OptiComm: The inter-net-work of the future
About the author:
- Author name:
- By Nick Harris
- Job title:
- Senior Analyst
- Date posted:
- 20 September 2019, 5:33 PM
- Sectors Covered:
- Telecommunications, Technology and Financial Services
- OPC is a unique and attractive business. We see a long growth pathway for the company; defendable and growing long term recurring earnings; and significant insider ownership as the key attractions. The key risks are regulatory and technological but we are comfortable these risks have been well managed.
- Despite all the attractive characteristics of the business, the only negative, in our view, is that OPC has rallied 63% from its IPO price and the valuation looks fair, based on FY20F earnings.
- We initiate coverage with a Hold recommendation (Morgans Clients can login to view detailed reports and price targets).
OptiComm (OPC) builds, owns and operates fibre based open access wholesale telecommunication networks.
These are predominantly for residential premises (aka households (HH)). These HHs include single dwelling unit housing estates, eg broadacre estates like Springfield Lakes, and Multi Dwelling Units (MDU), eg apartments, units and retirement estates.
In some instances, OPC also provides telecommunications services to commercial precincts and buildings (shopping centres and car parks).
As a wholesale access provider OPC offers its networks to Retail Service Providers (RSP) including iiNet, Exetel, iPrimus, etc.
These RSPs provide household residents with internet, phone, content and other telco-based services including security and internet of things.
The household resident pays the RSP a monthly usage fee (typically about A$75 per month) and the RSP pays OPC ~A$50 per month for last mile access.
OPC is a unique, defendable and growing business
It is rare that a business gets paid to build, own and operate an asset but OPC does.
Today OPC has around 60k active HHs who, through an RSP, pay OPC a monthly recurring fee to access the internet. OPC has a growing pipeline of contracted and passed, but yet to become active, HHs. The current pipeline means it will, over time, charge a further 100k HHs for access to its network.
This means, all things being equal, OPC's recurring network EBITDA should triple to ~A$70m over the next ~7 years. Whether this takes 5 or 10 years depends on the completion volatility of HH builds.
Risks and rewards
Key risks to us are development market volatility and regulatory issues.
Other less concerning risks include the potential for an NBN price reduction (we see this as an unlikely outcome); Regional Broadband Scheme levy (expensed in our FY21+ forecasts but still a legislative work in progress); and wireless substitution (predominantly a metro risk so not as relevant for OPC's networks which are mostly 30-60km out of town).
Upside risks relate to expanding OPC's development market share; bolt-on acquisitions; and the potential for faster take-up rates of passed and active HHs versus our forecasts.
Investment view – Hold rating
We initiate coverage with a Hold rating (Morgans Clients can login to view detailed reports and price targets).
Based on OPC's strong debut (+63% from the IPO price), and taking a 12-month view on its earnings trajectory, we initiate coverage with a Hold rating.
We see significant long-term value in the name but would prefer to accumulate shares on any share price weakness.
To view further analysis, Morgans clients can view the full research note. Alternatively, please contact your Morgans adviser or nearest Morgans office for access.
Disclaimer: Analyst may own 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.