At the current share price of 69.5 cents – which capitalises BigAir at $123 million – there would be more than a few faint-hearted former shareholders who regret selling at 3 cents in 2008. And the people who bought those offloaded holdings could not be happier.
Way back in 2008, things were not looking great for shareholders in junior telecommunications company BigAir Group Limited (BGL). The company had floated in 2006, raising $7 million at 25 cents a share, but had sunk to 3 cents.
Established in 2002, BigAir was Australia’s first wireless Internet Service Provider (ISP) and licensed telecommunications carrier. It had already launched its fixed wireless WiMAX (worldwide interoperability for Microwave Access) network, aimed at the business market, in 2006. But it was slow gaining traction, the company was not yet profitable, and by mid-2008, it was fair to say that a lot of shareholders had lost faith.
But BigAir founders Jason Ashton and Patrick Choi had big plans. Steadily BigAir moved into the cloud, managed services and unified communications markets through a string of acquisitions of competitors and value-adding opportunities, such as Wizz Communications (2010), Clever Communications (2011), Link Innovations (2012), Intelligent IP Communications (2013), Anittel Communications (2014), Oriel Technologies (2014), Integrated Data Labs (2014), Applaud IT (2015) and Everywhere Internet (2015.)
The acquisition of wireless-broadband and student accommodation internet provider Allegro in 2012 opened up the student accommodation market. BigAir Community Broadband was formed from the acquisition of both StarTech Communications and AccessPlus in 2010 and 2011.
The company is still on the acquisition trail. Just last month BigAir bought CyberHound, which provides a fully managed security solution to the business market, and is the leading provider of internet security services and digital learning enablement services to the education sector in Australia, currently supporting more than 350 schools.
All of these additions have allowed BigAir to bundle a much richer range of services to its customers, while opening up new markets.
At the current share price of 69.5 cents – which capitalises BigAir at $123 million – there would be more than a few faint-hearted former shareholders who regret selling at 3 cents in 2008. And the people who bought those offloaded holdings could not be happier.
These days, BigAir is organised in three divisions: fixed wireless for business, cloud managed services and community broadband. BigAir can offer a fully managed and unified communications service. BigAir has bilateral wholesale arrangements with all major infrastructure carriers allowing it to design and build solutions for customers. The company targets mid-market customers with multiple offices and up to 2,000 employees.
BigAir provides data solutions that enable it to design and manage large corporate communications networks. As a builder/operator, BigAir offers a comprehensive portfolio of connectivity, voice, cloud, security, managed services and IT solutions.
The fully owned network offers carrier-grade, high-availability broadband wireless services at speeds to up to 1 gigabyte (1000 megabytes) per second, to market niches such as media, advertising, hospitality, education, entertainment, law and accounting. The division operates high-speed infrastructure in the form of wireless base stations are located on prominent rooftops in CBD areas and also on communication towers in regional areas. Each base station can support hundreds of customers. The network covers Sydney, Brisbane, Melbourne, Adelaide, Perth, Hobart, Darwin, the Gold Coast and the Sunshine Coast, as well as extensive regional coverage.
Through its cloud managed services division BigAir designs and delivers a fully integrated solution that can be managed by it or the client.
The BigAir Community Broadband division is the leading provider of outsourced managed internet services in the Australian university student accommodation, installing both wired and wireless infrastructure delivering high-speed broadband. The division also supplies managed communications and WiFi services to shopping centres, local government, retirement villages and remote mining and oil/gas camps.
Fixed wireless currently generates 31 per cent of revenue and 70 per cent of underlying earnings. Cloud managed services accounts for 53 per cent of revenue and 32 per cent of underlying earnings. Community broadband accounts for 15 per cent of revenue and 10 per cent of underlying earnings, with the balance contributed by the corporate division.
Within community broadband, BigAir’s campus solutions division is the largest private ISP, supplying managed broadband services to campus accommodation style environments.
BigAir broke through into profitability in FY09. The maiden dividend came through in August 2012, after BigAir more than doubled its net profit for FY12.
By the end of FY15, BigAir had completed its eighth consecutive year of growth in underlying earnings, with EBITDA (earnings before interest, tax, depreciation and amortisation) growing over the last five years at a compound rate of 43 per cent a year. Revenue rose by 50 per cent to $62.7 million, EBITDA was up 25 per cent to $18.9 million and underlying net profit jumped 34 per cent to $8.5 million.
Then, for the half-year ended December 2015, revenue surged by 54 per cent to $40.3 million, underlying EBITDA rose 18 per cent to $9.6 million and underlying net profit was up 7 per cent to $3.7 million – a record high for all three figures. However, in response, the market stripped almost 30 per cent from BigAir’s share price – because the result did not meet expectations. And the level of debt also seemed to worry investors, with a 70 per cent increase in debt contributing to a rise in net debt/equity from 42 per cent (FY15) to 61 per cent.
But if you looked closely, there were some promising signs.
In particular, BigAir’s community broadband division had an excellent start to 2016, with a 15 per cent lift in student signups versus the same period last year. BigAir signed contracts to install its managed WiFi and analytics into another six large shopping centres, and also won the Western Sydney University WiFi tender, to supply WiFi infrastructure at 17 sites across its seven campuses. The great thing about the student accommodation business is that the price of the broadband access is included in the rent.
The company said its cloud and managed services pipeline was also running at record levels, and the cross-¬selling program that BigAir embarked upon last year was picking up momentum, with further significant contract wins expected to be announced in the second half. The company did not provide earnings guidance for the FY16 full-year, although it said the second half of the 2016 financial year would benefit from the addition of revenue and earnings from Everywhere Internet, and Applaud was also expected to contribute materially to earnings in the second half. BigAir’s earnings are normally skewed to the second half: broker Morgans expects a split of about 40/60.
According to FN Arena, the analysts that follow BigAir expect it to report earnings per share (EPS) for the year ending 30 June 2016 of 5.2 cents, which would represent a jump of 86 per cent on the 2.8 cents reported last year. A fully franked dividend of 1.7 cents is expected, up 42 per cent on the 1.2 cents paid in FY15.
At 69.5 cents, that prices BigAir on 13.4 times expected earnings, and a fully franked yield of 2.4 per cent. The analysts see EPS at 5.3 cents in FY17, with the full-year dividend at least maintained at 1.7 cents, meaning that BGL trades on a forward FY17 price/earnings (P/E) ratio of 13.1 times, and the same fully franked yield of 2.4 per cent. On P/E grounds, BigAir is not expensive by any means.
As with all telco stocks, BigAir investors face the risk of how the National Broadband Network (NBN) rollout and implementation will affect demand for its services. BigAir was one of the first movers that established nice businesses in wireless broadband, which is outside the NBN’s monopoly – which is restricted to fixed line broadband connections. That incumbency will be a strong advantage to BigAir.
On the analysts’ consensus price target of 72 cents, there is only small value implied in buying BigAir, but as the newer acquisitions start to contribute to earnings, and the cloud and managed services and community broadband businesses in particular make further inroads and increase their contributions to earnings, BigAir could surprise on the upside over the next couple of years.
