Key Takeaways
This month we have considered the future of the telecommunications sector with a particular focus on how traditional telecommunication incumbents, such as Telstra, Optus and Spark, could develop strategies to be successful in the future environment, challenged by new technologies, competitors and regulatory settings
We see the telecommunications industry as being at an inflection point:
Global telecommunications markets continue to evolve, with some of the bigger trends of the past 10-20 years now having played out. For example, the shift from fixed to mobile is now well advanced as is the migration from copper to fibre networks
Technology has, and always will, play a large role in determining the future of any telecommunications company. For example, software-defined networks and newer mobile technologies such as 5G will always be critical to future success. AR and VR are still early stage, but could fundamentally change the way in which we communicate in our personal and business lives
Likewise regulation has also played a critical role – traditionally favouring the incumbents (which were state-owned) and then encouraging competition and allowing for access regimes. Possibly the most crucial change of the last decade has been the dis-aggregation of networks (for example, the NBN) from retail service providers
These changes mean that telecommunications companies (for example, Telstra, Optus and Spark) now find themselves at a cross-roads having lost their network advantage in fixed line and with the OTT companies (such as Google, Facebook, Apple and Amazon) yielding unprecedented competition for business and consumer data
To be successful these companies must decide whether they will (a) build the telecommunications infrastructure companies of choice in Australia and New Zealand and be connected to the world or (b) build an ICT and OTT company that manages data and provides advanced services beyond access. Tempting as it might be, doing both is high risk and runs the risk of doing neither really well. In some ways, these companies are in unchartered waters along with most global incumbents
Below we have outlined in more detail two strategies that companies, such as Telstra, Optus and Spark - or frankly the larger challengers such as TPG / Vodafone and 2Degrees and others - could implement to position themselves for success in the future environment
Strategy A: Network-as-a-Service (NaaS) - develop ‘best in class’ utility style broadband connectivity
Internet and connectivity has become commoditised with little differentiation by access provider and as such, price is now coming under pressure
Telcos of the future embrace the utility nature of telecommunications (similar to electricity and gas), avoid direct competition with global OTT companies and embrace an ‘engineering’ mentality, to deliver superior infrastructure outcomes
The objective under this model is to generate respectable ROI on their infrastructure capex and service capabilities
Strategy B: New digital world - data management, security and exchange in a secure environment
Telcos become the champion for managing data in a secure environment and empowering both consumers and businesses with ‘ownership of their own data’
OTT companies with a large R&D spend are able to dominate - though privacy and security are becoming increasingly important and perilous
Overcomes the ‘engineering’ mentality to deliver customer propositions
The objective of this model is to generate returns by facilitating consumer's and business' management of their data - delivering this through managing regulation, technology and customer focus
Also, the Australian Institute of Health and Welfare (AIHW) released the Health Expenditure 2016-2017 report this month, showing that healthcare spending has reached $180.7 billion in the year to June 2017. This represents an almost 6% increase from the prior year (2015-2016) of $170.5 billion. The ratio of health expenditure to GDP continues to grow, having increased from 8.75% to 10.28% in the last 10 years. This has been driven by the growing demand for health goods and services, general population growth and health cost inflation, which was 1.03% higher than general inflation over the last 5 years. Health spending per person has likewise grown substantially and has now reached $7,411 per person, up 61% from $4,603 10 years ago. With respect to health expenditure funding, around 69% of total healthcare spending is funded by both local and federal governments, followed by individuals, who fund 16.5%, with the remainder being funded by health insurers and the non-government sector. Clearly, health expenditure cannot continue to grow unabated over the next 10-15 years - that would make it unaffordable and a large impost to taxpayers. We anticipate that artificial intelligence (AI) and genomics will provide much needed productivity gains in the health sector and with that, create disruption.
Should you like to discuss our sector outlook for either telecommunications or healthcare, please contact us here.
Telco Monthly Wrap
Best and Worst Monthly Performers
The 5 best and worst performers for the month of September 2018 were as follows:
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Source: Factset, as at 30 September 2018
Key Company Announcements
amaysim Australia Limited (14 September) announced the appointment of Gareth Turner as CFO who will commence by the end of November. Prior to accepting the role at amaysim, Gareth was the CFO of GBST and has held the previous roles as CFO at Hills Limited and General Manager of Finance at amaysim
Chorus Limited (5 September) announced the appointment of David Collins as CFO who will commence in December. Prior to joining Chorus, David was Head of Finance and Regulation – Network at Aurizon
DWS Limited (10 September) announced the resignation of Jodie Moule as Executive Director effective immediately
Netcomm Wireless Limited (3 September) announced it has extended its agreement with nbn co to supply the next generation of Reverse-Powered Distribution Point Units (DPUs) (in addition to NetComm’s current position as nbn’s supplier of 4 port DPUs)
Singapore Telecommunications Limited (8 August) reported 1Q FY19 results with revenue down 1.9%, EBITDA down 2.7% and underlying NPAT down 16.6%. In Australian consumer, revenue was up 5.0% and EBITDA up 3.0%
Spark New Zealand Limited (26 September) announced the extension of Future Director Nagaja Sanatkumar role for an additional 6 months. The role of Future Director allows young people with an interest in corporate governance to observe and participate in Boardroom discussions however, does not have voting rights and is not involved in decision making
SpeedCast International Ltd (27 September) announced it has successfully priced a US$175 million incremental term loan add-on to its existing US$425 million US Term Loan B facility (due 2025). The Incremental Term Loan and the Existing Term Loan have the same terms, including interest margin, and are priced at LIBOR plus 2.75% p.a., a 0.25% p.a. increase on the current interest margin under the Existing Term Loan
Superloop Ltd (5 September) announced the appointment of Jon Tidd as CFO who commenced in the role in mid-September. Prior to the role, Jon held senior executive financial roles at nbn co, Seven West Media and Vodafone Australia
Telstra Corporation Limited (6 September) revised its FY19 guidance in response to the nbn Corporate Plan 2019. The changes lowered FY19 guidance as nbn co reduced its Ready for Service and premise activated forecasts for the period. See below for a summary of changes:
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TPG Telecom Limited (18 September) reported FY18 results with underlying revenue up 0.5%, underlying EBITDA up 0.7% and underlying NPAT up 3.7% with a final dividend of 2.0 cents. Furthermore, the company is forecasting a fall in EBITDA in FY19 due further gross profit margin headwinds as DSL and home phone services continue to migrate to the NBN, and by a one-time step reduction in EBITDA caused by adoption of the new AASB15 revenue accounting standard offsetting growth from its ‘business as usual’ (BAU) operations
The company’s small cell roll-out continues in major capital cities and densely populated metropolitan areas with the company noting, “if the merger with Vodafone Hutchison Australia (VHA) proceeds, TPG’s small cell network would be complementary to VHA’s mobile network bringing greater strength to the combined group through increased coverage and capacity in densely populated areas”
Forward EV / EBITDA Multiples Chart
The forward EV / EBITDA multiples for leading telco stocks at the end of the month is as follows:
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Source: Factset, as at 30 September 2018
Telco stocks were trading on an average forward EV / EBITDA of 11.2x and a median forward EV / EBITDA of 8.6x
Media Monthly Wrap
Best and Worst Monthly Performers
The 5 best and worst performers for the month of September 2018 were as follows:
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Source: Factset, as at 30 September 2018
Key Company Announcements
APN Outdoor Group Ltd. (10 September) released the Scheme Booklet relating to the sale of APN Outdoor to JCDecaux. The Board of Directors continues to unanimously recommend the sale and the Independent Experts concluded that the transaction was fair and reasonable and therefore in the best interests of shareholders
APN Outdoor Group Ltd. (26 September) announced that FIRB has reviewed the proposed sale of the business to JCDeaux and will not oppose the transaction
Fairfax Media Limited (25 September) announced the dismissal of its appeal against a New Zealand Commerce Commission ruling to not clear or authorise the proposed merger between its subsidiary, Stuff Limited and NZME
GTN Group (21 September) announced that GTCR had sold all its shares in the company via a block trade undertaken by Macquarie Capital
HT&E Ltd (12 September) announced the resignation of Interim Chairman Robert Kaye, effective immediately
HT&E Ltd (18 September) announced the appointment of Paul Connolly as Acting Chairman, effective immediately
HT&E Ltd (28 September) announced the completion of the sale of Adshel to oOh!media for an enterprise value of $570m. The proceeds were used to paydown drawn debt and a special dividend of 72 cents per share was announced
Nine Entertainment Co. (26 September) announced that Southern Cross Austereo (SCA) will transfer its Canberra broadcast playout operation to NPC Media (a JV between Nine and Seven) in 2020. NPC will provide SCA with playout services for an initial period of seven years
oOh!media Ltd (21 September) announced the retirement of non-executive director, Michael Anderson from the board, effective 21 September
oOh!media Ltd (24 September) announced the appointment of David Scribner as Chief Customer Officer, a former CEO of Virgin Mobile
oOh!media Ltd (28 September) completed the acquisition of Adshel from HT&E for $570m and will now look to integrate the business over the coming months, with the Adshel brand to be replaced by oOh! by the end of the year
Pacific Star Network Limited (3 September) announced the sale of its Morrison Media business which consisted of its non-sport publishing assets Frankie Magazine and Smith Journal for $2.4m (less working capital adjustments) at a ~3.2x EV / FY18 EBITDA multiple. 70% of the transaction consideration will be paid in cash on settlement and the remaining 40% on 30 June 2019. Transaction was completed on 12 September
Pacific Star Network Limited (28 September) reported FY18 results with revenue up 78.7%, underlying EBITDA up 18% and a net loss of $3.0m
Seven West Media Limited (21 August) announced that Southern Cross Austereo (SCA) will transfer its Canberra broadcast playout operation to NPC Media (a JV between Nine and Seven) in 2020. NPC will provide SCA with playout services for an initial period of seven years
Southern Cross Media Group Limited (26 September) announced that it will transfer its Canberra broadcast playout operation to NPC Media (a JV between Nine and Seven) in 2020. NPC will provide SCA with playout services for an initial period of seven years
Forward EV / EBITDA Multiples Chart
The forward EV / EBITDA multiples for leading media stocks at the end of the month is as follows:
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Source: Factset, as at 30 September 2018
Media stocks were trading on an average forward EV / EBITDA of 11.2x and a median forward EV / EBITDA of 9.5x
Tech Monthly Wrap
Best and Worst Monthly Performers
The 5 best and worst performers for the month of September 2018 were as follows:
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Source: Factset, as at 30 September 2018
Key Company Announcements
3P Learning Ltd. (5 September) announced the appointment of Simon Yeandle as CFO, commencing in December. Prior to the role Simon held senior finance roles in tech, digital media and software companies
Afterpay Touch Group Ltd. (17 September) announced the closure of its share purchase plan which raised $25m. The original target was $20m however, at the close, applications totaled ~$36.8 million and as such, the Afterpay board decided to scale back the SPP applications to a total of $25 million (all applications will be scaled back on a pro rata basis). The issue price was determined to be $16.96 per share (equal to the volume weighted average price of Afterpay’s shares over the five consecutive trading days on the ASX up to and including, 17 September).
After paying transaction costs, repaying certain existing term debt and funding the costs of call option transactions (undertaken to offset the potential dilutive impact of a conversion of the note), the net proceeds of approximately US$242m will be used for potential acquisitions/investments in strategic and complementary businesses and assets which are in line with Xero’s strategy to drive long-term shareholder value
Zip Co Ltd. (6 September) announced the appointment of John Batistich as non-executive director. John has a background in retail, marketing and digital innovation
Zip Co Ltd. (13 September) announced a partnership with Target to provide Zip interest-free payments in its stores
Citadel Group Ltd. (20 September) announced the founders (Miles Jakeman and Mark McConnell) had sold ~10% of their shareholdings to aid with liquidity and future ASX300 inclusion. The founders continue to own ~15% and ~12%
ELMO Software Ltd. (19 September) announced the resignation of Chairman, James McKerlie effective immediately. The company citied that James’ role as a major shareholder and Executive Chair at Bambu may create a conflict in the future given it and ELMO are increasingly heading in a similar direction. Kate Hill a current non-executive director, will has assumed the position of interim Chair.
GBST Holdings Ltd (14 September) announced that CFO, Gareth Turner has resigned and will leave the company at the end of November, after which he will join amaysim
Kogan.com Ltd. (4 September) founding directors, Ruslan Kogan and David Shafer, sold 6.25m of their shares in the company (valued at ~$40m) who have advised that they don’t intend to sell any more securities prior to the release of their 1HFY19 results
Nearmap Ltd. (7 September) announce the completion of a $70m capital raising. The placement was undertaken at an issue price of $1.60 (vs $1.80 prior to trading holt) and involved the placement of 43.75m new shares to sophisticates, professional and institutional investors. The fund will be used to accelerate and support the groups strategic objectives, expand sales, marketing and product technology capabilities, fund further international expansion, provide work capital and to pay the costs associated with raising the funds
Xero Limited (27 September) announced the pricing of a US$300m 2.375% guaranteed senior unsecured convertible notes due in 2023. The initial conversion price was US$ 46.3386 per ordinary share, representing a conversion premium of ~30% over the reference share price (A$49)
Forward EV / EBITDA Multiples Chart
The forward EV / EBITDA multiples for leading tech stocks at the end of the month is as follows:
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Source: Factset, as at 30 September 2018
Tech stocks were trading on an average forward EV / EBITDA of 14.0x and a median forward EV / EBITDA of 13.9x
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:
APN Outdoor Group Ltd. (APO-AU), Carsales.Com Limited (CAR-AU), Domain Holdings Australia Ltd. (DHG-AU), Asia Pacific Digital Limited (DIG-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)