined: -

Support: A level where-in the stock prices tend to find support if they are falling, and downtrend may take a pause backed by demand or buying interest.

Resistance: A level where-in the stock prices tend to find resistance when they are rising, and uptrend may take a pause due to profit booking or selling interest.

Stop-loss: It is a level to protect further losses in case of unfavourable movement in the stock prices.

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