Venture Advisory Monthly Wrap – September 2018

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Venture Advisory Monthly Wrap – September 2018

Venture Advisory Monthly Wrap – September 2018

Monthly Markets Wrap and Company Updates - September 2018

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 nongovernment 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.

Telco Monthly Wrap

Media Monthly Wrap

Tech Monthly Wrap

Telco Monthly Wrap

Telco Monthly Wrap:

Telco Best and Worst Monthly Performers. The 5 best and worst performers for the month of September 2018 were as follows:

SOURCE: Factset, as at 30 September 2018

  • 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:

  • 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:

SOURCE: Factset, as at 30 September 2018

 Media Monthly Wrap

Media Sector – Highlights

Media Best and Worst Monthly Performers. The 5 best and worst performers for the month of September 2018 were as follows:

SOURCE: Factset, as at 30 September 2018

  • 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:

SOURCE: Factset, as at 30 September 2018

Tech Monthly Wrap

Technology Sector – Highlights

Technology Best and Worst Monthly Performers. The 5 best and worst performers for the month of September 2018 were as follows:

SOURCE: Factset, as at 30 September 2018

  • 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).
  • 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). 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

 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 30 September 2018