Perth-based telecommunications provider Amcom Telecommunications (AMM) has been a market darling for some time – with fairly good reason. In FY12 the fibre-optic network operator racked up its tenth consecutive year of underlying profit growth of 20%-plus. That’s quite an impressive track record, given that the last ten years have thrown up more than the odd business bump.
In FY12 revenue jumped 43% to $80.1 million, while underlying net profit rose 22% to $16.8 million. Amcom paid 5 cents a share in dividends for the year, up from 4.8 cents (on a like-for-like basis), in the previous year (that is, not benefiting from equity-accounted earnings or dividends from Amcom’s investment in fellow telco iiNet in FY 12.
AMM’s Consistent Track Record
Source – AMM Investor Presentation Macquarie Australia Conference
Free cash flow (that is, after ongoing capital expenditure) surged by 82% to $13.4 million, while return on shareholder’s equity rose to 15% from 13% in FY12.
The data networks (fibre) business was the largest contributor to the company’s earnings growth over the year. That is Amcom’s core business: providing high-speed data communications over its fibre optic network in Perth, Adelaide and Darwin. Customers include corporates, government agencies and other telecommunication providers. But the company is positioning itself to capitalise on the growing data demand from the corporate and government sectors by offering cloud solutions and managed services.
For the December 2012 half-year, net profit rose by 10%, to $10 million, but again, the cashflow picture was more impressive. Operating cash flow rose 20% to $16.9 million, while free cash flow again surged, up 66% to $7 million. Amcom was able to lift the interim fully franked dividend by 11% to 2 cents a share, and told the market to expect underlying earnings growth of 20% for the full FY13.
Amcom’s attributes include the fact that it has its own in-ground fibre network, with the ability to use other providers’ networks as it needs, to offer its clients what they want. As a corporate-focused wholesale network, Amcom’s is largely unaffected by the National Broadband Network (NBN). Being one of only three Cisco enterprise equipment resellers in the Australian market is a big plus. But the leverage of being able to offer a range of hosted IT solutions in the emerging cloud computing market is the company’s most interesting growth area, as companies look to ditch their own expensive infrastructure in favour of tapping into ‘applications’ and managed services offered by a third party such as Amcom.
Cloud services enable Amcom to offer fully combined voice, video and data solutions to customers across the country. As IT and telecommunications grow further entwined as an item of company capital expenditure, being able to cross-sell and bundle services becomes ever more critical for providers, and Amcom – while only a relatively small player in the sense of national market share – arguably has market-leading capabilities in offering data network access, cloud solutions and managed services.
Data is a big growth area. Cisco estimates that business data network traffic will double between 2011 and 2016, growing at 19% a year. Data storage is expected to grow 50 times between 2010 and 2020. These are the areas where Amcom is well-positioned. And importantly, its services are readily scaleable, to handle growth.
Amcom’s Cloud Collaboration Based on Cisco’s Unified Communications platform
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Source – AMM Investor Presentation Macquarie Australia Conference
As you would expect, the stock has been a strong performer. Four years ago, the stock was trading at 36 cents: it is now at $1.84. With the stock having run so strongly, capital growth is likely to be more constrained – but Amcom is maturing nicely as a business, it is still well-positioned to grow its revenue and profit over the medium term, and it is becoming a solid dividend payer. It is a much more.
The consensus target price for AMM is $1.95, giving not much ceiling above the current share price, at $1.835. Bullish investors are going to take a lot more notice of Citi’s 12-month price target price of $2.24 than they are of CIMB Securities; relatively downbeat target of $1.66. Remember, opposing views is what makes a market. (CIMB is not a ‘seller’ of Amcom: it rates the stock as ‘outperform.)
In the meantime, Amcom is expected by the consensus to pay a fully franked dividend of 7.2 cents a share this financial year (FY14), placing it on a prospective yield of 3.9%. If you owned the shares in a self-managed super fund in accumulation phase, that would be augmented to 4.8%: if the fund were paying a pension, the effective yield would be 5.6%.
