Game changing acquisition positions Uniti, our Stock of the Week, for share price growth

By Trevor Hoey. Published at Jun 19, 2020, in Stock of the Week

It was just this week that analysts at Bell Potter ran the ruler across diversified telecommunications company Uniti Group (ASX:UWL), making earnings upgrades and increasing their price target to $2.25 following the $532 million acquisition of Opticomm, a transaction that will drive substantial growth in the near to medium-term.

Bell Potter’s price target implies share price upside of 32% relative to Thursday’s closing price of $1.70

Uniti’s share price traded strongly during late-April and throughout May to hit a high of $1.72, but when the Dow plunged more than 1800 points last week it retraced to $1.54.

While the share price recovery that occurred this week can be in part attributed to a recovery in equities markets, it was the game changing acquisition that should be the focus when assessing the company’s growth profile, scope for further expansion and underlying valuation.

As a backdrop, Opticomm is one of the largest private providers of telecommunications infrastructure networks in Australia, and the group is expected to generate revenues of $70 million in fiscal 2020.

Importantly, it is a high margin business, underlined by EBITDA projections of $38.7 million in fiscal 2020.

Highlighting the potential earnings boost that Opticomm provides, Uniti’s pro forma post-acquisition EBITDA is $86.7 million.

One of the other key benefits of Opticomm is the earnings predictability that it brings to the group because of the significant proportion of recurring revenue.

Vocus, TPG, M2 team at the helm

Management estimates that the acquisition will be immediately earnings per share accretive to the tune of 23% with increasing incremental growth to occur as synergies are realised.

However, it is one thing to make projections regarding anticipated synergies, but another to actually realise these expectations in the form of increased revenues and earnings.

The good news for Uniti is that the company already has established a track record of successfully integrating acquisitions, but arguably of more importance, it has high profile executives including managing director Michael Simmons who has taken other ASX listed telcos down this path before.

Simmons has nearly 40 years of experience in the media and telecommunications industry as a CEO, Director or CFO over this period.

He was the founding chief executive of TPG Telecom (formerly SP Telemedia Limited/NBN Enterprises Pty Ltd), a non-Executive Director of M2 Telecommunications Limited, managing director of Terria (the industry bid to build NBNCo) and chief executive of Vocus Group.

TPG, M2 and Vocus all delivered outstanding shareholder returns on the back of growth by acquisitions.

The following chart shows the outstanding share price performance of TPG Telecom (ASX:TPM) that was largely attributed to the substantial earnings growth that stemmed from acquisitions during the period.

As M2 acquired approximately 20 companies over the course of 15 years, it transitioned from a mere minnow to a group valued at about $1.3 billion, and another Uniti executive in Vaughan Bowen played an active role in the process.

Bowen has held various directorships over the past 10 years, was the founder of M2 Group Limited, previously chairman of Vocus Group Limited and is currently the chairman of the Telco Together Foundation.

While M2 was acquired by Vocus, the following historical share price chart shows its strong acquisition led performance between 2006 and 2016 with the last leg up being its response to the Vocus takeover.

Bowen joined Uniti Group Limited in the role of Executive Director in March 2019 to lead the company's mergers and acquisitions activities.

Before examining the operational benefits of the Opticomm transaction, it is worth noting the performance of the broader S&P/ASX 200 Communication Services index (XTJ) throughout the recent period of volatility.

With communications services being of an essential nature, the sector has historically been a defensive area to park your money.

This is still the case, as evidenced by the following chart (as at 16/06/20 - date Opticomm acquisition announced), which shows the degree of outperformance by the XTJ (blue line) over the last six months, but more importantly the significantly shallower trough at the bottom of the downturn demonstrates the sector’s resilience and stability.

Opticomm has dominant positions in niche markets

Opticomm is a designer, builder, owner and operator of wholesale open access telecommunications infrastructure networks.

The group is a national provider of fibre-to-the-premises telecommunications networks to new residential, commercial and retail developments.

It has a particularly strong competitive position in greenfield sites, and management has made good progress in targeting markets such as retirement living and community precincts.

With growing demand for high-speed Internet connectivity, the company’s products and services should be highly sought after, and there is a legislative requirement for fixed line fibre telecommunications infrastructure to be made available in new housing developments, effectively providing regulatory support.

While we already emphasised the importance of Opticomm’s business model in terms of earnings visibility from its established businesses, it is also worth noting the growth transparency that is evident when considering that it has a current combined order book of nearly 190,000 contracted lots for future delivery.

Opticomm has 39 retail service providers on its network, as well as long-term relationships with developers.

The company’s success in expanding its presence, particularly on the eastern seaboard is demonstrated below.


Where to invest $1,000 right now

When the experts at Next Investors have a stock pick, it may pay to listen.

The Next Investors have been investing in ASX small cap stocks for years, with their best small cap picks yielding returns of 1,200%, 1,120%, 900% and 678%.

They have just revealed their hand-picked, FY2021 stock portfolio of high conviction long-term investments.

Click the link below to see what they are currently investing in.


SEE THE PORTFOLIO

S3 Consortium Pty Ltd (CAR No.433913) is a corporate authorised representative of LeMessurier Securities Pty Ltd (AFSL No. 296877). The information contained in this article is general information only. Any advice is general advice only. Neither your personal objectives, financial situation nor needs have been taken into consideration. Accordingly you should consider how appropriate the advice (if any) is to those objectives, financial situation and needs, before acting on the advice.

Conflict of Interest Notice

S3 Consortium Pty Ltd does and seeks to do business with companies featured in its articles. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this article. Investors should consider this article as only a single factor in making any investment decision. The publishers of this article also wish to disclose that they may hold this stock in their portfolios and that any decision to purchase this stock should be done so after the purchaser has made their own inquires as to the validity of any information in this article.

Publishers Notice

The information contained in this article is current at the finalised date. The information contained in this article is based on sources reasonably considered to be reliable by S3 Consortium Pty Ltd, and available in the public domain. No “insider information” is ever sourced, disclosed or used by S3 Consortium.

Australian ASX Small Cap stocks | Why Finfeed.com is Australia’s leading small cap publication

Founded seven years ago, Finfeed.com is Australia’s leading and longest standing website for investor and finance news, education and expert opinion.

Published by StocksDigital, Finfeed was created to report daily on the comings and goings of ASX listed stocks in the small cap market.

As the first digital publication dedicated specifically to this space, Finfeed soon became the most trusted publication in the market, quickly garnering over two million page views – a number that continues to rise.

Finfeed.com provides its readers with informative articles that tackle the latest in market moving #ASX small cap news, plus exclusive content you won’t find anywhere else. It is aimed at those with an interest in investing, market education, company performance, start-ups and much more.

Finfeed.com is the only media organisation operating under the strength of a Financial Services License and is backed by leading journalists and analysts all with brands of their own.

The website aims to inform, educate and entertain with content that drills down into the heart of financial matters.

Finfeed is a leading source of investor and market information, with everything investors need to know about how to invest written in a way that anyone can understand. 

Over the years, the website has expanded beyond exclusively reporting on small caps, to profile Australia’s leading ASX listed small, mid and large caps as well as some of the country’s most successful CEOs and business leaders to find out what makes them tick.

Every day you will find fresh content covering:

Fast Facts

Over 4,000 articles published

Over 2.3 Million Page Views and counting

Over 10,000 followers on social media

Subscriber list growing by 2% monthly

Thanks for subscribing!

X