Swoop: Gliding high and waiting to swoop

About the author:

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

  • Swoop (ASX:SWP) owns and operates one of Australia’s largest fixed Wireless Internet Service Providers. It is focused on regional areas where there are low internet speeds.
  • Board and management include several well-known and highly experienced industry veterans whose backgrounds cover M&A, integration and operations.
  • Today SWP trades on a full multiple. However, acquisitions should quickly pull this multiple lower. We initiate coverage with a Hold recommendation.

Company overview

Swoop (ASX:SWP) owns and operates one of Australia's largest fixed wireless networks (390 wireless towers with ~three quarters across VIC, WA and NSW). In FY21 54% of subscribers were off-net (reselling NBN and other offerings).

SWP prefers to sell on-net services to outer metro and regional areas (its sweet spot), where NBN speeds are limited and on-net services are better value for customers and SWP.

FY21 revenue of ~$30m was split 48% residential, 42% wholesale and 10% business. FY21 EBITDA was ~$5m and is expected to double in FY22.

Growth plans

SWP has a ~1-2% market share in its key markets. ~46% of these customers are on-net and the balance are resold (eg NBN last-mile). Gross profits will more than double if customers are moved onto SWP's fixed wireless network. 

SWP will expand its fixed wireless solution into ~10 new underserved regions over the next 24 months. This could double SWP's residential subscriber base and generate healthy returns. SWP will also add business and wholesale customers.

Organic growth should be supplemented with meaningful acquisitions.

Financials

SWP has guided to FY22 EBITDAR (Rent) of $10m (up 105% yoy and including government grants). Excluding grants we still see greater than 50% yoy growth. 

SWP ended FY21 with ~$17m of cash. On our forecasts this, and a small amount of debt, sees SWP becoming a free cash generative business in the next 2 years. 

For now, our forecasts are limited to Revenue, EBITDA and Free Cash Flow. We forecast a 3-year revenue CAGR of 11% and a 3-year EBITDAR CAGR of 32%.

Investment view

Based purely on today’s earnings SWP looks expensive. It trades on ~40x EV/EBITDA. The current share price implies SWP will make meaningful and highly value accretive acquisitions. We think this is likely, albeit not guaranteed.

SWP investors are backing management to undertake further acquisitions. We have no new acquisitions in our P&L forecasts. However, our target price assumes material acquisitions are undertaken (login to view target price).

We initiate coverage with a Hold recommendation. We expect material and highly accretive acquisitions should see SWP grow into its currently rather full multiple.

Price catalysts

Acquisitions 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. Q1 FY22 should be released in late October 2021.

Risks

Integration and execution risk are, in our view, the largest short-term risks for SWP. SWP is a combination of many companies, and more M&A is likely. To pull together these companies and consolidate systems and processes is no small task. 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 reach this status. We forecast healthy organic subscriber growth, which sees revenue growth exceed cost growth and sees SWP exiting FY23 FCF positive. This however is not guaranteed.

Competitive environment – SWP’s business model assumes regional Australian internet connectivity continues to be underserviced. This could change over time.

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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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