We resume coverage of SLC following the resetting event that is:
- the move to new accounting standards AASB15 (which materially lower earnings but not cashflow)
- new business segmentation under new CEO & CFO (who joined SLC in ~9 months ago)
- a capital raising to refresh the balance sheet
- issuance of guidance for the first time in SLC's history.
2H19 marks the end of SLC build and elevated capex phase. Submarine cable completion in June 19 marks the first time that SLC can sell to their competitive advantage (the only on-net provider of communications services in, around and between Hong Kong, Singapore and Australia).
If you back the strategy, and we do, then this is the first time they can sell to their competitive advantage.
Following release of research restrictions, we resume coverage with an Add recommendation and new price target (Morgans clients only).
Forecast changes are largely around AASB15 and timing on costs
Earlier we flagged that earnings would materially reduce due to the new accounting standards (AASB15) no longer recognising IRUs (upfront network sales) upfront and instead recognising them more evenly over the term of the contract.
We push these changes through which shaves millions off our earnings forecasts. Cashflow isn't impacted and we still forecast IRU / upfront cash contributions. Cost outs in FY19 have taken longer than we anticipated to complete, this combined with new accounting standards, reduces our forecasts materially.
We conservatively sit towards the lower end of guidance, leaving room for upside. Our price target decreases – Morgans clients view here.
Last three years were the build phase and now it's sales execution
SLC shareholders have needed to be patient over the last 24 months and we acknowledge this has been painful, however it does takes time to build new businesses, in new countries. By June 2019 SLC's submarine cable (INDIGO) will be live. With the last piece of the asset built the company starts to generate Free Cash Flow and can finally sell to their competitive advantage.
SLC is the only on-net provider of communications services in, around and between Hong Kong, Singapore and Australia.
In owning their own networks SLC is able to rapidly provision and adjust communications services for their end customers. If, like us, you believe this strategy creates value then sales should accelerate over the next few years.
SLC's 1st built asset Singapore (SG) illustrates the opportunity and in 1H19 delivered an impressive 75% yoy growth in recurring revenue and 56% growth in EBITDA. Annualised revenue is ~A$10m and EBITDA ~A$5m.
A cash return on assets of 10% is impressive considering its been live for just three years and is less than 15% utilised. Hong Kong (HK) went live ~18 months after SG and, in our view, still needs to improve its building connectivity and sales but has meaningful upside potential.
Investment view – lots of upside upon successful execution
We believe that relative to the share price the upside risks now far outweigh the downside risk which makes SLC a compelling buy at current levels.
Sales execution (selling on-net/ onto SLC extensive and now completed fibre assets) is, in our view, the key to delivering share price upside for shareholders. Successful sales execution and its implications for free cash flow generation are the key upside and downside risks to be aware of.
Morgans clients can login to view our detailed report and share price target for Superloop (SLC). Alternatively, please contact your Morgans adviser or nearest Morgans office for access.
Disclaimer(s): Analyst owns shares.
Morgans Corporate Limited was lead manager to the placement and SPP of shares in Superloop Limited and received fees in this regard.
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.