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Over The Wire

Nick Harris

Acquires VPN Solutions – a NSW-based managed network provider

Over The Wire (OTW) has announced the acquisition of VPN Solutions, a NSW-based managed network provider that provides business-grade telecommunications solutions to the Australian SME and Corporate markets. VPN has approximately 150 business customers and, like OTW, has experienced high levels of customer retention. The acquisition accelerates OTW's expansion into the NSW and South Australian markets.

Additionally, Data Networks represents over 90% of VPN's revenue and provides OTW with cross sell and interstate expansion opportunities.

Financials and forecast changes

The upfront consideration of cA$15.6m comprises:

  1. cA$14.8m cash (via cash and a new debt facility); and
  2. approximately A$0.8m in OTW scrip.

The upfront consideration represents an acquisition multiple of 5x EBITDA, which we consider reasonably priced and value enhancing. Synergies are expected to be achieved in FY18, with further cost savings to be delivered in FY19. After including the acquisition in our forecasts for 8 months in FY18 and expensing deal costs, our FY18 Cash EPS (which excludes non-cash amortisation) increases by 19%. VPN Solutions will contribute more meaningfully in FY19 as it will be owned by OTW for the full 12 months. In addition to expected synergies resulting from removing duplicate network and back-office costs. This results in an upgrade to our FY19F EBITDA by 28%, reported EPS by 18% and cash EPS by 29%.

Investment view

Over The Wire (OTW) continues its strategy of making well-priced acquisitions that complement its existing product offering and geographical diversification. Following the VPN Networks acquisition, OTW's earnings increase approximately 29% and its trading multiple falls back to 7.6x FY19F EV/EBITDA (versus peers on 8.5x). In addition to approximately 20% organic growth, we believe OTW is well placed to continue to make well-priced acquisitions to accelerate growth and create shareholder value. Key upside and downside risks for the share price relate to OTW's potential to surprise positively or negatively with respect to organic growth and acquisitions.

We retain our Add recommendation.

More information

Morgans clients can login to view our detailed report and share price target for Over The Wire (OTW). Alternatively, please contact your nearest Morgans office for access.

Disclaimer(s): Analyst owns shares.

The information contained in this report is provided to you by Morgans Financial Limited as general advice only, and is made without consideration of an individual's relevant personal circumstances. Morgans Financial Limited ABN 49 010 669 726, its related bodies corporate, directors and officers, employees, authorised representatives and agents (“Morgans”) do not accept any liability for any loss or damage arising from or in connection with any action taken or not taken on the basis of information contained in this report, or for any errors or omissions contained within. It is recommended that any persons who wish to act upon this report consult with their Morgans investment adviser before doing so.