BAILLIEU HOLST RESEARCH 27 May 2016 INTERNAL ONLY NetComm Wireless (NTC) RECOMMENDATIONS INITIATION OF COVERAGE Rating BUY ▲ Risk High Rise of the machine-to-machines Price Target $3.35 Share Price $2.81 . We initiate coverage on NTC with a BUY rating: Our 12-month price target is $3.35 (+19% on current price). NTC develops and manufactures SNAPSHOT data communications devices, which connect the ‘end user’– which may Monthly Turnover $21.5mn be a person or an electronic device – to a network. Its legacy business is Market Cap $415mn supplying modems to enable consumers and businesses to connect to the Shares Issued 146.0mn internet, but its future growth will come from the M2M market. 52-Week High $3.67 . Rise of the M2M market creates myriad of opportunities: Estimates 52-Week Low $0.56 suggest the number of connected Machine-to-Machine (M2M) devices will Sector Information Technology grow at a CAGR of 15-30% to 2020, when 20-50 billion devices will exist. NTC’s strategy is to focus on verticals where there is limited competition and a clear problem to solve. These include transportation ticketing (NTC BUSINESS DESCRIPTION was involved in the Opal system in Sydney, NSW), emergency services, NetComm Wireless develops and healthcare and utilities (NTC makes smart energy meters). manufactures industrial-grade data communications devices. These include fixed . Fixed Wireless Broadband (FWB) the near-term driver: Winning the broadband modems and wireless 3G/4G contract with Ericsson in 2011 to deliver the FWB component of the devices for the Machine-to-Machine (M2M) National Broadband Network (NBN) in Australia has given NTC world- market. Within the latter, NTC has carved out a significant niche in the global Fixed leading expertise. NTC leveraged this experience to win a similar contract Wireless Broadband (FWB) market. with a major US telco in 2015, which we believe is potentially up to 10 times larger. These projects will underpin strong near term revenue growth. Strategy leverages partners’ global networks: NTC has partnerships 12-MONTH PRICE & VOLUME . with a number of large global M2M players, including network providers (Telstra, AT&T, Vodafone, Verizon) and equipment manufacturers (Ericsson, Hitachi, Alcatel-Lucent). It is using this ‘riding the coattails’ strategy to target ‘large niches’ in the market. Financials show rapid growth: NTC reported very strong growth in 1H16, with revenue of $46.4m (+54% on 1H15), EBITDA of $5.1m (+124%) and NPAT of $2.3m (+538%). This was driven by increased revenue from the NBN project and marked the first time that the M2M business (which includes FWB) was over 50% of revenues. Increased costs from expanding the business in 1H16 are behind the slight decrease in FY16 NPAT, with NTC expected to triple its FY16 revenues in FY18. Investment view: We value NTC at $3.35, using a DCF analysis with a RESEARCH ANALYST risk-free rate of 5.0%, market risk premium of 6.0% and Beta of 1.3. NTC is Luke Macnab, CFA set to undergo rapid growth as the NBN and US carrier FWB rollouts occur + 612 9250 8930 over the next few years. We also believe there is potential upside to our [email protected] current forecasts from additional contract wins in FWB and other M2M Nicolas Burgess, CFA markets as well as growing the size of existing contracts. INVESTMENT SUMMARY + 613 9602 9379 [email protected] Year End: 30 June 2014A 2015A 2016E 2017E2018E Revenue $mn 64.5 74.2 85.8 133.3 259.2 Nick Caley EBITDA $mn 5.2 7.2 6.4 13.1 46.1 + 613 9602 9283 EBIT $mn 1.5 3.4 2.7 9.2 42.2 [email protected] Reported Profit $mn 1.0 2.5 1.6 6.5 29.6 Adjusted Profit $mn 2.9 4.6 3.7 8.5 31.6 Disclosure EPS (Reported) ¢ 0.8 1.9 1.2 4.3 19.8 The author owns no shares in NTC. EPS (Adjusted) ¢ 2.3 3.6 2.8 5.7 21.2 EPS Growth % 185.2 55.9 -21.5 104.8 270.4 PER (Reported) x 352.5 147.1 228.0 64.8 14.2 PER (Adjusted) x 123.3 79.1 100.7 49.2 13.3 Dividend ¢ 0.0 0.0 0.0 0.0 0.0 Yield % 0.0 0.0 0.0 0.0 0.0 Franking % 0 0 0 0 0 Baillieu Holst Ltd ABN 74 006 519 393 www.baillieuholst.com.au Please read the disclaimer at the end of this report. Page 1 BAILLIEU HOLST RESEARCH Netcomm Wireless Limited (NTC) Financial summary NETCOMM WIRELESS Code: NTC Rating: BUY Analyst: Luke Macnab Price Target: $3.35 Date: 27 May, 2016 Upside/downside: 19% Share Price: $2.81 Valuation: $3.35 Market Capitalisation: $420m Valuation method: DCF Financial Year End: June Risk: High PROFIT & LOSS (A$m) FY14A FY15A FY16E FY17E FY18E EARNINGS FY14A FY15A FY16E FY17E FY18E Operating revenue 64.5 74.2 85.8 133.3 259.2 EPS - Underlying (cps) 2.3 3.6 2.8 5.7 21.2 COGS -45.2 -51.1 -59.3 -93.3 -181.4 EPS Growth - Underlying -255% 142% -35% 252% 357% Gross profit 19.3 23.2 26.6 40.0 77.7 EPS - Reported (cps) 0.8 1.9 1.2 4.3 19.8 Expenses -14.2 -15.9 -20.2 -26.9 -31.6 Diluted shares (m) 128.8 129.0 132.4 149.4 149.4 EBITDA 5.2 7.2 6.4 13.1 46.1 DPS (cps) 0.0 0.0 0.0 0.0 0.0 Depreciation -1.0 -0.8 -0.8 -0.9 -0.9 Dividend Yield 0.0% 0.0% 0.0% 0.0% 0.0% EBITA 4.2 6.5 5.6 12.2 45.2 Payout Ratio 0% 0% 0% 0% 0% Amortisation -2.7 -3.0 -2.9 -2.9 -2.9 Franking 0% 0% 0% 0% 0% EBIT 1.5 3.4 2.7 9.2 42.2 Net Interest expense -0.7 -0.5 -0.5 0.0 0.0 VALUATION FY14A FY15A FY16E FY17E FY18E Minorities 0.0 0.0 0.0 0.0 0.0 P/E - Underlying (x) 124.4 79.1 100.7 49.2 13.3 Underlying PBT 0.8 2.9 2.2 9.2 42.2 EV/EBIT (x) 282.6 122.7 142.9 41.3 8.5 Tax 0.2 -0.4 -0.5 -2.8 -12.7 EV/EBITA (x) 100.3 65.0 68.2 31.3 7.9 Underlying NPAT 1.0 2.5 1.6 6.5 29.6 EV/EBITDA (x) 81.5 58.0 59.8 29.2 7.8 Underlying NPATA 2.9 4.6 3.7 8.5 31.6 Price/Book (x) 16.3 14.7 4.3 4.5 3.4 Price/NTA (x) 24.1 22.8 4.9 5.2 3.9 Significant items (net of tax) 0.0 0.0 0.0 0.0 0.0 Price/FCF 67.1 72.7 -42.7 60.4 14.8 Reported profit 1.0 2.5 1.6 6.5 29.6 GROWTH FY14A FY15A FY16E FY17E FY18E BALANCE SHEET (A$m) FY14A FY15A FY16E FY17E FY18E Revenue growth 51% 15% 16% 55% 94% Assets COGS growth 56% 13% 16% 57% 94% Cash 4.3 3.4 35.5 38.0 62.0 Expenses growth 8% 12% 27% 34% 17% Receivables 10.7 13.6 19.7 30.6 59.4 EBITDA growth 611% 40% -11% 103% 253% Inventories 7.4 10.1 27.5 27.5 27.5 PBT growth -131% 249% -24% 325% 357% Other Intangibles 7.2 8.7 11.1 11.5 13.8 Underlying NPAT growth -288% 142% -34% 297% 357% Investments 0.0 0.0 0.0 0.0 0.0 Reported NPAT growth -288% 142% -34% 297% 357% Other assets 8.2 8.6 14.3 19.0 23.6 Total Assets 37.8 44.4 108.2 126.7 186.4 MARGINS & RETURNS FY14A FY15A FY16E FY17E FY18E EBITDA Margin 8.0% 9.7% 7.5% 9.8% 17.8% Liabilities EBITA Margin 6.5% 8.7% 6.6% 9.1% 17.4% Payables 9.3 14.8 18.3 27.7 49.0 NPBT Margin 1.3% 3.9% 2.5% 6.9% 16.3% Provisions 1.1 1.2 0.2 0.7 3.1 ROIC 12.8% 18.9% 10.4% 16.0% 54.5% Tax payable 0.0 0.2 0.8 2.1 7.2 ROE 4.9% 10.5% 2.9% 7.2% 27.5% Other liabilities 5.2 3.6 2.5 3.3 4.6 ROA 11.8% 15.7% 7.4% 10.4% 28.9% Total Liabilities 15.6 19.8 21.8 33.8 63.9 Effective Tax Rate 30.0% 30.0% 30.0% 30.0% 30.0% Equity GEARING FY14A FY15A FY16E FY17E FY18E Share capital 15.3 15.4 75.4 75.4 75.4 Net Debt/(Cash) 0.5 -0.1 -35.5 -38.0 -62.0 Retained earnings 6.1 8.6 10.2 16.7 46.2 Enterprise value 420.2 419.7 384.2 381.8 357.7 Other equity 0.7 0.6 0.8 0.8 0.8 Net Debt/EV (%) 0.1% 0.0% -9.3% -10.0% -17.3% Total shareholders equity 22.2 24.6 86.4 92.9 122.5 Net Debt/EBITDA (x) 0.1 0.0 -5.5 -2.9 -1.3 EBITDA/Net Interest (x) 0.0 0.0 0.0 0.0 0.0 BV per share (cps) 17.2 19.1 65.3 62.2 82.0 NTA per share (cps) 11.7 12.3 56.8 54.5 72.8 SEGMENT REVENUES (A$m) FY14A FY15A FY16E FY17E FY18E Broadband business 31.3 40.5 28.3 29.7 31.2 CASH FLOW (A$m) FY14A FY15A FY16E FY17E FY18E M2M business 33.2 33.8 57.6 103.6 228.0 Cash at Start 3.9 4.3 3.4 35.5 38.0 Cash from operations 5.7 6.4 -4.4 10.3 33.5 Capex -0.3 -1.4 -4.3 -3.3 -5.2 Free cash flow 5.4 5.0 -8.7 7.0 28.3 Cash flow from investing -3.6 -4.5 -5.6 -4.5 -4.2 Cash flow from financing -1.4 -1.4 46.4 0.0 0.0 Cash at end 4.3 3.4 35.5 38.0 62.0 Free cash flow per share (cps) 4.2 3.9 -6.6 4.7 18.9 GOCF / EBITDA 130% 100% -53% 91% 100% FCF / Underlying cash NPAT 530% 202% -534% 107% 96% Baillieu Holst Ltd ABN 74 006 519 393 www.baillieuholst.com.au Please read the disclaimer at the end of this report.