Market Cap: 20m
P/E: 10.9
P/B: 2.34
Dividend Yield: 0%
A niche Wimax operator, BigAir operates a national network in 7 of Australia's biggest cities. The company is geared towards delivering services to the wholesale market, leveraging the sales forces of other organisations who use BigAir services to complement their offerings. The key advantages of Wimax technology are:
1. Fast turn-on (hours vs weeks for a terrestrial connection)
2. High speeds for wireless (up to 1Gbps symmetrical)
3. Low install costs (Running fibre in built up areas costs well over $100 per metre)
Since turning cashflow positive in 2009, BigAir have been making smart acquisitions like Clever Comms (Their main competitor) and ISP operators who deliver managed internet services to the student accommodation market, such as Accessplus. While BigAir have a number of other competitors in the Wimax market, none of these operators have a national network.
For a company only selling at 11x earnings, with strong profit margins with no debt, BigAir is positioned to continue their significant growth. FY10 saw revenue growth of 17%, and NPAT growth of 50%. BGL is becoming more and more profitable, while revenue continues to grow rapidly, funding investment into more Wimax points, fuelling future growth in the business. Gross margins are in the region of 80%, now that they've binned the offnet business in favour of services delivered via their own infrastructure.
The fact that BGL currently doesn't pay a dividend isn't a major concern for me, right now the best place to invest their healthy profits appears to be back into the business. As the reinvested profits approach diminishing returns it will make sense to begin returning cash to shareholders.
BGL have just put up their mid FY11 numbers, and revenue growth has not slowed at all - maintaining their CAGR of 51%. Net operating cashflow doubled. This huge cashflow allows BigAir's growth to be fully self-funded, while making acquisitions with a mix of stock and cash. An important qualifier is while the half year numbers account for the costs of the CVA and AccessPlus acquisitions, they do not include any of the earnings. It is reasonable to expect good earnings accretion for year's end, which will result in significant profit growth for end FY12 once core network synergies have been realised.
One of BigAir's major assets is their CEO, Jason Ashton. Jason owns 10% of BigAir and successfully co-founded an ISP in 1993 which was sold 6 years later for $20M.
BigAir is a company I can see myself holding forever, provided the telecoms industry's evolution doesn't damage their market position. They're growing like mad, and it will eventually make sense to pay a dividend. In the meantime, BGL are a growth opportunity with significant potential and no major competition.
Hi Leon,
ReplyDeleteAre you content to simply value these businesses with multiples?
The reason I ask this question is that the traditional method of valuation usually involves a DCF, and a DCF of 'look-through', or real, cash earnings. If you were to conduct a DCF-type analysis on a business like BigAir, is it fair to say that with the ever-evolving nature of the internet procurement business, and the risk within the long-term regulatory environment, cash flows could not be forecast with a sufficient level of certainty to warrant even a vague valuation?
Or do you define 'value' differently?
Thanks for your comment Ben.
ReplyDeleteTo answer your question, I use multiples like P/E, Debt/Equity, and a few other metrics to filter the roughly 2000 stocks listed on the ASX to find potential stocks I will look at more deeply (Lately I get around 60, some of which have potential and some of which are clearly trouble).
Once I've found a candidate I'll start combing through the annual reports and research competitors to identify whether the underlying business is sound. This 2-stage process allows me to find well-performing business in solid financial shape selling for a good price.
I do not know how to use DCF so I do not use it. Rather than trying to determine what the share should be priced at, I find shares that appear underpriced by a reasonable margin, and buy where the underlying business appears to be of best quality.
If I didn't work in the telecommunications industry I probably wouldn't have invested in BGL as their market offering is a bit more specialised than a typical carrier. My understanding of the business telecoms market made me confident in BigAir's future prospects.
The technology BigAir uses satisfies a niche that will still be in demand post-NBN and BigAir do not currently have serious competitors in the Wimax space. I'll grant you there is still an unpredictable element to future prices of the services BigAir provides but their current P/E and growth provide a large enough margin of safety that I am confidently holding them long-term.