##{"id":60547,"date":"2012-09-10T12:18:39","date_gmt":"2012-09-10T02:18:39","guid":{"rendered":"http:\/\/www.fnarena.com\/index.php\/2012\/09\/10\/double-digit-earnings-growth-for-amcom\/"},"modified":"2012-09-10T12:18:39","modified_gmt":"2012-09-10T02:18:39","slug":"double-digit-earnings-growth-for-amcom","status":"publish","type":"post","link":"https:\/\/staging.fnarena.com\/index.php\/2012\/09\/10\/double-digit-earnings-growth-for-amcom\/","title":{"rendered":"Double-Digit Earnings Growth For Amcom"},"content":{"rendered":"

\n\t – Amcom<\/span> offers solid earnings growth outlook
\n\t – An enhanced cloud offering one earnings driver
\n\t – High margins and low customer churn additional positives
\n\t – Macquarie initiates with an Outperform rating<\/strong><\/p>\n

\n\t
\n\tBy Chris Shaw<\/p>\n

\n\tAmcom<\/span> Telecommunications ((AMM<\/span>)) provides fibre-based<\/span> services to government, large corporate and wholesale customers via 2,200km<\/span> of higher speed fibre-optic<\/span> networks in Perth, Adelaide, Darwin and Alice Springs. The company also has the capacity to offer data connectivity nationwide.<\/p>\n

\n\tMacquarie has initiated coverage on Amcom<\/span> with an Outperform rating, attracted to the expectation Amcom<\/span> can deliver double-digit earnings growth over the next few years. This growth should come from new fibre<\/span> sales and increased demand for cloud services.<\/p>\n

\n\tOne advantage identified by Macquarie is that Amcom<\/span> faces less competitive markets for its core fibre<\/span> business, as aside from Telstra ((TLS)) the likes of Pipe Networks are more exposed to markets on the east coast of Australia. Amcom<\/span> benefits when competing against market leader Telstra by being able to offer more tailored and managed connection solutions.<\/p>\n

\n\tA further advantage is that given significant capex<\/span> has already been spent on establishing Amcom's<\/span> fibre<\/span> network, operations now generate strong levels of cash. With customers signing long-term contracts, revenues are annuity-style in nature.<\/p>\n

\n\tGiven relatively limited customer churn of around 10% annually, Macquarie estimates Amcom<\/span> generates around $1.6 million annualised<\/span> per month in new fibre<\/span> revenues, with around $90 million in recurring revenues secured at the end of FY12<\/span> across all annuity product lines.<\/p>\n

\n\tGiven relatively flat costs, margins are attractive, with gross profit margins standing at around 84% on Macquarie's numbers. With the network extending past a number of established buildings, incremental capex<\/span> for new contract wins is also falling, Macquarie noting capex<\/span> to connect $1 in fibre<\/span> revenue has declined from $1 in FY10<\/span> to $0.59 in FY12<\/span>.<\/p>\n

\n\tThis adds support to Macquarie's earnings growth expectations, which in earnings per share (EPS) terms stand at 8.8c in FY13<\/span> and 11.1% in FY14<\/span>. What should help drive this growth is increasing demand for cloud services.<\/p>\n

\n\tThe company's recent L7<\/span> acquisition will assist in this regard, as Macquarie notes the deal will allow Amcom<\/span> to offer bolt-on IT services operations to existing cloud computing offerings, meaning increased cross-selling opportunities. A full year contribution from L7<\/span> should boost earnings in FY13<\/span> relative to the seven month contribution in FY12<\/span>.<\/p>\n

\n\tAs well as boosting earnings the expanded cloud offering should deliver more consistent revenues and earnings to Amcom<\/span>, as Macquarie points out general IT equipment sales can be lumpy but with an associated cloud offering clients can benefit from ongoing refreshment of their IT environment.<\/p>\n

\n\tAmcom<\/span> has a strong balance sheet, Macquarie estimating net debt to equity stands at around 7% at present. With around $40 million in bank facilities not maturing until December of 2014 current dividend payout levels should be maintained, proving a solid income component to investor returns. Amcom<\/span> paid 5c<\/span> in dividends in FY12<\/span> and Macquarie forecasts increases to 6.2c in FY13<\/span> and 7.1c in FY14<\/span>, which implies respective fully franked yields of 5.5% and 6.3%. <\/p>\n

\n\tMacquarie has set a price target for Amcom<\/span> of $1.31, which implies solid upside of around 17% relative to a current share price of less than $1.15. Macquarie's target is in line with the $1.30 price target of RBS<\/span> Australia, which is the only other broker in the FNArena<\/span> database to cover Amcom<\/span>. RBS<\/span> also rates the stock as a Buy.<\/p>\n

\n\tIn a slightly stronger market shares in Amcom<\/span> today are down, trading 1c<\/span> lower at $1.115 as at 12.00pm. This compares to a range over the past year of $0.75 to $1.23. <\/p>\n

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