Swoop: Diving into Newcastle

About the author:

Nick Harris
Author name:
By Nick Harris
Job title:
Senior Analyst
Date posted:
07 October 2021, 8:00 AM
Sectors Covered:
Telecommunications, Technology

  • Swoop (ASX:SWP) has announced the acquisition of Newcastle based telco Countrytell.
  • Strategically the deal makes sense and financially it is highly accretive. SWP is paying 4.2x FY22F EBITDA vs trading on ~35x (yesterdays close and excluding earnings from today’s acquisitions).
  • We upgrade our Hold forecasts to include a full twelve-month contribution from Countrytell in FY22. EBITDAR increases 14% in FY22 and 12% in FY23.
  • Our price target remains unchanged at (login to view) as this already factors in likely acquisitions including the recent Countrytell acquisition.

Event: Countrytell acquisition 

SWP has announced the acquisition of Newcastle based Countrytell.

This is predominately a business telco which provides connectivity, data centre and managed services. We understand the revenue mix is ~10% other services, 25% Data Centre Services and the balance core network services (most of which are for businesses).

The acquisition is expected to complete by 31 October 2021.

SWP will pay 4.2x FY22 forecast EBITDA 50/50 cash/scrip. Payment consists of $2.1m cash and $2.1m worth of SWP shares (955k new shares).

From a cash perspective, $1.6m is payable in October 2021, and the balance in October 2022. In addition, the vendor also gets a payment representing the net cash and working capital as at the effective date.

The cash payment is subject to some adjustments (claims or other) and spread over two financial years. The initial cash component is funded from SWP’s current cash reserves.

Overview of Countrytell

Countrytell is a telecommunications and data centre provider delivering high-speed internet through a mix of technologies, including fibre and fixed wireless.

It has wireless network coverage in and around Newcastle, the Hunter, Mid-coast and Snowy Monaro regions in New South Wales.

It also owns and operates data centre facilities in Newcastle and recently built a fibre network which services its towers and on-net business customers.

Forecast changes

The structure of the deal means that SWP will book a full twelve months of Countrytell earnings through its FY22 accounts. However, earnings from Countrytell won’t show up in SWP’s Q1FY22 which is due for release in late October 2021.

Consequently, we increase our revenue forecasts by 10% and EBITDAR (rent) by 14% and 12% in FY22 and FY23, respectively.

Investment view: HOLD retained

In our recent initiation note we pointed out that investors (and ourselves) are expecting SWP to continue to make value accretive acquisitions such as the one announced today. We expect more of these to occur over the next ~18 months.

Our interpretation of what these may look like is included in our (login to view) Target Price.

Price Catalysts

Acquisitions, acquisition funding and other growth initiatives are likely to drive the share price, although we believe meaningful expectations are already factored in.

Proof points along the path to achieving FY22 guidance of >$40m of revenue and $10m of EBITDA (excluding Countrytell and other potential acquisitions).

Q1 FY22 should be released in late October 2021.

Risks

Integration and execution risk. Management is highly experienced but that does not guarantee success.

SWP is EBITDA positive but is not yet free cash flow positive. Growth and a small debt position are required, on our forecast, to pay deferred consideration and become a free cash generative business.

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Disclaimer: 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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