Company Overview: Over the Wire Holdings Limited is a provider of telecommunications, cloud and information technology solutions. The Company has an integrated product suite of services, including data networks and Internet; voice; cloud and managed services, and data center co-location. It offers custom built, private connections to construct a fully managed wide area network (WAN). It provides power redundant, rack space in its data centers as part of its managed collocation offerings. Its AWS Direct Connect services provide a private connection directly into Amazon Web Services hosted environment. It provides a range of infrastructure as a service (IaaS) options, utilizing virtual machines (VM's), physical machines and utility disk. Its backup as a service (BaaS) is a privately hosted cloud backup system for businesses. Its platform as a service (PaaS) offering allows business to utilize a fully outsourced infrastructure platform for computing needs.

OTW Details

Remarkable Organic Growth Across all States in FY19: Over the Wire Holdings Limited (ASX: OTW) is a telecommunication, cloud and IT solutions provider having a national network with points of presence in all major Australian capital cities and Auckland, NZ. The company’s offerings include Data Networks and Internet, Voice, Data Centre co-location, and Cloud and Managed Services. In FY19, the company reported decent growth across all the key metrics, including revenue, EBITDA and profit. Product-wise revenue also went up for all categories, with cloud/services leading the lot. The period was characterised by impressive organic growth, both in terms of product and region. As a result of sound financial performance, earnings per share for the year went up by 63% to 20.66 cents per share. Performance during the year was mainly driven by the effective implementation of geographic expansion plans along with quality acquisitions. The company has successfully completed the integration of the acquired businesses, except Access Digital Networks and Comlinx, which are still on schedule.

Going forward, the company is aiming to provide a boost to organic growth through continued geographical expansion and expansion of product and services offerings to maintain strong customer relationships. In FY20, the company is targeting an organic growth rate of more than 15%, which was achieved in FY19.

Over the period covering FY15 to FY19, the business has reported consistent growth in revenue, EBITDA, NPATA and EPS, as depicted in the graphs below. Over the above-stated period, top-line CAGR growth was reported at ~50.9%, with FY15 and FY19 total revenue, including revenue from contracts with customers and other income, amounting to $16.15 million and $83.71 million. Bottom-line CAGR growth over the 5-year period was reported at ~50.6%, with profit after tax amounting to $1.97 million and $10.14 million, respectively. The highest growth in both revenue and PAT has been reported in the current year, i.e., FY19, with growth rates of ~56% and ~83%, respectively.


5-Year Growth Across Key Metrics (Source: Company Reports)

FY19 Financial Highlights: During the year ended 30 June 2019, the company reported total group revenue amounting to $79.6 million, up 49% on prior corresponding year revenue of $53.6 million. Gross profit for the year amounted to $40.8 million, up 37% on prior corresponding period gross profit of $29.8 million. EBITDA for the year stood at $20.1 million, representing an increase of 64% on the previous year’s EBITDA of $12.3 million. NPAT stood at $10.1 million, representing a substantial increase of 83% on prior corresponding year NPAT of $5.5 million. During the year, the company witnessed the continued strong conversion of EBITDA to cash. Cash and cash equivalents at the end of the period stood at $7.0 million.


Profit & Loss Statement (Source: Company Reports)

Product Performance: During the year, cloud/services segment reported the highest increase in revenue from $7.3 million in FY18 to $23.0 million in FY19, demonstrating a percentage increase of 217% on y-o-y basis. This was followed by data networks segment that reported a growth rate of 26%, with FY18 and FY19 revenue amounting to $29.4 million and $37.0 million, respectively. Voice revenue for FY19 came in at $16.4 million, representing an increase of 17% on prior corresponding period revenue of $14.1 million. Data Centre Co-location segment reported a rise of 11%, with FY18 and FY19 revenue amounting to $2.9 million and $3.2 million, respectively.


Product Performance (Source: Company Reports)

Growth Strategy: In FY19, the company witnessed decent organic growth across all states. Revenue for the year witnessed an organic growth rate of 15%. On the product front, Cloud/Services segment reported the highest organic growth rate at 52%, followed by the Voice segment at 12%. During the year, the company continued to work on its geographic expansion strategy. The highest organic revenue growth was reported in Queensland at 17%. New South Wales, South Australia and Victoria reported a growth rate of 14%, 13% and 11%, respectively. In FY20, the company is targeting for an organic growth rate of more than 15% through continued geographic growth and market penetration. In FY19, revenue growth of 49% depicted good demand for all products, which will be further enhanced by leveraging strong customer relationships and provision of a broader range of products and services for high customer retention. The company is also aiming for new customer acquisitions through targeted campaigns focused on industry tailwinds in Hosted Voice, Cyber Security and SD-WAN.


Geographical Revenue Growth (Source: Company Reports)

Contribution from Acquisitions: On 1 November 2018, the company acquired Access Digital Networks that contributed $5.4 million to FY19 revenue. On the same date, the company also acquired Comlinx, a leading provider of IT managed solutions to Enterprise and Government customers. Revenue contribution from Comlinx came in at $10.4 million.

In light of the above acquisitions, the company has planned for a set of objectives for FY20. Team integration and systems integration with respect to Access Digital Networks are on track to be completed during the first half of FY20. Moreover, the business has begun to realise synergies from the acquisition and expects the contribution to be reflected in FY20 financials. In addition, strong local team capability is expected to deliver considerable organic growth in South Australia in FY20. The combined capability of Over the Wire Holdings and Comlinx resulted in new customer wins and $740,000 of new customer revenue in FY19. This is expected to continue going forward, through SD-WAN capability. Moreover, the company has notified about geographic expansion plans for Comlinx in FY20.

Recent Updates:

(a) Release of Shares from Voluntary Escrow: To provide a background on the update, the company informed that it acquired Access Digital Networks in November 2018 for a consideration comprising cash, shares and a deferred consideration in the form of an earn-out requiring the retention of key staff and key customers. In relation to the shares issued as consideration, Access Digital’s vendor had entered into a voluntary escrow arrangement, under which all the shares issued were escrowed for a period of 12 months from the date of acquisition. In a recent update to the exchange on 21 November 2019, the company updated that 98.4% of the earn-out conditions have been achieved. In addition, it also informed that a corresponding proportion of the potential deferred consideration, amounting to $1,426,800, was paid to the vendor. Therefore, 567,392 ordinary shares in the company will now be released from voluntary escrow on 6 December 2019, in accordance with Listing Rule 3.10A.

(b) Notice of AGM: In another recent announcement, the company notified that the 2019 Annual General Meeting will be held on 28 November 2019.
 

Top 10 Shareholders: The top 10 shareholders have been highlighted in the table which together form around 66.93% of the total shareholding. Maximum number of shares were held by Omeros (Michael Nictarios) with a percentage holding of 26.40%, followed by Paddon (Brent Evans) with a holding of 23.55%. Naos Asset Management Ltd holds 7.73% shares in the company. Apart from the above three shareholders, holdings of other shareholders in the top 10 list stood less than 5%.
 

Top Ten Shareholders (Source: Thomson Reuters)
 
Key Metrics: During the year ended 30 June 2019, the company had a gross margin and EBITDA margin of 51.3% and 20.8%, respectively. Net margin for the period was reported at 12.7%, higher in comparison to prior corresponding period margin of 10.3%. Current ratio of the company improved from 0.81x in FY18 to 1.00x in FY19, demonstrating a better position to address short-term liabilities of the business. During the year, the company also improved on its capital composition and reported a reduction in debt. Debt-to-Equity ratio for the period stood at 0.17x, representing an improvement on prior corresponding year’s ratio of 0.53x. Moreover, the ratio stood below the industry median of 0.56x, representing more financial stability in comparison to peers.


Key Metrics (Source: Thomson Reuters)

Outlook: As discussed above, the company’s performance in FY19 was aided by the continuous implementation of the geographical expansion strategy and quality acquisitions. Going forward, the company is looking forward to integrate Access Digital Networks and Comlinx, benefits from which will unfold in FY20. In addition, it will work on broadening the range of products and services offered to customers with a complete solution from one supplier dedicated to customer service, for simplification.


Key Valuation Metrics (Source: Thomson Reuters)

Valuation Methodologies:
Method 1: EV/Sales Multiple Approach:

EV/Sales Multiple Valuation (Source: Thomson Reuters)
 
Method 2: EV/EBITDA Multiple Approach:

EV/EBITDA Multiple Valuation (Source: Thomson Reuters)

Note: All forecasted figures and peers have been taken from Thomson Reuters, *NTM-Next Twelve Months

Stock Recommendation: The stock of the company generated negative return of 7.75% over a period of six months. In the last one months, the stock witnessed a decline of 0.43%. The company reported impressive organic growth of 15% in FY19 and is targeting for a higher growth rate in FY20. As per the management, the business is tracking well against the strategy and continues to generate positive operational cash flow while maintaining a strong balance sheet. As a result, OTW seems well-positioned to continue to deliver organic growth and pursue further accretive acquisitions. Considering the financial performance in FY19, anticipated synergistic benefits from integration of Access Digital Networks and Comlinx, growth strategy and a decent outlook for FY20, we have valued the stock using two relative valuation methods, i.e., EV/EBITDA multiple and EV/Sales multiple, and arrived at a target price of lower double-digit growth (in % term). Hence, we recommend a “Buy” rating on the stock at the current market price of $4.690, up 1.078% on 22 November 2019.

 
OTW Daily Technical Chart (Source: Thomson Reuters)

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