OptiComm: Off to a great start

About the author:

Nick Harris
Author name:
By Nick Harris
Job title:
Senior Analyst
Date posted:
25 February 2020, 12:43 PM
Sectors Covered:
Telecommunications, Technology and Financial Services

  • OPC delivered a result that was slightly better than we had forecast and places the company well to achieve, and maybe even beat, its FY20 Prospectus forecasts.
  • Highlights included: 1) the strength in the recurring network operations business (EBITDA was up 29% yoy and was 4% ahead of our forecast); and 2) Construction growing yoy despite a challenging property development cycle in 1H20.
  • We’ve upgraded our short and medium term cash EBITDA forecasts by 5% and 6% respectively. Our FY20 forecast sits marginally above Prospectus.
  • Our price target increases (clients login to view) as a result of our medium term forecast upgrades and revision to our valuation methodology.

Watch the video

Paul Cross and John Phillips, Chief Executive Officer and Chief Financial Officer for Opticomm (ASX:OPC) discuss the most recent results following 1H20 with the Morgans network.

Result snapshot  

OPC’s 1H20 result was slightly ahead of our forecasts. Prospectus guidance was reiterated and, in our view, looks comfortably achievable given the 1H trajectory.

The 1H20 Pro-forma result was a 5.6% beat at the EBITDA level and 2.7% beat at EPS. OPC’s Network operation (recurring earnings) grew EBITDA 29% yoy. This was slightly ahead of our forecast and the key driver of the beat. Construction was slightly below our forecast, but is expected to pick-up in 2H20.

Overall this was strong result that places OPC comfortably to achieve Prospectus forecasts and is likely to be well received.

Free Cash Flow (on a normalised basis) grew 44% yoy to $5.6m (5.4cps) and the Board declared a 3.6cps fully franked interim dividend (representing a payout ratio of 67% of free cash flow).

FY20 Prospectus forecasts reiterated; Management said… 

Despite a challenging housing market, OPC’s contracted revenue has grown.

OPC’s current trading position and outlook is supportive of the forecasts outlined in its prospectus.

Regulatory changes including the RBS levy (regional bush tax) are currently before Parliament and if passed are not expected to be effective before 30 June 2020. 

Noteworthy items

Lots (aka households) grew strongly from 2H19 to 1H20. Lots contracted (to be built at some stage in the future) grew 19k to 140k. Lots constructed or passed (connected to OPC’s network but not yet paying for the internet) grew 7.5k to 114K. Work In Progress lots (being constructed now) also grew by 7.5k. While the all-important, Active lots (people paying through an RSP to use OPC’s internet), grew 6.3k to 66.5k.

Active lots drives OPC’s recurring earnings and average wholesale revenue per Active lot (aka ARPU) was ~$51 for the December period; ahead of Prospects forecast for this to hold at $49 for FY20.

Higher ARPU and slightly more active users in the half (vs our forecast) resulted in OPC’s Network revenue growing 31% yoy and beating our forecast by 8%.

Network EBITDA grew 29% yoy and beat our forecast by 4.4%. This was a strong result from the recurring part of OPC’s business.

Considering the relatively benign property market, OPC’s construction business, also performed well.

Wins in the Apartment and Independent Living space helped offset weakness in Broadacre and OPC still grew its Construction business.

Investment view 

We change our valuation methods from a blended DCF + Sum Of The Parts to 100% DCF based. We upgrade our FY20 NPAT by 3% and sit 2% ahead of Prospectus forecast. We have upgraded our medium term forecasts by ~4% on a higher bush tax threshold.

Collectively this results in our valuation and price target increasing (login to view target price).

More information

Morgans clients can login to view our detailed report and share price target for OptiComm (OPC). 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.

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