- Over the wire's (OTW) 1H18 result was impressive across the board and exceeded our forecasts.
- Through a combination of double digit organic growth and acquisitions, OTW reported 73% revenue growth, 61% EBITDA growth, 38% reported EPS growth and 33% DPS growth. Momentum in the business looks impressive and 2H18 looks like be another good period for the company.
- We retain our Add recommendation and increase our price target. Morgans clients login to view.
Result was ahead of our forecast
Revenue was up 73% to A$24.1m and ahead of our forecast of A$22.6m. EBITDA increased by 61% to A$4.9m, compared with our estimate of A$4.4m.
OTW's consolidated EBITDA margin dropped 200bps to 20%, diluted by lower margin acquisitions but likely to improve again over the coming years as synergies are realised.
Cash EPS (adding non-cash amortisation to reported EPS) of 6.6cps was up 60%. A fully franked interim dividend of 1cps was declared which was in-line with our forecast.
Operating cash flow of A$3.5m was up 400% yoy, well ahead of our A$1.9m forecast and cycled a weak 1H17. Adjusted cashflow conversion was 104% (versus 80% in 1H17).
After capex of A$1.1m (including internally generated software), OTW generated A$2.4m of free cash flow. After paying A$14.8m cash for the VPN Networks acquisition OTW ended the period with net debt of A$10.3m or ~1x annualised EBITDA. This still leaves the balance sheet well positioned to fund future opportunities.
Cash generation was the standout for 1H18 but all metrics were strong. OTW didn't disclose organic growth this period but our calculations suggest organic growth in data (OTW's largest division) was ~10% versus 2H17 / 20% annualised.
The Board reiterated guidance for > 20% yoy organic revenue growth. Including the extra four months of VPN earnings (A$1m extra EBITDA in 2H18 vs 1H18) and assuming 10% growth hoh should see FY19 EBITDA of A$11.4m.
On top of this there should be further synergies realised. OTW expects to completely integrate VPN Solutions before the end of CY18
Lower costs from the Telarus and VPN Solutions acquisitions should start to flow in 2H18, however we assume these gains are offset (reinvested) back into the business in 2H18 as OTW spends money to realise medium-term synergies.
On a consolidated basis gross profit and EBITDA margins both declined which was a function of adding in the Telarus and VPN Solutions acquisitions which are lower margin businesses.
Over time we expect OTW's EBITDA margin to edge back towards the mid 25%. We have upgraded our reported EPS by +4.3%/+0.1% in FY18/19 respectively.
Our valuation and price target increase slightly (Morgans clients login to view) and we retain our Add recommendation.
Bull points include a ~30% cash return on equity, strong cash flow and earnings growth, undemanding trading multiple (relative to growth) and substantial equity ownership by management.
OTW trades broadly in-line with Telco peers (trading on 10x FY19 EV/EBITDA) but with double the EPS growth, strong earnings momentum and the potential to surprise with value-adding acquisitions.
Morgans clients can login to view my full report on Over the Wire's 1H18 result. Alternatively, contact your Morgans adviser or nearest Morgans office.
Disclaimer(s): Analyst owns shares.
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