Venture Advisory Monthly Wrap - October 2018

Updated: Jun 27, 2019

Key Takeaways

This month we comment on the recent debate around the meaning of ‘fair dinkum’ with energy and how the health expenditure in Australia continues to outstrip the growth of our economy.

What is the meaning of fair dinkum power?

No doubt many of you have followed the debate around the use of the words ‘fair dinkum power’. Our Prime Minister believes ‘fair dinkum power’ to be ‘the stuff that works when the sun isn’t shining and the wind isn’t blowing’ - though won’t reveal whether this is dispatchable energy or plain simple coal fired - click here for the speech. Mike Cannon-Brookes has taken exception to this and tweeted ‘You've made me mad & inspired me. We need a movement. We need a brand for Australia’s energy future. We need a rallying cry for Australians who believe in solar, wind and wave powers.’ We welcome this debate.

Almost universally, energy sector commentators would say that we have lacked any consistent energy policy in Australia over the past 10 to 15 years. On a few occasions we almost got there, but other political disruptions have let us down. We have no doubt that households want lower and sustainable energy prices but we also know that they have a strong view that this should also be ‘clean’ energy. The obvious winning combination is to have these two elements (cheap and clean) coming together for a sustainable future. Over 75% of Australians rank solar power in their top three choices for energy, according to the Climate of the Nation 2018 Australian energy report. 

At Venture Advisory we believe in the future and the future is about adopting new technologies that deliver better outcomes for society and future generations. To this end, we are proud supporters of DC Power Co which has launched its own brand of power - we would say it’s 100% fair dinkum. The business model has around 12,500 consumers that are also owners of the company. DC Power Co proudly conducted the world’s largest equity crowdfunding during the year. It is all about a movement that promotes the use of roof-top solar power. The company wants to accelerate the trend that has seen around 1.85m homes using solar. Research by Venture Insights predicts (click here) that this will rise to above 30% by 2030, and that this could happen sooner as the price of technology comes down (i.e. panels and batteries).

How far can Government health expenditure funding stretch before breaking point?

Overall, we see health costs as unsustainable in the medium term. As pointed out in last month’s analysis of the Australian Institute of Health and Welfare 2016-2017 report, health spending has reached $181b or 10.3% of GDP (up from 8.8% of GDP ten years earlier). In a new Venture Insights report, Venture Insights have undertaken analysis that considers the future of the health industry and the role of disruptive technologies in this process.

Given that health expenditure is growing faster than inflation and the economy (the real rate of growth for health was 4.7% (being higher than the 5-year average of 3.1%), it means that Federal and State governments will either need to restrict their services or find substantial productivity gains to maintain health services over the medium and longer term.

We believe the areas that provide the greatest prospect of productivity gains over the medium to longer term include artificial intelligence (AI) and genomics. AI, genomics and digital health have the potential to transform the healthcare industry by removing inefficiencies, providing real-time analytics and recommending preventative measures to tackle the issues with health conditions.

Governments, communities and individuals will need to work together to build a trust in AI and utilise it for efficient health plan management. The health sector has historically been very slow to move. It is highly sensitive and health professions have been ‘gatekeeper’ to change. In the internet age, health consumers have greater access to information and are becoming increasingly well educated about their health. We believe that this education process and access to ‘self-help’ will lead to the democratisation of the health industry and the arrival of an alternative delivery model. We are pleased to be working with Tonic Health Media and Hit100 both of which are focused heavily on enhancing our health system and providing better outcomes for health consumers.

Some additional resources can be found here:

Total Health Expenditure growth

Australian Health Landscape

CSIRO Future of Health

PWC What doctor?

Note: Views expressed by Venture Insights are independent of Venture Advisory and may not reflect the views and opinions of Venture Advisory.

Key takeways from the Telecommunication & ICT, Media and Technology sectors

Key Market Activity Takeaways

This month saw continued M&A activity, with KKR making an unsolicited offer to acquire MYOB. Bain Capital sold its 17.6% stake in MYOB to KKR, bringing KKR’s total stake in MYOB at the time of offer to 19.9%. Furthermore, NEXTDC completed an acquisition of Asia Pacific Data Centre after it launched an unconditional on-market takeover. Lastly, Event Hospitality & Entertainment announced the sale of its German cinema exhibition division, CineStart, to Vue International BigCo for up to $358m (the final price is subject to German market admissions for 2019).

In the telecommunications industry more broadly, Superloop and SingTel announced the landing of the INDIGO Central subsea communications cable at Coogee Beach. SingTel also announced that its wholly-owned subsidiary Optus Cyber Security Pty Limited has signed an agreement to fully acquire Hivint, a cyber security consulting company in Australia, to enhance the Group’s cyber security capabilities. Furthermore, in regional telco news, Spirit Telecom announced a $1.7m partnership with the Victorian State Government to provide the regional city of Horsham with high speed internet services, as part of the State Government’s Enhanced Broadband program.

Telcos

Best and Worst Monthly Performers

The 5 best and worst performers for the month of October 2018 were as follows:

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Source: Factset as of 31 October 2018

5G Networks Limited (2 October) announced the appointment of Telstra Wholesale Executive Glenn Fowler as Chief Marketing Officer and Vishal Patel as National Networks Manager

5G Networks Limited (19 October) announced a new funding facility of $5.5m with Commonwealth Bank of Australia, of which $3m will be used as the final payment of the APTel purchase, $1m used to consolidate all lease obligations and $1m to cover lease guarantees

amaysim Australia Limited (26 October) announced the intention of non-executive director Maria Martin to retire

amaysim Australia Limited (30 October) announced the completion of the sale of fixed line broadband customer base to Southern Phone Company Ltd

Chorus Limited (2 October) confirmed the price at which shares will be allotted under the Chorus Dividend Reinvestment Plan for the FY18 final dividend, which is NZD 4.67560

Chorus Limited (9 October) stated that it has immediately commissioned a fully independent review relating to the employment practices of small business sub-contractors working on the Ultra-fast broadband network

Chorus Limited (11 October) provided a FY19 connections updates, with broadband demand continuing to growth strongly in the Chorus fibre areas

Inabox Group Limited (8 October) announced the sale of its indirect business to MNF Group for $33.5m in cash, where total cash distributions to shareholders potentially in excess of $0.80per share. Under the sale agreement the maximum consideration payable to Inabox is $33.5m (on a debt free basis), comprised of $28.0m payable in cash upon completion with escrow amounts of $2.5m in aggregate payable in cash by 30 June 2019 and an earn-out comprising three tranches and providing $3m in aggregate, the first tranche payable in cash on 31 March 2019 and the second and third trances payable in cash on 30 June 2019

MNF Group Limited (8 October) announced its acquisition of the Wholesale and Enablement business of Inabox

MNF Group Limited (10 October) released its FY19 and FY20 guidance, outlining a Margin of $86.4m and $100-105m, EBITDA of $29.1m and $33.0-36.0m with NPAT of $12.8m and $15.0-16.5m and EPS of 17.5c and 20.4-22.4c

MNF Group Limited (19 October) announced a capital raised via a Share Purchase Plan, at a 3.3% discount to the prior VWAP at $4.40 per share. The funds raised are to be used to reduce debt and for the company’s working capital

NetComm Wireless Ltd (19 October) announced the retirement of Kenneth Boundy as non-executive director, at the end of the scheduled AGM

NEXTDC (12 October) announced a takeover bid for Asia Pacific Data Centres AJD, via an unconditional on-market offer for all stapled securities in Asia Pacific Data Centres for A$2.00 cash per stapled security, and announced the compulsory acquisition of Asia Pacific Data Centres Group on the 23rd of October

Over the Wire Holdings Limited (18 October) announced the acquisition of Access Digital Networks and Complix. The acquisitions are fully funded by an institutional placement of $21.5m at $4.30 per share and existing cash. A share purchase plan was offered to all shareholders for up to $15,000 of shares on the 24th of October

Superloop Limited (1 October) announced that Jason Ashton, Executive Director retired from the Superloop board with effect from 30 September

Superloop Limited (15 October) announced that it had entered into new secured debt facilities with ANZ and Westpac totalling $120m to be provided under common terms club financing structure

Superloop Limited (29 October) announced the landing of the INDIGO Central subsea communications cable at Coogee Beach

Spark New Zealand (5 October) provider a shareholder update ahead of its annual general meeting, detailing for FY18 a moderate improvement in revenue to $3,649m and had delivered against operational and financial targets

Spark New Zealand (23 October) announced that Matt Bain had started as its Marketing Director, effective immediately

Spark New Zealand (31 October) established a new committed revolving bank facility for NZ$100m from the Hongkong and Shanghai Banking Corporation Limited, to mature of 30 November 2021. The facility will be drawn as needed for general corporate purposes and replaces an existing $100m committed revolving bank facility maturing 31 October 2018

Spirit Telecom Limited (17 October) announced a $1.7m partnership with the Victorian State Government to provide the regional city of Horsham with high speed internet services, as part of the State Government’s Enhanced Broadband program. The partnership will see the development of a significant fixed wireless network using 5G technology throughout five core districts in Horsham enabling spirit to provide internet roughly throughout the region across a 50km radius around Horsham to help serve the population of 17,000

Telstra Corporation Limited (16 October) received a ‘first strike’ on its Remuneration Report after registering a 61.98% vote against the report for 2018

Telstra Corporation Limited (16 October) announced that a private group led by Management of Ooyala Inc acquired Ooyala Inc from Telstra Corp Ltd for an undisclosed amount

VITA Group (26 October) provided guidance for H1 FY19, detailing that it expects to deliver earnings before interest, tax, depreciation and amortisation (EBITDA) of around $23.0m to $24.5m for the six months to 31 December 2018, representing a 15 to 23% increase on the prior year. The group also expects earnings before interest and tax (EBIT) to be around $18.0m to $19.4m, up 15 to 24% from the prior period. This guidance reflects solid performance across all its channels

Singapore Telecommunications Limited (12 October) announced that its wholly-owned subsidiary Optus Cyber Security Pty Limited has signed an agreement to fully acquire Hivint, a cyber security consulting company in Australia, to enhance the Group’s cyber security capabilities. This acquisition will strengthen Optus Business’ cyber security capabilities as Trustwave, the global cyber security arm of Singtel and Optus, integrates Hivint’s advisory services into Trustwave’s security offerings across Australia and the Asia Pacific

Singapore Telecommunications Limited (26 October) announced that it has entered into an agreement with its regional associate Bharti Airtel (Airtel) to invest US$250 million in Airtel Africa Ltd, a subsidiary of Airtel with operations in 14 African countries. Singtel holds a 39.5% effective stake in Airtel.

Singapore Telecommunications Limited (31 October) announced that it is the exclusive carrier partner of the Razer Phone 2 in Singapore

Singapore Telecommunications Limited (31 October) announced the landing of the INDIGO Central subsea communications cable at Coogee Beach in Sydney

Forward EV / EBITDA Multiples Chart

The forward EV / EBITDA multiples for leading telco stocks at the end of the month is as follows: 

📷

 Source: Factset, as at 31 October 2018

Media

Best and Worst Monthly Performers

The 5 best and worst performers for the month of October 2018 were as follows:

📷

Source: Factset as of 31 October 2018

APN Outdoor Group Limited (31 October) announced that the Scheme of Arrangement between APN Outdoor and its shareholders was approved. Accordingly, JCDecaux now holds all shares on issue with APN Outdoor where the consideration of $6.40 cash for each share was paid on 25 October, in addition to a special dividend on $0.30 cash for each share, paid on 29 October. APN Outdoor will have the quotation of its shares terminated effective from close of trading on 1 November

Asia Pacific Data Centre Group (8 October) received a takeover bid from NEXTDC Limited via an unconditional all cash on-market takeover for the 70.8% of shares it does not own. NEXTDC further advised that 360 Capital Group, which holds an interest of 67.3% of the APDC securities, has stated that it intends to accept the NEXTDC Offer in respect of all the securities in APDC that it holds in absence of a superior proposal. The Offer of $2.00, plus Special Distribution of $0.02 per security is equivalent to APDC’s Net Tangible Assets per security of $2.02 as at 30 June 2018

(17 October) received a notice of subsisting default and forbearance from Bankwest, stating at APDC Group is now required to repay the $29m outstanding to Bankwest within 14 days of the notice

(18 October) released its Target’s statement, stating that the Independent Board Committee of Asia Pacific Data Centre Holdings Limited and the Board unanimously recommending the acceptance the NEXTDC Offer

(23 October) authorised the notice of the Compulsory Acquisition of the remaining 1.98% of shares that NEXTDC does not own

Domain Holdings Australia Limited (12 October) provided a trading update ahead of the Fairfax media’s expected formal commencement of the Fairfax/Nine merger Scheme process and lodgement of the Scheme Booklet. The trading update is intended to replace the disclosure at the Annual General Meeting to be held on 20 November. The FY19 revenue to date states total revenue is 1% lower and pro-forma total costs are c.7% higher.

Event Hospitality & Entertainment Limited (22 October) announced the sale of its German cinema exhibition division, CineStart, to Vue International BigCo for A$210.0m, and variable consideration of up to A$148m depending on Germany market admissions for calendar year 2019. The maximum potential enterprise value for Cinestar is A$358m, subject to competition authority approval in Germany

Fairfax Media Limited (12 October) provided a trading update, stating that FY19 ytd overall group revenues are 5% below last year

HT&E Limited (30 October) appointed Hamish McLennan as Chairman, effective immediately

iCAR Asia (9 October) released its quarterly results, stating that revenue grew 51%yoy to $3m, and that cash receipts from customers grew 46% yoy to $3.2m

oOH!Media Limited (3 October) appointed Maria Polczynski as Joint Company Secretary effective immediately

Pacific Star Network Limited (22 October) announced the launch of a dedicated sport content radio station in Adelaide

Prime Media Group Limited (31 October) provided a trading update, stating that total advertising revenue for the quarter to 30 September 2018 had declined 9.1% on the prior period, where national agency revenue in the first quarter was down 8.3% while local direct revenue declined 12.3%

QMS Media Limited (29 October) announced the resignation of Peter Cargin as Chief Financial Officer, with no permanent appointment. The Group’s Financial Controller Kate Solomon will act as Interim CFO

Village Roadshow Limited (3 October) announced the completion of Wet’n’Wild Sydney sale of approximately A$37m to Parques Reunidos. The net proceed will be used to reduce VRL’s debt levels

WPP AUNZ Limited (23 October) announced the resignation of Mike Connaghan as CEO and Executive Director, effective 31 December 2018

WPP AUNZ Limited (23 October) updated its market guidance, where it expects its full year results for the year to be below its current guidance of 3% growth in EPS

Forward EV / EBITDA Multiples Chart

The forward EV / EBITDA multiples for leading media stocks at the end of the month is as follows: 

📷

 Source: Factset, as at 31 October 2018

Technology

Best and Worst Monthly Performers

The 5 best and worst performers for the month of October 2018 were as follows:

📷

Source: Factset as of 31 October 2018

Afterpay (2 October) announced that it has entered into a Business Sale Deed with Nelumbo Limited to sell its European e-Services business for $7.5m

Bravura Solutions (11 October) has entered the ASX200 following the removal of APN Outdoor Group Limited

Catapult Group International Ltd (24 October) announced its FY19 guidance, with implied revenue growth between 17% and 20% and underlying core EBITDA of between 37% and 63%

Class Ltd (4 October) provided its quarterly shareholder update, where they reported that total accounts increased by 3,039 to 172,452 and customers increased to 1,413 with a quarterly increase of 46 new customers

Class Ltd (24 October) announced that its CEO Kevin Bungard has stepped down from his role, with no new appointment announced

Crowd Mobile Limited (8 October) announced that it had been added as a Certified Partner by Snap Inc

Computershare Ltd (5 October) announced that Dr Paul Reynolds has been appointed to the Company’s Board as an independent non-executive director effective immediately. Dr Reynolds is a past Director of Eircom (Dublin), eAccess (Tokyo) and is the former Chairman of AAPT (Sydney)

Computershare Ltd (9 October) released a preliminary earnings report for FY18, upgrading its earnings guidance and announced a final dividend of 21c for the period, with total dividends of 40c for the year (+11% yoy growth)

ELMO Software Ltd (10 October) appointed Barry Lewin as a non-executive director and independent Chairman effective immediately

GBST Holdings Ltd (11 October) appointed Matthew Walton as Chief Financial Officer, with effect from 15 October 2018

GetSwift (10 October) appointed Belinda Gibson to the Board as a non-executive director

GetSwift (19 October) announced technology expansion plans with the opening of a new software development centre in Denver, Colorado, creating jobs in fields including machine learning, artificial intelligence, product, design, and testing

Infomedia (12 October) announced that Performance rights issued 13 October 2015 with testing dates of 1 October, 2016,2017 and 2017 had lapsed and been effectively cancelled

Impelus Ltd (22 October) announced the divestment of Clipp to PNI Financial Services for $300,000 cash, with the funds used to pay down debt

Impelus (31 October) announced extension of their voluntary suspension from trading; effective from 26 October

Integrated Research Ltd (23 October) announced the retirement of Steve Killelea as Chair and Director effective from 1 November 2018

iSentia Group Limited (12 October) announced that Pat O’Sullivan has advised his intention to retire as a Non-Executive Director of the Company

iSentia Group Limited (26 October) appointed Peter McClelland as Chief Financial Officer, effective from 18 February 2019

iSelect Limited (26 October) announced the resignation of David Christie as Company Secretary, and appointed Mark Licciardo as the replacement.

Kogan.Com Limited (29 October) provided a business update, stating that Exclusive Brands revenue was up 15.7% in comparison to 1Q FY18; Global Brands revenue decreased 27.4% in comparison to 1Q FY18 which was driven by the changes in GST laws from 1 July 2018, and in particular, the now apparent avoidance of GST by a number of foreign websites selling into Australia; Partner Brands revenue has grown 73% compared to 1Q FY18, which was driven by on-boarding of new brands and some brands transitioning from Global Brands to Partner Brands.

Kogan.Com also reported that Gross Margin has decreased as a result of competition from foreign websites, a general decline in the strength of AUD and other factors. The Company’s expenditure of marketing grew by more than 30% yoy, on the back of addressing the decline in sales of Global Brand. The share price of Kogan has sharply declined following this announcement

Link Administration Holdings Limited (23 October) announced pursuant to PEXA commencing its formal Initial Public Offering deal marketing process, Link intends to sell approximately 12.5m of the 26.5m shares it currently holds in PEXA. The remaining 14m shares will be subject to voluntary escrow and are expected to represent approximately 10% of the issued capital of PEXA. The value of the proceeds will be dependent on the IPO price but is expected to be more than $165m

MYOB Group Limited (8 October) announced an unsolicited proposal from KKR to acquire all other remaining shares not already owned by KKR by a preliminary non-binding indication of interest via a Scheme of Arrangement at $3.70 per share which is a 24% price premium to the closing share price on 5 October. MYOB group also announced that Bain Capital sold 17.6% of the issued share capital of MYOB to KKR at a price of $3.15 per share. KKR has an aggregate economic interest in MYOB of 19.9%.

Retech Technology (31 October) provided a Q3 update, stating an increase in Net Operating Cash Flow to $2.1m

WiseTech Global Limited (16 October) announced the acquisition of UK logistics software provider DataFreight for c.$5.0m, with ~$3.6m up front, and further multi-year earn-out potential of ~$1.4m. DataFreight is expected to be consolidated into WiseTech Global accounts from November 2018

WiseTech Global Limited (17 October) announced the acquisition of parcel shipping software provider, SmartFreight for c.$55.0m, with $20.0m upfront, and further expected multi-year earn-out potential of ~$35.0m. SmartFreight is expected to be consolidated into WiseTech Global accounts from November 2018

WiseTech Global Limited (31 October) announced the acquisition of Swedish customs solutions provider, CargoIT for c.$3.6m, with ~$1.8m upfront and further expected multi-year earn-out potential of ~$1.8m. CargoIT is expected to be consolidated into WiseTech Global accounts from November 2018

Xero Limited (5 October) announced the settlement of US$300m 2.375% convertible notes due 2023

Zip Co Limited (18 October) provided a response to the media in regards to the Senate Inquiry into financial services not covered by the current Banking Royal Commission, stating it is voluntary participating in the ASIC review of buy now, pay later services

Zip Co Limited (31 October) announced its partnership with Software of Excellence, which provides dental practice management software to dentists and dental practices

Forward EV / EBITDA Multiples Chart

The forward EV / EBITDA multiples for leading technology stocks at the end of the month is as follows: 

📷

 Source: Factset, as at 31 October 2018

Reference stocks

Our reference portfolio is as follows:

Telecom Stocks:

5G Networks (5GN-AU), amaysim Australia Ltd. (AYS-AU), Chorus Limited (CNU-NZ), Hutchison Australia (HTA-AU), Inabox Group Ltd. (IAB-AU), Macquarie Telecom Group Limited (MAQ-AU), Megaport (MP1-AU), MNF Group Limited (MNF-AU), Netcom Wireless (NTC-AU), Nextdc Limited (NXT-AU), Over the wire (OTW-AU), Singapore Telecommunications Limited (Z74-SG), Spark New Zealand Limited (SPK-NZ), SpeedCast International Ltd (SDA-AU), Spirit Telecom (ST1-AU), Superloop Ltd. (SLC-AU),  Telstra Corporation Limited (TLS-AU), TPG Telecom Limited (TPM-AU), Vita (VTG-AU), Vocus Group Limited (VOC-AU)

Media Stocks:

Carsales.Com Limited (CAR-AU), Domain Holdings Australia Ltd. (DHG-AU), Asia Pacific Digital Limited (AJD-AU), Event Hospitality & Entertainment Ltd. (EVT-AU), Fairfax Media Limited (FXJ-AU), HT&E Ltd (HT1-AU), iCar Asia Ltd. (ICQ-AU), Macquarie Media Limited (MRN-AU), Nine Entertainment Co. Holdings Pty Ltd. (NEC-AU), News Corporation Shs B Chess Depository Interests repr 1 Sh (NWS-AU), oOh media Ltd (OML-AU), Pacific Star Network Limited (PNW-AU), Prime Media Group Limited (PRT-AU), REA Group Ltd (REA-AU), Seek Limited (SEK-AU), SKY Network Television Limited (SKT-AU), Seven West Media Limited (SWM-AU), Southern Cross Media Group Limited (SXL-AU), Trade Me Group Limited (TME-NZ), Village Roadshow Limited (VRL-AU), WPP AUNZ Limited (WPP-AU)

Tech Stocks:

3P Learning Ltd. (3PL-AU), Altiumc (ALU-AU), Afterpay Touch Group Ltd. (APT-AU), Appen Ltd. (APX-AU), Big Un Limited (BIG-AU), Bravura Solutions Limited (BVS-AU), Catapult Group International Ltd. (CAT-AU), Citadel Group Ltd. (CGL-AU), Class Ltd. (CL1-AU), Crowd Mobile Limited (CM8-AU), Computershare Limited (CPU-AU), Data#3 Limited. (DTL-AU), DWS Limited (DWS-AU), ELMO Software Ltd. (ELO-AU), GetSwift Ltd. (GSW-AU), Gentrack Group Ltd (GTK-NZ), Hansen Technologies Limited (HSN-AU), Impelus Ltd (IMS-AU), Infomedia Ltd (IFM-AU), IRESS Limited (IRE-AU), Integrated Research Limited (IRI-AU), iSentia Group Limited (ISD-AU), Kogan.com Ltd. (KGN-AU), Link Administration Holdings Ltd. (LNK-AU), Melbourne IT Ltd (MLB-AU), MYOB Group Ltd. (MYO-AU), Nearmap Ltd. (NEA-AU), Netwealth Group Ltd. (NWL-AU),  OFX Group Ltd. (OFX-AU), Pro Medicus Limited (PME-AU), Pushpay Holdings Ltd (PPH-NZ), Reckon Limited (RKN-AU), Technology One Limited (TNE-AU), Webjet Limited (WEB-AU), Wisetech Global Ltd. (WTC-AU), Xero Limited (XRO-NZ), Zip Co Ltd. (ZML-AU)

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