After a poor interim result, amaysim’s share price plummeted and we took the plunge, upgrading the virtual network operator in Unlocking value in amaysim. The full-year result was much better and sent the share price soaring 10%.
The market was excited about two things: subscriber growth and margins.
Subscriber growth that had stalled earlier in the year accelerated in the second half and amaysim finished the year with 966,000 subscribers. Although this is at the bottom end of expectations, it does include contributions from a poor first half.
Subscribers and profits up strongly
Scaling is increasing margins
Excellent maiden result
Since then, amaysim has triggered a price review with wholesale partner Optus and launched new plans with lower pricing. Subscribers returned with almost 20,000 new subscribers added in the last two months alone.
In an ultra-competitive market, amaysim’s cost advantage is enabling it to grow. Rising subscriber numbers is key to increasing profit, so growth in this metric bodes well for our investment case.
Success with scaling
A crucial part of that case concerned the scalability of amaysim. We expected earnings before interest, tax, depreciation and amortisation (EBITDA) margins to rise alongside the customer base and eventually top out at 15%. That is exactly what's happening.
|Year to Jun ($m)||2016||2015|| /(–)
|U'lying EPS (c)||11.3||5.8||95|
Two years ago, amaysim had just over 600,000 subscribers and margins of 7%. These have now doubled to 14% as high incremental margins lift the profitability of the entire business.
Digital distribution – the tendency of customers to join and top up over the internet rather than in person – is a key advantage leading to lower costs and higher margins. Lower churn rates, which fell from 3% to 2.5% per month, were also unexpectedly good.
Higher margins, more than revenue growth, caused underlying EBITDA to more than double to $35m (see Table 1). Gross margins in the second half rose spectacularly to over 36% which seems a little high and may include some seasonal assistance. We should see them stabilise at slightly lower levels although EBITDA margins are on track for our 15% target.
Perhaps the weakest number reported was average revenue per user (ARPU) figure, which fell slightly and is below expectations at just over $25 per user per month.
This suggests that amaysim's cheaper brand, vaya (doesn’t anyone use capitals anymore?), may be growing faster than the main brand, dragging the aggregate ARPU lower. This may also explain why revenue growth, while decent, wasn’t as good as the profit numbers suggest.
Strong cash flow
The vaya acquisition made the accounts this year a little messy, with acquisition costs and IPO expenses a drag on cash flow.
Adjusting for these items, however, free cash flow was healthy at $32m. True to expectations, this remains a capital light business that generates better free cash flow than the network operators. At current prices, amaysim trades on a free cash flow yield of 9%.
The items that made this result a good one – the impact of scale and strong subscriber growth – should continue to improve the economics of the business.
By this time next year amaysim should boast well over 1m subscribers, about 10% of Optus’s entire customer base where it is the dominant source of subscriber growth. For Optus, amaysim is becoming indispensable which helps alleviate some risk.
Another short-term risk, shares being released from escrow, has come and gone uneventfully which a large block trade sold to institutions at a small discount. With those risks now easing and an excellent maiden result under its belt, it’s time to ditch the speculative part of this recommendation.
Despite the share price jump, amaysim is still cheap and, as growth improves economics, that cheapness will become apparent over time. BUY.
Disclosure: The author owns shares in amaysim.