company update spirit telecom · market. it was also named melbourne's fastest telecom...

Spirit TelecomTelecommunications

Canaccord Genuity is the global capital markets group of Canaccord Genuity Group Inc. (CF : TSX)The recommendations and opinions expressed in this research report accurately reflect the research analyst's personal, independent and objective views about any and allthe companies and securities that are the subject of this report discussed herein.

26 July 2019

BUYunchangedPRICE TARGET A$0.30unchangedPrice (7-Feb)Ticker

A$0.24ST1-ASX

52-Week Range (A$): 0.08 - 0.28Market Cap (A$M): 80.1Dividend /Shr (A$): 0.00Dividend Yield (%) : 0.0Net Debt (Cash) (A$M): 3Enterprise Value (A$M): 58.7Cash (A$M): 1.2Long-Term Debt (A$M): 3.9

FYE Jun 2018A 2019E 2020E 2021ESales (A$M) 16.2 17.3↓ 26.9↑ 29.1↑

Previous - 17.5 25.1 28.6EBITDA (A$M) 2.8 1.6↓ 5.6 7.9↑

Previous - 1.7 - 7.4Net Income Adj (A$M) 0.8 (0.3)↓ 2.2↓ 3.6↑

Previous - (0.2) 2.3 3.4EPS Adj&Dil (A$) 0.00 (0.00) 0.01 0.01

Previous - (0.00) 0.01 0.01P/E (x) 86.0 (270.2) 39.4 24.0EV/EBITDA (x) 29.0 52.4 14.0 9.6

Priced as of close of business 7 February 2021

Conor O'Prey | Analyst | Canaccord Genuity (Australia) Ltd. | [email protected] | +61.2.9263.2716Annabel Li | Associate Analyst | Canaccord Genuity (Australia) Ltd. | [email protected] | 61 2 9263 2744

Company Update

Exiting FY19 with strong momentum4Q19 trading updateST1 has released a trading update showing that it is exiting FY19 with strong revenuemomentum and continuing growth in new contract signings. The company expects FY19revenue of $17.3m, implying 4QCY19 revenue of c$5m and, we estimate, underlyinggrowth (excluding acquisitions) of c8% on 3QCY19. Importantly, 2HFY19 has seen amaterial uplift in new contract value from the first half and we estimate ST1 added$3.7m of new revenue (contracted and to be imminently installed) in 4QFY18, following asolid $3.3m in 3QFY19.The company also expects 2HFY19 EBITDA margins to be higher than the 12% initiallyguided to at the 1HFY19 result. We expect the LinkOne acquisition (36% EBITDA marginin CY18) to have aided this result.Acquisition of Pheonix AustecST1 also announced the acquisition of Pheonix Austec for $1.6m ($1.3m cash, $0.3mscrip), adding to its managed IT services offering. Pheonix specialises in the Real Estatesector however, also services a range of SME customers, generating revenues of $1.9m(19% CAGR since 2016).The 4.3x EBITDA multiple paid for Pheonix is in line with recent transactions and infersan incremental $0.4m in annualised EBITDA. On our $5.6m EBITDA forecast for FY20for ST1, Phoenix’s EBITDA would contribute c7% on an annualised basis. Notably, weexpect managed services to provide c20% of group revenues in FY20, with the additionof Arinda and Phoenix to the business this month.Forecast changesWith confirmation of FY19 revenues of c$17.3m and an EBITDA margin above 12%,we tweak our FY19 estimates according. We had forecast $17.5m revenue for the fullyear and bring that into line with commentary. As a result, we nudge our FY19 EBITDAestimate down by $0.1m to $1.6m (of which $1.3m falls in 2HFY19, at a margin of 14%).For FY20, we have incorporated the Phoenix acquisition’s earnings ($0.3m EBITDA) intoour model, although our EBITDA estimate remains unchanged as we start from a lowerbase from FY19 and we assume a modestly lower incremental organic gross profit inFY20.FundingWe forecast ST1 has $8.7m funding capacity after accounting for FY19 cash, optionconversion, debt capacity and deducting $3.4m for the Arinda and Pheonix acquisitions.During the course of FY20, we expect a further $2m to progressively accrue as thebusiness generates operating cash flow and incurs capex, for a total of $10.7m.Valuation & viewOn our revised forecasts, ST1's shares trade on an FY20F EV/EBITDA of 14.0x, falling to9.6x in FY21F.We have left our DCF-based valuation (WACC 10%; terminal growth rate 3%) unchangedat 30¢ per share. We believe the revenue and new contracts exiting FY19 means thebusiness has real momentum and we stay at BUY.

For important information, please see the Important Disclosures beginning on page 7 of this document.

2

Figure 1: Summary financials for Spirit Telecom

Source: Company reports, Canaccord Genuity estimates

42.3 42.3 Target Price $0.30

June year end Share Price $0.24

Profit & Loss ($m) 2018A 2019F 2020F 2021F Valuation ratios 2018A 2019F 2020F 2021F

Revenues 16.2 17.3 26.9 29.1 EPS underlying (cps) 0.3 -0.1 0.609 1.0

Gross profit 11.1 12.6 20.7 22.6 EPS Growth (%) -6% -132% n/a 64%

Gross margin 69% 73% 77% 78%

Opex -8.4 -11.1 -15.1 -14.7 P/E (x) 86.0 n/a 39.4 24.0

Underlying EBITDA 2.8 1.6 5.6 7.9 Enterprise Value ($m) 58.7 73.7 77.9 76.2

D & A -1.3 -1.7 -2.2 -2.6 EV / EBITDA (x) 21.2 47.4 14.0 9.6

EBIT 1.5 -0.2 3.4 5.3 EV / EBIT (x) 39.3 -415.1 23.1 14.3

Net Interest Expense -0.3 -0.2 -0.2 -0.1

NPBT 1.2 -0.4 3.2 5.2 DPS (cps) 0.0 0.0 0.0 0.0

Tax expense -0.5 0.0 -1.0 -1.6 Dividend Yield (%) 0.0% 0.0% 0.0% 0.0%

NPAT adjusted 0.8 -0.3 2.2 3.6 Payout Ratio 0.0% 0.0% 0.0% 0.0%

Post tax NRI's -0.2 0.0 0.0 1.0 Franking (%) n/a n/a n/a n/a

NPAT (Statutory) 0.6 -0.6 2.2 3.6 FCFPS - excl acq. (cps) -0.4 -0.7 0.6 0.7

P / FCFPS (x) -54.3 -36.0 40.9 35.1

EBITDA Margin (%) 17.1% 9.0% 20.7% 27.3%

EBIT Margin (%) 9.2% -1.0% 12.5% 18.3% Dupont Analysis 2018A 2019F 2020F 2021F

NPAT Margin (%) 4.8% -1.7% 8.3% 12.5% Net Margin 4.8% -1.7% 8.3% 12.5%

Asset Turnover 0.9 0.7 0.8 0.8

Cash Flow ($m) 2018A 2019F 2020F 2021F ROA (%) 4.6% -1.2% 6.9% 9.4%

Operating EBITDA 2.6 1.4 5.6 7.9 Financial Leverage 1.6 1.4 1.3 1.2

Change in working capital -0.6 2.2 1.5 0.2 ROE (%) 7.3% -1.6% 8.8% 11.6%

Interest -0.3 -0.3 -0.2 -0.1

Tax 0.0 0.0 -1.0 -1.6 Balance Sheet ratios 2018A 2019F 2020F 2021F

Other 0.0 -1.0 0.0 0.0 Net debt/ (cash) 0.2 1.3 -2.2 -3.9

Operating Cashflow 1.7 2.3 6.0 6.4 Net debt/ EBITDA 0.1 0.8 net cash net cash

NTA per share ($) -0.01 0.03 0.04 0.04

Capex -2.8 -4.3 -4.0 -4.1 Price / NTA (x) -34.0 9.3 6.8 5.4

Intangible acquisitions -0.7 -0.1 -0.6 -0.6 Shares on issue- period end (m) 243.8 301.5 333.8 333.8

Acquisition of businesses 0.0 0.0 0.0 0.0 Growth ratios 2018A 2019F 2020F 2021F

Sale of assets -3.0 -4.0 -3.4 0.0 Sales revenue 41% 7% 56% 8%

Investing cash flow -6.5 -8.4 -8.0 -4.7 EBITDA 41% -44% 259% 42%

EBIT 21% n/a n/a 58%

Dividends 0.0 0.0 0.0 0.0 PBT 15% n/a n/a 63%

Equity /other 7.2 4.9 5.6 0.0 NPAT 9% n/a n/a 63%

Change in borrowings 0.9 -0.9 -0.9 -0.9

Financing cash flow 8.2 4.0 4.7 -0.9 $m 2018A 2019F 2020F 2021F

Commercial 8.9 10.5 16.1 19.6

Net Cashflow 3.4 -2.0 2.6 0.8 Residential/ student 3.9 3.9 3.9 4.0

Cash at beginning of period 1.2 4.6 2.6 5.2 Legacy 3.0 2.5 2.3 1.7

Cash at end of period 4.6 2.6 5.2 6.0 Non-recurring 0.3 0.4 0.4 0.4

Balance Sheet 2018A 2019F 2020F 2021F Group revenue 16.2 17.3 22.6 25.6

Cash 4.6 2.6 5.2 6.0

Debtors 0.4 0.4 0.7 0.7 Valuation

PPE 6.4 9.2 11.1 12.8 DCF

Intangibles 9.0 13.7 17.8 18.3 WACC 10% Equity value 104.3

Other assets 1.5 2.3 2.3 2.3 Terminal growth rate 3% Shares (m) 333.8

Total Assets 22.0 28.1 37.1 40.1 Enterprise value 100.2 Valuation (¢ per share) 31

Borrowings 4.8 3.9 3.0 2.1 Net debt 4.1

Trade Creditors 1.3 1.7 3.5 3.7

Other Liabilities 0.4 1.1 1.1 1.1 Description

Total Liabilities 6.5 6.6 7.6 6.9

NET ASSETS 15.5 21.5 29.6 33.2

Board of Directors / Substantial Shareholders

Board of Directors Shareholding (m) %

James Joughin, Chairman 1.0 0.3%

Geoff Neate, CEO 33.7 11.2%

Terry Gray, Non-executive director 1.7 0.6%

Mark Dioguardi, executive director 0.0 0.0%

Sol Lukatsky, executive director 0.1 0.0%

Substantial Shareholders Shareholding (m) %

Peter & Diana Diamond Superfund 55.5 18.4%

Joshart Investments 33.7 11.2%

Spirit Telecom (ST1) is a fast-growing niche provider of Telecom services in

Australia with customers in both the Retail and Commercial sectors. ST1 utilses its

own fixed wireless network to connect buildings and then markets is services to

tenants of the facilities. A mark of its popularity among residential customers is

that it has achieved a 19% share of the buildings in which its services are

available, which is approximately TPG Telecom's share of the wider residential

market. It was also named Melbourne's fastest Telecom provider in November

2017, beating out all the major Telecom providers in the process. The Commercial

offering, however, is the fastst-growing element of the business and we expect

that to continue with the enhanced Melbourne network and new markets opening

in Sydney and Brisbane.

Spirit TelecomCompany Update

Buy unchanged Target Price A$0.30 unchanged | 26 July 2019 Telecommunications 2

3

Exiting FY19 with strong revenue momentum

ST1’s trading update reports FY19 revenue of $17.3m, which we estimate implies

c$5m for 4QCY19. Excluding the contribution of acquisitions in the period, we

calculate underlying revenue were c8% higher sequentially than 3QFY19, which

demonstrates the excellent revenue momentum.

2HFY19 EBITDA margin was also confirmed to be above the 12% guided at the

1H19 results. The LinkOne acquisition should undoubtedly assist with that (36%

EBITDA margin in CY18) and we are modelling 13% for the period in the underlying

ST1 business in 2H FY19.

New contract value

That revenue momentum is enhanced by onging impressive new contract signings

which continued the stepwise transformation from 1H19. Adding in contracts which

have been signed but not yet installed, we estimate that ST1 added $3.7m of new

revenue in 4Q FY19, following $3.3m in the third quarter (we do not believe there is

not a long lag for these to-be-installed revenues- likely less than a quarter).

Figure 2: Value of new contracts signed per quarter

Source: Company Reports, Canaccord Genuity estimates

Cash flow and balance sheet

2HFY19 operating cash flow is set to be $1.9m, which is significantly better than the

$0.4m reported in 1H19.

Capex in 2HFY19 looks set to be c$2.6m, with a step-up in 4Q FY19 attributable to a

network build in Horsham ($0.65m) and an upgrade for LinkOne ($0.2m). We

estimate, therefore that capex/ revenue in 2H FY19 will be c28% of revenue

compared to 21% in 1H19, although that ratio will drop as Managed Services

revenue enter the mix.

Based on those operating cash flow and capex figures, we estimate ST1 finished

FY19 with $2.6m of cash ($1.3m net debt), which would be boosted by $5.7m of

option conversion capital coming into the business in early FY20.

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

Q3-17 Q4-17 Q1-18 Q2-18 Q3-18 Q4-18 Q1-19 Q2-19 Q3-19 Q4-19

New contract value ($m) New business to be installed ($m)



4

Acquisition of Phoenix Austec- building Managed Services

ST1 also announced an acquisition adding to its Managed Services offering by

buying Phoenix Austec Group. Phoenix specialises in the Real Estate sector and has

a range of other SME customers across its 100-strong corporate client base. ST1 will

pay $1.6m ($1.3m cash; $0,3m scrip) at an EBITDA multiple of 4.3x, implying

incremental $0.37m in annualised earnings. That multiple is in line with ST1’s

recent transactions.

Phoenix has revenues of $1.9m, having grown at 19% CAGR since 2016. Managed

Services will now provide c20% of group revenues having added Arinda to the

business earlier this month. Phoenix’s EBITDA would contribute c7% on an

annualised basis to our $5.6m forecast for FY20 for ST1.

The cash component of the acquisition will be funded from existing reserves.

Phoenix is ST1’s fourth acquisition in as many months signalling, we believe,

management’s confidence over the outlook. Managed Services should contribute

$1m on an annualised basis.

Figure 6: Recent acquisitions by Spirit Telecom

Date Valuation Cash Equity Revenue EBITDA EV/EBITDA Comment

Spirit Telecom

Phoenix Austec 24/07/2019 1.6 1.3 0.3 1.9 0.4 4.3

Arinda IT 2/07/2019 2.6 2.1 0.5 2.2 0.6 4.3

Building Connect 9/5/2019 0.3 0.0 0.3 N/A N/A N/A

LinkOne 3/04/2019 5.7 4.0 1.7 3.2 1.1 5.2 Includes infrastructure assets

World Without Wires 25/08/2017 4.6 3.1 1.5 2.7 1.1 4.2

Phone Names 8/12/2016 4.2 4.2 0.0 1.5 0.8 5.3


Forecast changes

With confirmation of FY19 revenues of c$17.3m and an EBITDA margin above 12%,

we tweak our FY19 estimates according. We had forecast $17.5m revenue for the

full year ands bring that into line with commentary. As a result we nudge our FY19

EBITDA estimate down by $0.1m to $1.6m (of which $1.3m falls in 2H19, at a

margin of 14%).

For FY20, we have incorporated the Phoenix acquisition’s earnings ($0,3m EBITDA)

into our model, although our estimate remains unchanged as we start from a lower

base from FY19 and we assume a modestly lower incremental organic gross profit in

FY20. We discuss the FY20 EBITDA bridge in more detail below.

Figure 3: Forecast changes for Spirit Telecom following Arinda IT acquisition and incorporating option conversion funds

$m FY19 FY20 FY21

Old New Change Old New Change Old New Change

Revenue 17.5 17.3 -1% 25.1 26.9 7% 28.6 29.1 2%

EBITDA 1.7 1.6 -8% 5.6 5.6 0% 7.4 7.9 7%

NPAT -0.2 -0.3 50% 2.3 2.3 0% 3.4 3.7 10%

EPS (¢ per share) -0.05 -0.08 n/a 0.63 0.63 0% 0.93 1.02 10%

Net debt 1.6 1.7 n/a -3.2 -2.1 n/a -5.2 -3.8 n/a

Source: Canaccord Genuity estimates

Figure 4 shows the bridge between our FY19 EBITDA forecast to our $5.6m forecast

for FY20F, of which the key components are:



5

Organic gross profit growth $1.6m on $13.6m 2H19 annualised gross profit for

12% grow yoy.

Organic Opex (ie excluding all the acquisitions) $0.2m lower yoy in FY20 based

on the lower run rate from 2H19 (from the 1H19 presentation).

LinkOne and Building Connect $1.3m incremental EBITDA.

Managed Services including Phoenix and Arinda- $1m assuming about 11

months’ contribution and some continuing organic growth in those businesses. If

we work off the $1m EBITDA base, the contribution would be more like $0.8m in

FY20.

Figure 4: EBITDA bridge for Spirit Telecom FY19-20


Funding

We estimate that ST1 has $8.7m in funding capacity after accounting for FY19 cash

on hand, option conversion, debt capacity and deducting $3.4m for the two

Managed Services acquisitions. During the course of FY20, we expect a further $2m

to progressively accrue as the business generates operating cash flow and incurs

capex, for a total of $10.7m,

Figure 5: Spirit Telecom funding capacity, FY20

Source: Canaccord Genuity estimates



6

Valuation & view

On our revised forecasts, the shares trade on an FY20F EV/ EBITDA of 14.0x, falling

to 9.6x FY21F.

We have left our DCF-based valuation (WACC 10%; terminal growth rate 3%)

unchanged at 30¢ per share. We believe the revenue and new contracts exiting

FY19 means the business has real momentum and we stay at BUY.



Appendix: Important Disclosures

Analyst CertificationEach authoring analyst of Canaccord Genuity whose name appears on the front page of this research hereby certifies that (i) therecommendations and opinions expressed in this research accurately reflect the authoring analyst’s personal, independent andobjective views about any and all of the designated investments or relevant issuers discussed herein that are within such authoringanalyst’s coverage universe and (ii) no part of the authoring analyst’s compensation was, is, or will be, directly or indirectly, related to thespecific recommendations or views expressed by the authoring analyst in the research.Analysts employed outside the US are not registered as research analysts with FINRA. These analysts may not be associated persons ofCanaccord Genuity LLC and therefore may not be subject to the FINRA Rule 2241 and NYSE Rule 472 restrictions on communicationswith a subject company, public appearances and trading securities held by a research analyst account.Sector CoverageIndividuals identified as “Sector Coverage” cover a subject company’s industry in the identified jurisdiction, but are not authoringanalysts of the report.

Investment RecommendationDate and time of first dissemination: , ,Date and time of production: , ,Target Price / Valuation Methodology:Spirit Telecom - ST1We use a DCF to value ST1’s shares. Using a WACC of 10% (Beta 1.2; risk-free rate 4%; 3% terminal growth rate), we estimate a value ofA$0.30 per share, representing 13x our FY21 EBITDA forecast.Risks to achieving Target Price / Valuation:Spirit Telecom - ST1

RegulationThe government is planning to introduce a Reginal Broadband Scheme (RBS) whereby Carriers that provide active high speed, fixed linebroadband services to premises on their network would contribute around $7.10 per premises per month. It is intended that carrierswould pay a charge for all premises serviced by fibre to the premises (FTTP), fibre to the node (FTTN), fibre to the basement (FTTB), fibreto the curb (FTTC) and hybrid fibre coaxial (HFC) networks. The RBS also includes a concession period that exempts the first 25,000residential and small business premises on each carrier’s network for the first five years. This will support market competition and helpsmaller carriers transition to paying the charge.New entrantsThe fact that Spirit Telecom is exempt from using nbn infrastructure and is therefore not subject to its expensive access charges couldattract new entrants to the market. However, we believe that Spirit’s position in the market is niche in nature and its current revenuesand profits would not make a material difference to the main Telecom operators’ performance. Nonetheless, these players re subject topricing pressures and growth challenges and new avenues to improved performance could be attractive to them.CompetitionSpirit Telecom operates in the competitive Telecommunications sector in Australia. Even in its fixed wireless niche, there are a number ofcompetitors the most notable of which is BigAir, which is now part of Superloop (SLX.ASX- Buy). Other fixed wireless operators in Australiainclude NuSkope (also acquired by Superloop); Uniti Wireless and Cirrus Communications.

Distribution of Ratings:Global Stock Ratings (as of 07/26/19)Rating Coverage Universe IB Clients

# % %Buy 519 59.25% 50.87%Hold 201 22.95% 35.82%Sell 26 2.97% 19.23%Speculative Buy 130 14.84% 75.38%

876* 100.0%*Total includes stocks that are Under Review

Canaccord Genuity Ratings System



BUY: The stock is expected to generate risk-adjusted returns of over 10% during the next 12 months.

HOLD: The stock is expected to generate risk-adjusted returns of 0-10% during the next 12 months.

SELL: The stock is expected to generate negative risk-adjusted returns during the next 12 months.

NOT RATED: Canaccord Genuity does not provide research coverage of the relevant issuer.“Risk-adjusted return” refers to the expected return in relation to the amount of risk associated with the designated investment or therelevant issuer.Risk QualifierSPECULATIVE: Stocks bear significantly higher risk that typically cannot be valued by normal fundamental criteria. Investments in thestock may result in material loss.

12-Month Recommendation History (as of date same as the Global Stock Ratings table)A list of all the recommendations on any issuer under coverage that was disseminated during the preceding 12-month periodmay be obtained at the following website (provided as a hyperlink if this report is being read electronically) http://disclosures-mar.canaccordgenuity.com/EN/Pages/default.aspx

Required Company-Specific Disclosures (as of date of this publication)Canaccord Genuity or one or more of its affiliated companies intend to seek or expect to receive compensation for Investment Bankingservices from Spirit Telecom in the next three months.

Spirit Telecom Rating History as of 07/25/2019

AUD0.35

AUD0.30

AUD0.25

AUD0.20

AUD0.15

AUD0.10

AUD0.05Oct 14 Jan 15 Apr 15 Jul 15 Oct 15 Jan 16 Apr 16 Jul 16 Oct 16 Jan 17 Apr 17 Jul 17 Oct 17 Jan 18 Apr 18 Jul 18 Oct 18 Jan 19 Apr 19 Jul 19

I:B:AUD0.2505/02/2019

B:AUD0.3007/02/2019

Closing Price Price Target

Buy (B); Speculative Buy (SB); Sell (S); Hold (H); Suspended (SU); Under Review (UR); Restricted (RE); Not Rated (NR)

Past performanceIn line with Article 44(4)(b), MiFID II Delegated Regulation, we disclose price performance for the preceding five years or the whole periodfor which the financial instrument has been offered or investment service provided where less than five years. Please note price historyrefers to actual past performance, and that past performance is not a reliable indicator of future price and/or performance.

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company update spirit telecom · market. it was also named melbourne's fastest telecom...

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