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Stock Insights

3 Telco Stocks to Become 1?

3/12/2020

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The telco sector is currently the largest thematic exposure we have across our portfolios. It’s a sector we like because it’s defensive and has been a key beneficiary from the Covid remote working environment. Every 5-10 years we also see a period where the industry goes through large rounds of consolidation, mergers and acquisitions that can last several years.
PictureAuthor: Ron Shamgar
We have seen this begin recently. Think TPG merging with Vodafone, Uniti group acquiring Opticomm, Optus offering on amaysim’s mobile business and many other deals at the smaller end of the market.
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Our top three picks in the sector are, in our opinion, undervalued and could even become one larger company one day

Uniti Group (UWL.ASX) is a fibre infrastructure play. UWL competes directly against the NBN and, following the acquisition with Opticomm (OPC), they now have 15% market share of Greenfield residential connections after the NBN.
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Source: UWL company filings
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Although UWL had to pay up for OPC following a bidding war against industry super fund, Aware, it does highlight the desired quality of an annuity, long life, cash generating fibre business. In addition, UWL recently received ACCC clearance for functional separation which means they can now sell internet services direct to consumers. This will allow UWL to capture more of the value chain margin and acquire more internet service providers (ISPs) in future.
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We forecast UWL to deliver in excess of $100m of EBITDA in FY22 which places the stock on 11x EV/EBITDA. We also expect the stock to enter the ASX200 early next year. We value UWL at $2.00.

Aussie Broadband (ABB.ASX) is a pure play ISP provider which only listed a month ago and is already up 100% from its IPO price. Despite this, we believe it is still undervalued. ABB is the fastest growing (organic growth with no acquisitions) ISP brand in Australia with almost 90% year on year growth in residential connections, 310,000 during Q1 FY21.
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ABB has taken 11% of all new NBN residential connections during Q1, a number which contrasts well to their current overall market share of 4%. This key metric is significant as it highlights that the company is taking share and is a good indicator of future growth.
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Source: ABB company filings
Additionally, ABB is currently rolling out its own fibre infrastructure in the Australia’s main cities to connect directly to the NBN points of interconnections. This will allow ABB to save over $15m in costs and is all EBITDA margin by FY23. ABB can also sell add on services on this fibre to corporate customers.

We estimate that ABB will have over 500,000 residential connections by FY23 and EBITDA in excess of $55m. We value ABB at $3.00+ and believe it is a potential takeover target for UWL in the future.
Check out Ron Shamgar's recent appearance on Ausbiz: 'Ron's three telco superstars'
Spirit Technology Solutions (ST1.ASX) is a modern IT services and telco provider, mostly to SMEs and corporate/government clients. ST1 is fast acquiring smaller telco and IT businesses and has recently entered the cyber security sector via two acquisitions. ST1’s strategy is to become a one stop shop provider to its customers. Offering not just internet/data connectivity, but managed IT services, cloud software and cyber security solutions.
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Source: ST1 company filings
ST1 is currently annualising over $100m in revenues and EBITDA margins of about 15%. We believe more acquisitions will occur in 2H FY21 and, in our estimation, the company is well funded to complete one further deal. We estimate ST1 to exit FY21 on a revenue run rate of $150m+.

Part of our investment thesis in ST1 is backing its Managing Director, Sol Lukatsky, who has transformed this business over the last twelve months. We believe Lukatsky is focussed on crystallising shareholder value in the next 18-24 months through a merger or sale transaction. Once again, we see UWL as a potential acquirer as they have actually made a bid for ST1 in the past, almost two years ago. Watch this space.  We value ST1 at 55 cents.

Disclaimer: TAMIM currently has positions in the three stocks outlined above.
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​The information provided on this website should not be considered financial or investment advice and is general information intended only for wholesale clients ( as defined in the Corporations Act). If you are not a wholesale client, you should exit the website. The content has been prepared without taking into account your personal objectives, financial situations or needs. You should seek personal financial advice before making any financial or investment decisions. Where the website refers to a particular financial product, you should obtain a copy of the relevant product services guide or offer document for wholesale investors before making any decision in relation to the product. Investment returns are not guaranteed as all investments carry some risk. The value of an investment may rise or fall with the changes in the market. Past performance is no guarantee of future performance. This statement relates to any claims made regarding past performance of any Tamim (or associated companies) products. Tamim does not guarantee the accuracy of any information in this website, including information provided by third parties. Information can change without notice and Tamim will endeavour to update this website as soon as practicable after changes. Tamim Funds Management Pty Limited and CTSP Funds Management Pty Ltd trading as Tamim Asset Management and its related entities do not accept responsibility for any inaccuracy or any actions taken in reliance upon this advice. All information provided on this website is correct at the time of writing and is subject to change due to changes in legislation. Please contact Tamim if you wish to confirm the currency of any information on the website.  

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