Joint Statement by Baillieu Limited Chairperson David Trude and Managing Director Gavin Powell

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Over the Wire (OTW) | Guidance around consensus – Partnership with NEXTDC

  • Minimal impact from COVID-19: OTW has indicated that it expects FY20 Revenue and EBITDA to be “within 3% of consensus (Revenue $90.4m, EBITDA $17.4m)”, which is in line with our forecasts ($92.0m, $17.0m). Recurring service revenue has minimal exposure (<3% of segment) to the sectors hardest hit by COVID-19 (hospitality, retail, travel), whilst the non-recurring segment is expected to record revenue which is >70% of that previously forecast.
  • Demand, product rollouts positive: OTW has benefited from increased demand for voice and collaboration technologies and higher voice volumes due to COVID-19. On the downside, some data services rollouts have been delayed due to access restrictions and non-recurring (ie equipment) revenue has been reduced. The company’s new product launches during 2HFY20 are on track, with the Microsoft Teams Direct Routing product going live in Q3 and the Mobile product expected to launch in late Q4.
  • Strong financial position: OTW remains cashflow positive and the balance sheet remains “strong” (no specific update but zero net debt, $7.4m cash and $20m debt headroom at 31 December). OTW is continuing to evaluate potential acquisitions, which we believe could be fully funded by debt and be earnings accretive from Day 1.
  • Partnership with NEXTDC: The company has also entered a strategic partnership with NEXTDC to migrate key parts of its network and private cloud infrastructure into NEXTDC’s Tier 4 Facilities. This will support OTW’s capability to provide public and private cloud services to its clients, along with allowing OTW to resell NEXTDC’s cloud-related products and services. NEXTDC will in turn use OTW’s networking capabilities to assist in building out new data centres.

Investment view: This was a well-received update from OTW as the market was nervous about a potential third downgrade in a row. We maintain our positive stance due to (1) favourable sector fundamentals (copper network and ISDN shutdowns), (2) solid recurring revenue growth (10% annualised), and (3) high chance of accretive acquisitions (zero net debt). With potential earnings upside from achieving their 15% growth target in FY21 and/or acquisitions and trading on a below-market FY21 P/E ratio of 15x, we believe the stock is good value at current levels. BUY maintained.

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