Stock updates: NTC, UXC and EPD

We review our recommendations for the three stocks following their interim results.

NetComm Wireless (NTC)

Netcomm’s share price has been weak over recent months from the lack of material contract wins, and especially due to the delay in the expected Ausnet Services (AST) work.

The half-year result included 15 per cent revenue growth and a large jump in net profit. But the market reacted negatively due to the deferral of more substantial earnings growth to FY16.

The positive surprise from the result was that the traditional fixed broadband business grew to $17 million in revenue. With expectations of $34m for the full year it provides confidence that the base business has stabilised. It has declined in recent years as the company spent more of its focus expanding into the fast growing machine-to-machine (M2M) market.

Revenue from M2M device sales of $13.5m comprised a slower than expected ramp-up from the Vodafone contract. A substantial increase from the Ericsson NBN contract offset the decline from the Ericsson-Ausnet Services smart metering contract that was largely completed in FY14.

The second half will be stronger, particularly from the NBN contract. It is on track for 37,000 units to be sold in FY15, with a large increase again in FY16.

In FY14 NTC sold 108,000 devices for the Ausnet Services smart meters. Ausnet has had a problem with a further 300,000 units that used a module manufactured by someone else. It is expected that Netcomm will win this work. But the reason it will not occur in FY15 is because Ausnet has to fix its back office systems first. They have a commitment to install the meters by the end of Calendar year 2016, and as such this presents a positive opportunity for NTC in FY16.

There is little doubt about the huge growth that will occur in the M2M market (devices that communicate to each other over a network). The unknown is to what extent Netcomm can leverage its Australian success in rural NBN broadband and smart meters to win overseas contracts. Management has established overseas partnerships and is actively bidding for contracts of much larger scale than what can be achieved in Australia.  

The company is targeting a further three additional partners in the next nine months, in line with its strategy to build as many relationships as possible with the top 20 global telecommunications carriers in M2M.

Carriers around the world have indicated that they are shutting down the use of copper lines. The standard replacement in “built-up areas” is fibre which covers 90 per cent of customers. For the remaining 10 per cent (regional and rural) it has been generally accepted that fixed wireless is the best solution – This is the opportunity for NTC with its proven capabilities. There is a US contract opportunity due to be announced by the end of the year that could be Netcomm’s first major international contract.

Other than NBN and smart meters the other verticals Netcomm is targeting are E-Health, industrial automation and business services (point of sale, vending machines, digital display).

Management provided guidance that full-year EBITDA will increase from last year, despite an increased cost base of approximately $1.6m. This is largely due to an increased staff count, setting the company up for future growth.

With potential Ausnet work pushed out to FY16, we are forecasting FY15 EBITDA of $6.6m vs $5.2m in FY14. NBN revenue should increase to at least $40m in FY16 from $17m this year. Then there is a potential $35m-plus revenue opportunity in FY16 from Ausnet.

Our base case forecasts for FY16 don’t include Ausnet or any further contract wins. The FY16 $100m revenue forecast, and $6.7m NPAT forecast (5.2c earnings per share) places the company on a PE of 8.5 times FY16.

After the more conservative base case assumptions our DCF valuation is reduced from $0.90 to $0.70, and we maintain our “buy” recommendation.


IT services company UXC produced a strong first-half result that was largely pre-announced. The 81 per cent increase in net profit after tax was largely due to acquisitions and none of the project execution issues taking place that had occurred in the first half last year.

An 68 per cent increase in return on equity as well as increased margins were positives but they were both coming off a low base.

Management has very ambitious margin targets that the market currently doesn’t believe is achievable in the near term. Based on profits before tax, the margin targets are 9-10 per cent for consulting, 11-12 per cent for applications and 4.5-5.5 per cent for infrastructure.

As a guide, if these where achieved, it would result in a 50 per cent plus increase to consensus earnings for FY16.

The infrastructure division was the largest improvement with profit before tax of $3.7m versus a $0.2m loss last year. Consulting was acceptable given the weak environment, and applications was positive due to acquisitions.

With the large amount of acquisitions the important thing to monitor with UXC is the organic performance. Although it is still not strong there appears to be signs of improvement. Annuity revenue is now approaching 30 per cent, and generally speaking the acquisitions look to have added value.

Full-year guidance was a general “earnings will grow and is weighted towards the second half”.

We maintain our “buy” recommendation with a long term valuation of $1.10. At 80 cents the stock is on a FY16 PE of 12 with a 6 per cent dividend yield. This should provide support given reasonable prospects for continued medium-term growth.

Empired (EPD)

The micro IT services company has an attractive growth profile, but the first half result raised some question marks with very weak cash flow.

Half-year revenue of $50m was up 74 per cent, and underlying EBITDA of $4.4m was also significantly higher. Despite this, operating cash flow was very weak at -$3.8m.

A number of excuses were given for the poor cash flow position, which would suggest the situation will turn around for the full-year result. The full-year outcome will be a good test for management credibility.

Among the excuses were transaction costs for the Intergen acquisition, as well as a $2m working capital impact for two large fixed price contracts that were invoiced in January and February. A new finance system was also said to impact receivables but is now resolved.

The Intergen acquisition has added $60m of annualised revenue and some much needed East Coast exposure. The integration is said to be on track with milestones achieved thus far.

The contract pipeline is strong with $100m of new multi-year contracts to potentially add to large growth from contracted work.

Full-year revenue guidance was $110 to $120m, and FY16 guidance was for $145 to $165m. Our forecasts have the company on a FY15 PE of 12 and an FY16 PE of 8.

We are assuming the negative cash-flow situation will be resolved by the full year and maintain our “buy” recommendation with a 90 cents valuation.

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