Superloop: Three out of four ain't bad
About the author:
- Author name:
- By Nick Harris
- Job title:
- Senior Analyst
- Date posted:
- 23 October 2019, 4:30 PM
- Sectors Covered:
- Telecommunications, Technology and Financial Services
- Superloop's (ASX:SLC) CEO and CFO have had their feet under the desk for just over 12 months. Despite what the share price indicates, we think they have made significant progress, rightsizing and refocusing the business on where value is created for customers and shareholders. These are leading indicators and the lagging indicator are on-net sales growth and earnings growth which will occur in FY20.
- The total network is now built and the balance sheet fit for purpose. This is strategically significant as SLC can finally focus on selling their unique assets. SLC is the only 100% on-network provider of telecommunications around and between HK, SG and AU. This matters to some and should accelerate sales.
- We resume coverage post capital raising with an Add recommendation (Morgans clients can login to view detailed reports and price target).
Three down, executing on #4 will rerate the share price
SLC is a turnaround play and, in our view, most company turnarounds come in four stages.
- Refresh management with industry experts
- Refocus the business on where the most value is created (for the customers and the company)
- Fix the balance sheet
- Execute on sales and cost control to grow earnings and free cash flow.
Post recapitalisation we think SLC have achieved 3 of these 4 targets and #4 is the focus for FY20.
We see limited downside given telco network asset value is ~77cps and the stock now trades at close to book value of ~111cps.
Investors have been disappointed over the last two years and expectations are understandably low.
On a positive note this creates meaningful upside risk if/when on-net sales grow. All eyes are on management's ability to drive on-net sales and deliver cost controls in FY20.
After 5 years and $500m the build is finally complete
We estimate the network value of A$280m (includes A$23m completion capex due in 1H20) is roughly attributed 33% to Australia, 29% to Hong Kong, 21% to Singapore and 17% to Submarine cable capacity (Indigo).
In addition to capex deployed to build assets SLC have also undertaken capacity swaps to complete the network loop.
For example swapping some of SLC's own Singapore to Perth to Sydney submarine cable connectivity with 3rd parties submarine cable providers to gain connections from Singapore to Hong Kong and Hong Kong to the rest of world.
SLC's strategic goal to build a globally unique next generation APAC network is finally complete.
The key question is whether, or not, customers will come and the goal set back in 2015 will become a reality.
Our view is it will; and now is the most attractive time to buy shares.
Investment view – Add retained
Following the recapitalisation we update our forecast to reflect the new share count (+42%) and the lower levels of debt.
Our EBITDA forecasts are largely unchanged but given SLC is a loss making business the higher share count results in lower losses per share and we upgrade our EPS forecast by ~40%.
Our DCF based valuation decreases. The impact of dilution is a more material valuation downgrade.
However, we have increased our medium-term forecasts due to better company disclosure allowing us to better model the medium-term earnings.
Morgans clients can login to view our detailed report and updated share price target for Superloop (SLC). Alternatively, please contact your Morgans adviser or nearest Morgans office for access.
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