ESK Details

Performance Rights Issue: Etherstack Plc (ASX: ESK) develops, manufactures, and licenses radio technologies to network operators and wireless equipment manufacturers in areas of public safety, utilities, transportation, defence, and resource sectors. ESK has R&D facilities in New York, Yokohama, London, and Sydney. The company issued 627,500 performance rights under the code ESKAC on 6 August 2021 as per an employee incentive scheme.

New Deal with Samsung Electronics:

• ESK has recently entered a new five-year contract with Samsung Electronics Co. Limited, Korea, to provide network elements to a telecommunications carrier client of Samsung for applications in public safety.
• ESK estimates US$11.6 million of total revenues, including the project deployment & support revenues and license fees.
• The company expects to recognise most of the license revenues during FY21-FY23, with initial support revenues from FY22.
• Besides, ESK expects the non-contracted long-term annual support revenues to renew in FY25.
• ESK is engaging with Samsung for multiple deals, and this agreement will be the first delivery to one of Samsung’s clients.

Business Update:

• Upgraded Revenue Forecast: The company now expects more than the US$4.2 million revenue in 1HFY21, up by 76% YoY. ESK had previously estimated revenue between the US$3.5-$4.0 million. The guidance has been revised due to the early delivery of two projects.
• Contracted Revenue for 2HFY21: ESK estimates US$4.2 million of contracted revenue in 2HFY21, including the Samsung deal-related revenue of US$1.2 million.

FY20 Result Highlights:

• Positive Cashflow: ESK generated US$1.7 million of net operating cash inflow in FY20 for the third consecutive year.
• Positive EBITDA: ESK earned a steady EBITDA of US$1.1 million in FY20.
• Growth in Recurring Revenue: ESK posted an increase of 27% YoY in recurring revenues (support and royalty revenue) in FY20 based on the new royalty agreements.

Total Revenue & Net Income from FY17-FY20; (Analysis by Kalkine Group)

Key Risks:

• COVID-19 Impact: The company expects a delay in the timing of revenue recognition due to the uncertain timing of project deliveries and COVID-19 impact on clients’ budgets.
• Technology Risk: ESK faces technological changes causing additional investments in its network devices & technology.

Outlook:

• The management expects the FY21 EBITDA and revenue to be considerably higher than the FY20 based on the new contracts and strategic alliances entered during FY20 and the growth of underlying recurring revenue.
• ESK will release the 1HFY21 financial results for the period ended 30 June 2021 on 18 August 2021. Besides, the company will hold an analyst and investor webcast on 20 August 2021.

Stock Recommendation: The stock of ESK gave a positive return of ~26.0% in the past three months and a positive return of ~0.80% in the past six months. The stock is currently trading below the 52-weeks’ average price level of A$0.460 - A$0.845. The stock of ESK has a support level of ~A$0.550 and a resistance level of ~A$0.770. On a TTM basis, the stock of ESK is trading at an EV/Sales value multiple of 10.9x, higher than the industry (Software & IT Services) median of 4.9x, thus seems overvalued. Considering the current trading levels, decent returns in the past three months, increase in the 1HFY21 revenue guidance, contracted revenue for 2HFY21, valuation on a TTM basis 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 $0.630, up by ~2.439%, as on 13 August 2021.

ESK 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.

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