Superloop: Doubled EBITDA in 21 and will do so again in 22

About the author:

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

  • SLC’s FY21 result was in line with our expectations. On a continuing business basis revenue grew 14% and underlying EBITDA grew 108%. 94% of revenue is now recurring and 94% of sales signed in FY21 has a >2 year tenure. Each year SLC accelerates the growth of its higher quality, high margin fibre business.
  • We have layered meaningful costs into our FY22 forecast (investing for growth) and still think our FY22 forecast looks comfortably achievable.
  • Add retained, target price increased to (login to view).

Event: Result as expected

SLC’s FY21 result was in line with our forecasts. Australia Fibre and guest WiFi performed better than we expected, while SG was weaker (due to FX).

SLC reported an NPAT loss of $31m which was lower than our $36m forecast. It started FY22 free cashflow positive.

Analysis: Good earnings momentum in FY21 and starting point for FY22

Our FY22 forecast have sales completed but not yet billing and a similar level of new sales in FY22 as was delivered in FY21. This drives core SLC EBITDA to $30m in FY22 (+63% yoy organic growth). We layer in an additional $8m of costs (investing for growth) and the core SLC business delivers EBITDA of $22m in FY22 (+20% yoy organic growth).

We layer in the Exetel acquisition with $10.2m of EBITDA (on a reported basis and $16m on a PF basis). Reported consists of $11m standalone plus $2.5m of synergies (50% of the $5.0m+ realised in FY22) less $3.3m integration costs.

We include higher sales, marketing and business development costs for Exetel and Superloop in our $8m investing for growth figure, mentioned earlier.

This sees SLC report combined EBITDA of $32m and FCF of $8m in FY22 or $38m and $14m respectively, on a pro-forma basis.

Forecast and valuation update

FY22/23 we upgrade revenue/ EBITDA forecasts by ~2% and EPS by 6-10%.

Investment view

We see value in SLC. We think investors are missing the strong underlying organic growth in the high-quality fibre business due to the CMS (Cloud and Managed Services) drag which is now gone.

CMS literally went to zero at the end of 1H21. In 2H21 we can more clearly see the growth in the higher quality core connectivity business shining through. This will become more apparent in FY22 and we are optimistic this should see the stock rerate.

SLC’s new CEO Paul Tyler joined ~12 months ago and made several key sales hires. These sales hires and other growth initiatives instigated in FY21 should deliver comfortably higher sales and EBITDA in FY22.

Price catalysts

We expect SLC to provide EBITDA guidance with their AGM in November 2021.

Ongoing review of HK assets. SLC may invest more to build a local partner sales channel (to accelerate growth) and/or divest some of the underutilised HK assets. 

Return of travellers (international students and interstate domestic business workers) using SLC’s Guest WiFi solutions. Earnings are depressed, making just $3m in FY21, versus ~$10m GP in FY19). Should rebound in 12-24 months.

We think SLC is a potential takeover target. If the investment community does not value the business reasonably infrastructure funds or others may make a move.

Risks

SLC is a growth business and needs to invest to grow. The amount of costs being invested in growth is unclear. We think we have more than adequately captured this in our forecasts, however until guidance is provided this is unknown.

Acquisition risk – although we think this is relatively low for Exetel as a 100% organic growth business (not a rollup) and their business model fits well with SLC’s core business strategy. Exetel will leverage SLC’s large but largely empty fibre network. Getting more traffic on this network makes sense.

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