This week we look at the telco sector and how it is benefiting from a surge in demand due to the shift to working and staying at home. We believe the demand for faster connectivity will continue for the foreseeable future regardless of how the Covid-19 situation unfolds. We currently see good value in two companies servicing the sector. Read on to find out more.
Over the last few weeks we have spoken to several telcos and service providers and the common theme so far is an increase in demand for faster internet, higher bandwidth and business services such as teleconferencing and number porting. With a wide range of ASX stocks to choose from, we have invested in a couple of stocks that are both highly profitable, cashed up and on an upgrade cycle. This week we discuss one of them.
Uniti Wireless (UWL.ASX) is a provider of telecommunications services specialising in fixed wireless, fibre and telco services to both consumers and small/medium sized businesses. UWL competes directly with the NBN and wholesales its fibre network to internet service providers in residential multi dwelling buildings and housing estates. This division of the company generates 55% of group revenues, has very high margins and is cash generative.
UWL also provides businesses with connectivity solutions such as 1300 numbers, number porting and phone PBX (Private Branch Exchange, a private telephone network used within a company or organisation) hosting solutions. This division is approximately 45% of group revenues and, although it operates in a more competitive part of the telco market, we believe it will continue to grow organically and through acquisitions.
Part of the appeal of UWL is the high quality senior management team and a board of directors with extensive experience in the industry. For instance, CEO Michael Simmons has over 30 years’ experience and was the CEO of both SP Telemedia and Vocus. Similarly, director Vaughan Bowen was the founder of M2 Group which was established 20 years ago and eventually acquired by Vocus. Directors have been continuously buying shares on market and in placements.
We view UWL as a sector consolidator. The company has undergone a series of acquisitions since listing last year and will continue to be acquisitive going forward. The company has over $36m of net cash to deploy. So far management has shown that acquired businesses are growing ahead of original expectations.
The company has upgraded profits twice this financial year so far while most other companies have been withdrawing their guidance. At the last quarterly update in April, UWL notes the following key developments:
We estimate UWL will earn over $80m of revenues and about $45m of EBITDA in FY21. The sector is currently trading on EV/EBITDA of close to 10x. UWL is on 9.5x while growing at significantly higher rates and, unlike many of its peers, is debt free. We believe UWL deserves a premium and we value the stock at about the $1.80 level.
Disclaimer: UWL is held in the TAMIM Australia All Cap portfolios.
Be sure to check out Ron's Monday appearance on Ausbiz discussing the Australian telco space. See here.
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TAMIM Asset Management provides general information to help you understand our investment approach. Any financial information we provide is not advice, has not considered your personal circumstances and may not be suitable for you.