initial investment report buy - 28/10/05

TELE-IP LIMITED Recommendation
Initial Investment report BUY
I value Tele-IP at a price of 14.5 cents per share, based on the current underlying
business and issued capital of 557.5m shares.
NPAT for the first 6 months of 2005 was a loss of $1,923k following capital raising
costs, provisions for integration costs of $350k and delays in Beam Communications
revenues of approximately $1.5m to $2m, which are being rapidly made up in 1Q06.
NPAT of recent acquisitions PGS Communications Systems Pty Ltd and Able
Communications and Service Pty Ltd for the FY05 is estimated at $914k combined.
The merged entity officially began trading on 1 July 2005. NPAT for FY06 is forecast to
be $4,850k, or EPS 0.87 cents, buoyed by $800k cost savings, and a $1.1m sale price
of the StratoSonde divestment.
Other contributors to a strong FY06 NPAT are NEC maintenance contracts, which will
increase profit margins from 20% to 60%, and combined with direct sales are forecast to
deliver an additional $5m in revenue. Growth in revenue from current businesses, are
expected to average approximately 20% over the next forecast 3 years.
Acquisition of 2 to 3 positive earnings companies are anticipated to be completed in
FY06, with additional plans for acquisitions in FY07, giving rise to further economies of
scale through these periods.
Revenue from wholly owned subsidiary Beam Communications Pty Ltd is expected to
gain momentum in FY06, with anticipated revenues of $5m and historic net profit
margins around the 45% figure (normalised – adjusted for abnormal occurrences).
Retained tax losses of Tele-IP of an estimated $7m will continue to have a positive
effect on tax savings through FY06 and FY07.
Given substantial upside to revenues, a value of 14.5 cents should be considered
conservative.
TEE
$0.027
28 October 2005
Australian Small Cap Telecom
Services
Donald Ellett
Analyst, CFA
[email protected]
0416 025 826
Tele-IP Limited
ASX Code TEE
52-week range 3.6-1.9 cents
Market Cap $A $15.05m
Issued Capital 557.50m
Ave Daily Turnover * 650k
Ave Daily Volatility* 7.62%
est. NTA $4.9m
est. Net Debt $3.2m
*quarterly figures used
Source: IRESS adj. prices, Analyst estimates
Key Financials Year Dec-04 JUN 05 FY06E FY07E FY08E
(6 mths)
Revenue 6,907,592 1,450,534 23,913,000 27,375,600 32,850,720
EBITDA -1,344,694 -2,226,907 4,950,000 5,174,400 6,209,288
NPAT -1,541,924 -1,923,355 4,850,000 4,236,912 4,458,488
EPS (cents) -0.28 -0.34 0.87 0.76 0.80
Diluted EPS (cents) -0.28 -0.34 0.87 0.76 0.80
EPS Growth n/a n/a n/a -13% 5%
Diluted P/E -9.80 -7.86 3.12 3.57 3.39
Normalised NPAT -949,661 -1,605,688 2,905,000 3,546,480 4,493,502
Normalised EPS (cents) -0.17 -0.29 0.52 0.64 0.81
Normalised EPS Growth % n/a n/a n/a 0.22 0.27
Normalised P/E -15.85 -9.37 5.18 4.24 3.35
Dividend 0 0 0 0 0
Source: IRESS, Company, Analyst Estimates
OVERVIEW
Tele-IP Limited was founded in 1986 as Martin Communications, listing as Tele-IP Limited in 1999 and since then has grown to
be a leading telecommunications technology supplier to the service provider and corporate data network markets, specialising in
network infrastructure design and implementation, including wireless LAN, point to point microwave, switch router and IP based
management solutions.
Tele-IP focuses on the development and sale of network infrastructure products and services to the communications markets in
Australia and overseas. Tele-IP has developed its intellectual property through continued research and with third parties,
including certain intellectual property rights that have been exploited through their sale to overseas interests. The key
components of Tele-IP’s intellectual property rights are embodied within three areas of its business:
(i) Network integration, inc luding all voice and data technologies, providing networking solutions and network services.
(ii) Wholly owned subsidiary StratoSonde Pty Ltd focusing on Atmospheric profiling and acoustic wind measuring
technologies (divestment will retain royalties)
(iii) Wholly owned subsidiary Beam Communications Pty Ltd offering Iridium network satellite communication products.
In June 2005, Tele-IP acquired PGS Communication Systems Pty Ltd and Able and Telenet Communications, funded by a 5 for 2
renounceable rights issue and subsequent placements. Capital was raised to fund the acquisitions, retire a proportion of debt
and provide additional working capital to proceed with systems integration, relocation branding and the establishment of a
Sydney office. Tele-IP officially began trading as a merged entity on 1 July 2005, and have since changed their reporting period
from end-December to end-June.
The addition of positive earnings companies to the group, places Tele-IP in a profitable position with the ability to sustain future
growth through cost efficiencies of economies of scale and a leading market presence. Tele-IP’s target acquisitions in FY06
begin with Brisbane and Adelaide followed by Sydney thereafter. With a total target of 8 NEC dealers nationwide, Tele-IP’s
acquisition path will soon see it as the primary NEC distributor in the Australian market. Whilst Tele-IP seeks to be the national
primary provider of NEC hardware and services, Tele-IP differs from their competitors and existing NEC dealers, in that they have
existing relationships with a number of other vendors, providing a significant flexibility in independent solution offerings that is
considered a major advantage when competing with those businesses that are single vendor reliant.
A new subsidiary, Telenet Rentals Pty Ltd, has been set up to provide rental finance for technology hardware, and will add
additional upside in revenues.
A Heads of Agreement was entered into in April 2005 with First European Consulting Pty Ltd, an exclusive provider of products
and integration services to a new medical service provider.
Tele-IP anticipates this could position them as the preferred provider to in excess of 40,000 medical practitioners throughout
Australia.
INDUSTRY BACKGROUND
Tele-IP Limited is classified as a Telecommunications Services company (ASX industry classification 5010), however they also
consider themselves to be part of the Information Technology industry (ASX Industry Classification Software and Services 4510
and Technology Hardware and Equipment 4520). Therefore, to do a broad industry analysis of peers, both sectors (and subsectors)
should be viewed.
Positive earnings companies trade on the ASX (as sourced by IRESS) with an average trailing PER (Price Earnings Ratio) of
20.76 for the Telecommunications Services sector, and 48.99 for the Information Technology sector. This gives weight to a
positive re-rating on Tele-IP after, as expected, profitable quarterly results are released to the market through FY06.
Market in general – Inflation is estimated to be below 3% over the long-term. A flat yield curve predicts a stable monetary
environment and cost of funds over the period of analysis, with, at most a small increase in the cash rate in FY06 and falling back
in FY07 and FY08.
In the technology and telecommunications industry fixed cost bases will enable earnings to be relatively insulated from any
inflationary pressures of increasing cost inputs they may arise. Pricing power and margin quality remain robust in the sector.
Employees are becoming increasingly mobile, on and off site. Technologies such as ‘presence’, indoor wireless mobile networks
and conferencing among others, are helping this trend.
An emerging market trend is the convergence to IP centric solutions, such as IP telephony solutions, empowering mobile workers
to access applications via the corporate network regardless of where or what time of day. These technologies allow a ‘virtual
presence’ to be maintained at the office.
Voice and data convergence represents an evolutionary step in achieving lower TCO (Total Cost of Ownership) by providing
integrated maintenance, reducing total system costs and increasing employee productivity. Commander, M2, Senetas Group,
UXC, Telstra (Damovo), Optus (Alpha West), KLM and numerous others address the Telephony and IT services market segments
in varying degrees targeted by Tele-IP. Commander has proven a similar model to the path Tele-IP is following, however
Commander has historically targeted the key systems (KTS) and hand set markets in alliance with Telstra and NEC, later
breaking from Telstra and NEC to drive their carrier connections following the acquisition of RSL com.
Tele-IP is relatively unique, in that they focus on the PBX and IP convergence sector adding competitive strength with multivendor
product sets and application specific solutions.
This market has traditionally been the vendor mainstay of Cisco and NEC (both product sets that Tele-IP support and sell).
Following trends in North America PBX replacement, activity was abundant prior to 2000, with customers choosing replacement of
existing systems for those that were Y2K compliant. As a consequence, the average age of th e installed base was lowered and
fewer replacement systems were shipped in the years following. The average lifespan of a PBX system is 5-7 years, indicating
that the bulk of these systems will be due for replacement or upgrade in 2005-2007.
Frost and Sullivan forecast that in the Asia Pacific, China and Australia are leading the adoption of IP telephony enterprise
solutions. Frost and Sullivan also view NEC as a strong technology driven vendor with a very strong range of products ranging
from KTS, through PBX and within the last years into IP PBX and IP Centric telephony solutions.
The Australian telephony market is forecast to grow from USD220m in 2005 to USD330m by 2010 with a 7.4 % CAGR
(compound annual growth rate).
The focus will shift from traditional voice or TDM technologies with PBX and KTS to voice and data convergence with IP-PBX and
IP-centric telephony solutions, delivering IP based solutions growth from USD113m in 2005 to USD280m in 2010.
This type of market growth gives way to the introduction of innovate technologies, and creates unique opportunities for solution
providers to target specific vertical industry segments with applications and total packaged solutions, ideally positioning Tele-IP as
strong future segment player.
COMPANY STRUCTURE
Following the acquisition of PGS Communication Systems Pty Ltd and Able Communications and Service Pty Ltd, Tele-IP now
comprises three divisions, being Tele-IP Network Services, Beam Communications Pty Ltd and StratoSonde Pty Ltd, the
atmospheric profiling and microwave propagation entity. Tele-IP also engages in specialist projects combining the technologies
from the divisions above.
BOARD
Post merger of PGS and Able has resulted in the potential to restructure the board and implement a new management team.
Ian May, ex director of the business division within Optus, continues as Managing Director. Dr Colin Adam, a board member of a
number of high technology companies, serves as Chairman. Andrew Martin, founder, is an executive director and Chief Technical
Officer. Dr Maurice Venning a well respected industry consultant, Christopher Eade the principal of a financial advisory firm and
Anthony Bigum ex CEO of Thermo Electron Ltd, are the remaining non-executive directors.
Tele-IP’s board composition reflects the required commercial, technical and strategic needs for the new consolidated entity, and
appointments relate to best fit.
It is anticipated that an interested major investor may take a seat with the divestment of StratoSonde.
MANAGEMENT
The Managing Director of PGS, Mr. Geoff Fennell, has joined Tele-IP as Chief Financial Officer and the Managing Director of
Able, Mr. Vince Vecchi, has also joined Tele-IP, as Manager of Operations and Support, offering undeniable business and
management expertise.
Mr Rick Wakeham, with 20 years experience in telecommunications including senior roles at Hutchison Telecomms, Optus and
Telstra, has recently been appointed Strategic Development and Marketing Manager.
Also Mr Richard Hudson from Able, has joined as a Sales Manager, and Mr Dennis Payne (ex-Optus and Heinz) as Financial
Controller.
The satellite products subsidiary, Beam Communications, is headed by GM, Mr Michael Capocchi (previous Asia Pacific Sales
Manager for Iridium), and utilizes Tele-IP’s Finance, HR and Marketing departments for administrative support.
ORGANISATION CHART 1 JULY 2005
Board of Directors
Ian May
Managing Director
Rick Wakeham
Strategic Dev. &
Marketing
Geoff Fennel
CFO
TBA
National Sales
Manager
Mike Opie
Maintenance
Services
Vince Vecchi
Manager Installation
Beam Operations
Michael Capocchi
StratoSonde
IT Services
Sales
Tech Support
Service
Finance
Admin
HR
Professional
services
Project Estimations
Installations
Data and cabling
Maintenance
TELE-IP BUSINESS SEGMENTS
STRATOSONDE PTY LTD
This wholly owned subsidiary is the repository of all intellectual property and patents pertaining to Tele-IP’s Atmospheric Profiling
technology. Whilst StratoSonde will be divested, royalties are anticipated to be retained for a minimum of 10 years and expected
to be approximately 1% to 5% of designated revenue streams. A sale price of $1.1m has recently announced, and subject to
shareholder approval, is expected to be received in FY06. This divestment will also relieve Tele-IP of the current direct expense
burden of approximately $500k per annum attributed to StratoSonde.
BEAM COMMUNICATIONS PTY LTD
Beam was created by Tele-IP in 2003, following the successful development and commercialisation of the Remote Satellite
Terminal (RST) product range, for accessing the Iridium satellite network. The proprietary hardware and software is designed to
address the applications required for fixed and mobile terminals based on the Iridium LEO (Low Earth Orbit) satellite
constellation.
Beam continues to focus on developing and distributing satellite-based phone systems. The systems provide the user with the
ability to attach a common, standard domestic-style telephone handset or numerous intelligent handsets and telemetry interfaces,
connected directly to the Beam developed products and provide communication anywhere in the world via the Iridium satellite
network.
Beam products are already used by Telstra, Sydney Water, Energy Australia, Toll, Brambles, the Royal Flying Doctor Service of
Australia and internationally by Horizon Mobile Communications (HK) Co Ltd, Globe Wireless Inc, Geolink, France Telecom and
GMPCS Personal Communications Inc.
New Beam Global Positioning System (GPS) enabled products, have been developed to provide the position reporting capability
required by the mandatory Ship Security Alert System (SSAS) regulations. They also operate with non-maritime applications
such as asset tracking throughout the transport industry.
There exists considerable growth potential to expand on international market opportunities, where to date over 1,700 products
having been sold. This opportunity ideally needs to be exploited with further investment in global distribution or indirect channels
to market. Establishing a US presence will provide access to remote-area applications in Mexico and South America. There are
also a number of European, African and North American sales opportunities through existing local telecommunication carrier’s
channels to market.
Beam normalised revenues in calendar year 2004 were approximately $3.5m, however in the 6 months to June 2005, revenues
were much lower and can be accounted for by an abnormal occurrence due to a forced hardware upgrade by Iridium, which
resulted in orders being backlogged into FY06. Revenues for FY06 are expected to be approximately $5m, based on normalised
sales growth and attributable from the conversion of these existing backlog orders. Beam is expected to contribute approximately
20% to FY06 group revenues.
These estimates do not include any upside from better penetration into and further expansion of international markets, or the
capital expenditure required to acquire this additional revenue growth.
Whilst currently approximately 85% of international sales are generated in USD, pricing is in AUD, and therefore exchange rate
fluctuations are of minimal concern.
NETWORK SERVICES (Now including PGS and ABLE)
This business division focuses on addressing the needs of carriers, ISP’s, network service providers and the provision of
networking solutions in the metropolitan areas and regional networks.
Services offered include design, sale and implementation of new telecommunications infrastructure through voice and data
services, hardware reseller and services business, next generation networks able to deliver multi-differentiated services, unique
services in the analysis and maintenance of broadcast networks based on wireless infrastructure.
From its original base technologies, Tele-IP has inherited and developed specialist skills and knowledge in the area of microwave
radio systems design and diagnostics, which is imbedded in the DRA (Digital Radio Analyser) technology.
Tele-IP received NEC maintenance provider status in July 2005, which means that Tele-IP (unlike some other channel
competitors) has the ability to offer direct maintenance support, providing for a substantial increase in related gross profit margin
from 20% to 80%.
It is estimated by Frost and Sullivan in 2005 that NEC maintains vendor dominance with over 35% of the market for installed base
of PABX’s. The average installed PBX has an estimated 5-7 lifespan, with new technologies such as VOIP or bridging such as IP
PBX offering cost effective and future proof alternatives.
This area of Tele-IP is a key driver in the 20% growth estimates over the next several years, making almost 80% of expected
FY06 revenues.
SUPPLIERS
Tele-IP has existing strong and enduring alliances with some of the world’s leading technology manufacturers such as NEC,
Avaya, Cisco, Aruba, Riverstone, Enterasys and Zultys. In working with these partners, Tele-IP is able to meet the rapidly
growing requirements of the marketplace.
THE MERGED ENTITY
Following the merger of Able, PGS and Tele-IP, the combined entity now offers a diverse set of specialized skills that address the
end-to-end customer needs of combined voice and data communications solutions from the carrier to the desk for all computer,
PDA, wireless, IP and voice needs.
With the growth of VoIP (Voice over Internet Protocol) and associated mobile technologies, Tele-IP now has a differentiated
blend of end-to-end services, voice and data skills, specialised expertise, size of company, vendor support, and customer mix,
that can provide a competitive platform to address the current and emerging market opportunities.
NEC awarded a contract in 2004 with the Victorian government, that extends for three years and both Able and PGS have been
involved in sub-contracting to NEC Business Solutions for the supply of services to the Victorian government.
PGS and Able will further extend and strengthen the existing Tele-IP Network services segment. It is estimated by Tele-IP that
Able and PGS command nearly 80% of the Victorian NEC reseller market. Together they have a customer database of over
4,000 customers, and offer a profitable and successful business in their own right.
SERVICES AND SUPPORT
Tele-IP has a broad product range and focus on providing a total business solution.
Tele-IP is one of the largest multi-vendor service providers in Australia serving the PBX and Key systems markets. Due to its
independence, Tele-IP provides tailored service and support plans for an extensive range of technology platforms, focusing on
the increasing demands of data and voice transmission required by computing and telephony users in every segment of a
network, from building access and metro aggregation, to the data centre and switched exchanges (Private Branch Exchange
(PBX) and through to the individual desktop for computing and telephony.
Tele-IP specialises in tailoring a full or partial facilities management solution that can include network management and a range
of support and administrative functions, offering a contracted skilled engineer for part or full-time employment on site.
Alternatively, under a fully-fledged managed service program, Tele-IP can supply the entire infrastructure under a capital
acquisition model or through a full rental program via Telenet Rentals Pty Ltd, a recently incorporated Tele-IP subsidiary. Fully
bundled services and products, including hardware, software, network carriage, insurance and maintenance can then be offered
for monthly payments over the contract period.
Tele-IP offers a range of professional communication consulting services designed to add value to business by increasing
productivity. These services can be as simple as a preview meeting through to a complex network design specification.
PGS Communication Systems Pty Ltd
PGS had at the time of acquisition, 23 staff and was established 12 years ago. I expect sales revenue for FY05 to be $4m and
NPAT 9.3% or $370k for that period.
The PGS business is a senior Victorian channel partner for NEC Business Solutions Ltd and provides the following services to its
customer base of more than 2000:
The sale, installation and servicing of NEC telephone systems including wireless telephone systems, VoIP and unified
messaging, provision of complex cabling solutions including blown fibre solutions, data network design, programming and
installation, project management, provisioning of all Telstra services and specializes in call centre applications. The business
also has a number of national and multinational customers for whom it carries out extensive telecommunications and cabling
support services.
Able Communications and Service Pty ltd
Able has been in business for 23 years and at the time of the acquisition had 30 employees. I expect sales revenue in FY05 to
be $8m with NPAT 6.6% or $540k, being an inaugural profit.
Able provides Tele-IP with the following services to its base, which exceeds 2000 customers:
IP and Traditional PBX and Key Telephone Systems, Voice, Data, Electrical and Fibre Cabling, Communications Consultancy,
Systems Integration Services, Point of Care Computing to the Health Industry, Project Management, Facilities Management,
Maintenance and Support Services.
Able supplies NEC equipment and administers NEC’s Business Solutions NECare support services to the Victorian regional PBX
market. In addition, Able is a supplier of Voice over Wireless LAN technology to NEC and to its own customers.
Key Financials Able PGS
Year FY04 FY05E FY04 FY05E
Revenue 6,430,000 8,212,000 3,661,000 4,072,000
Gross Profit 4,255,000 5,419,920 2,478,000 2,850,400
EBITDA 336,000 774,260 370,000 542,000
NPAT 356,000 541,982 252,000 372,400
Source: Company, Analyst Estimates
SWOT ANALYSIS
STRENGTHS
Tele-IP have transitioned from a R&D company focusing on commercialisation of IP and subsequent capital based product sales,
to a strategically focused enterprise with an annuity earnings driven business, which will provide consistent cashflow and
contracted future revenue streams.
Tele-IP are divesting themselves of the major sources of previous cash drain such as StratoSonde, thereby reducing operating
expenses, allowing funds to be utilised for maximising growth of the new product and service mix.
Tele-IP has an estimated 80% of the NEC resale business in Victoria, which supports a very competitive position, and provides for
a model that can easily be replicated into the other states with relative ease of integration and support from NEC.
Tele-IP’s rapid and successful integration of PGS and Able, provides confidence in their abilities to successfully acquire and
integrate further NEC distribution and resale businesses. To date, the short-term integration savings of staff and rationalisation of
building leases have been achieved.
Tele-IP is a large player in an expanding niche market serviced by specialists often not found in larger companies. This niche
market, combined with extensive growth by acquisition of key market players, will enable Tele-IP to supplant dominance in the
market segment relatively quickly, with little short- term opposition.
The merged entity has a strong high profile customer base, now with over 4,000 customers.
NEC has indicated key support for this integration, enabling Tele-IP to potentially become the primary NEC vendor distributor in
Australia.
WEAKNESSES
The high volatility of share price and lack of liquidity for large positions may create investor caution. Overall lack of marketability
of the stock, combined with a micro-cap status, also bears on the potential for sustained share price appreciation.
Lack of access to ready capital may result in dilution of earnings by further script issues to fund acquisitions.
Past historic financial and share price performance heavily weigh down on the current share price and market sentiment, which is
expected to have a short term continuing effect until at least the first positive quarterly earnings report.
OPPORTUNITIES
The Medical Service Provider Agreement offers significant upside, particularly later in FY06, where revenues have the potential to
create exponential earnings growth.
Further NEC distributor acquisitions over the next 2 years will add to revenues whilst increasing economies of scale, margins and
increasing bottom line profit.
Telenet Rentals Pty Ltd offers incremental recurring cashflows with predefined margins that allow profit levels to be easily
maintained and forecast over long-term periods.
Strategic partnerships with new technology vendors that enhance and accelerate Tele-IP’s market position, will add strength to
the organic growth embodied in the forecasts.
THREATS
Low technology barriers to entry generally exist in the Telecommunication and Services industry, howev er the barriers are higher
with segments focusing on niche solutions or those with specialized expertise that Tele-IP focus on.
An ambitious acquisition path is planned for the next few years, and Tele-IP must ensure they do not outgrow themselves and that
their company structure can support such a rapid short-term acquisition plan.
NEC vendor support is required for Tele-IP to remain the primary distributor, although this is somewhat mitigated in that Tele-IP is
non-vendor exclusive and may offer alternative vendor products where required.
VALUATION
Using a multi-period supernormal growth discounted earnings model, with weighted average cost of capital as the discount factor.
The supernormal growth period is expected to last for 3 years, and produce 20% growth to base revenues per annum. Growth is
attributed a number of factors including the VOTS (Victorian Office Telephony Services) contract continuing for NEC Business
Solutions Ltd (NEC) and their ongoing contracting for service delivery by the ex Able and PGS businesses, an increasing share of
NEC’s direct sales business combined with additional revenue from PBX maintenance and more focus on carrier connections
across the combined customer base.
Growth by acquisition has not been included in these figures, and should be considered additive.
VALUATION ASSUMPTIONS
The present value of future earnings is discounted using the Weighted Average Cost of Capital (WACC), which has been
calculated at 10.25%.
The Cost of Debt is assumed at an average 10.0%, being 7% net of tax savings.
The Cost of Equity is10.8% derived from the risk free rate (cash rate) of 5.5% and an equity risk premium of 5%.
The expected future L-T Debt ratio is 15%
The expected weighting of Equity is 85%
The terminal value assumes a sustainable growth of 5% in perpetuity
Tele-IP Limited PV Sensitivity WACC +2% Sensitivity WACC -2%
WACC 10.25% 12.25% 8.25%
FY06 0.7891 0.7750 0.8037
FY07 0.6252 0.6032 0.6486
FY08 + TV 13.1290 12.4396 13.8702
Terminal Value (TV) 16.7943 16.7943 16.7943
Value (cents) 14.54 13.82 15.32
EARNINGS
EPS FY06 is expected to be 0.87 cents or 0.52 cents on a normalised basis. Normalisation assumes zero accumulated tax
losses, and zero divestment cashflows. Tax losses have a positive effect of approximately 100% of EBT in FY06 and
approximately 50% of EBT in FY07 before being depleted. Normalised earnings growth is expected to be 22% in FY07 and 27%
in FY08.
Earnings as result of the PGS and Able acquisitions are expected to impact fully by Q2FY06 due to normal delays in trade debtor
receipts.
Acquisitions are expected to contribute approximately $3m to revenues in 2H06, and roughly $10m in FY07. Net profit margins
are expected to be inline with the rest of Tele-IP at 14% on a normalised basis.
Expected royalty commissions from the divestment of StratoSonde are unable to be estimated and remain as upside potential for
future revenues.
Beam revenue growth on a normalized basis from calendar year 2004 is expected to be 40% in FY06, however it is assumed that
growth will fall back in line with the rest of the business at 20% in FY07. Whilst only contributing to 20% of revenues, Beam is
expected to contribute over 40% of NPAT in FY06.
NEC maintenance provider status approved in July 2005 is expected to add approximately $1m in additional revenues for FY06
based on average requirements, with profit margins at 60%.
CAPEX
Beam Communications – international distribution networks in US and Europe.
Further acquisitions of NEC dealerships.
CAPITAL STRUCTURE
Current issued capital is 557,498,507 ordinary fully paid shares. Outstanding options amount to 22,956,000 and will serve to
dilute holdings by a maximum of 4.18% if the share price appreciates past 10 cents. Current dilution is 2,150,000 opti ons, with a
strike price of 2 cents.
OPTIONS
Expiry Ex Price Issued
Jun-06 0.05 456,500
Jun-06 0.05 1,199,500
Dec-06 0.05 1,000,000
Dec-07 0.08 3,000,000
Dec-08 0.08 3,000,000
Dec-09 0.08 3,000,000
Jun-08 0.02 900,000
Dec-06 0.02 1,250,000
Jul-07 0.04 1,150,000
Dec-06 0.05 4,000,000
Dec-09 0.06 2,000,000
Dec-10 0.10 2,000,000
22,956,000
SHARE PRICE DRIVERS
STRATEGY
Tele-IP intends to expand into the flow-on network user requirements afforded by new technologies in laptop, personal
computers, personal digital assistants and mobile phones, which will allow the company to grow and support the services relating
to private and public wireless access infrastructure now and in the foreseeable future. The convergence of the user requirements
of voice and data networks now dictates the provision of services such as Voice over Internet Protocol (VoIP) utilizing the same
physical fabric. Tele-IP has the expertise and the essential tools to provide a comprehensive VoIP assessment service across all
vendor products.
The combination of growth opportunities and the new skills derived from the recent acquisition of Able and PGS provide
significant potential for major synergies and a platform for the company to grow its business, in particular exploiting activity in the
convergence of voice, data and IP networks.
Tele-IP will continue its focus on carrier connections bundled with hardware sale and services and growth of annuity revenues.
The StratoSonde divestment is part of a strategy to focus on positive earnings, and will relieve Tele-IP of the cash drain that has
been prevalent of past.
AQUISITIONS
Tele-IP anticipate that a further 2-3 new acquisitions of NEC dealerships will be concluded and integrated within this financial
year, with a focus on additional synergistic business’s with existing NEC and principle relationships for the following financial
years.
Acquisitions are planned to be funded by a mix of cash and script. Cash will be sourced from retained profits and the balance
may be drawn from additional placements. Directors are mindful of dilution to current shareholders, but are confident as the
business grows; the acquisition targets may be forced out of the market and will resign to accept more favorable acquisition terms
to Tele-IP.
Phase 1 - Integration of PGS and ABLE Victorian businesses. (Completed)
- Open Sydney office for existing business requirements. (Completed)
Phase 2 - Open Hobar t office. Complete negotiations for integration with Qld and SA resellers and commence the
NSW strategy in FY06.
- Complete the national roll out by pursuing 3 further acquisitions in FY07
Revenue from each of these acquisitions is anticipated to be between $2m and $4m annually, with NSW being slightly higher.
This is additive to current projections over the next 3 years.
SPECIALIST PROJECTS/BUSINESSES
Medical Service Provider Agreement
The medical service provider heads of agreement offers products and services that will include all related information technology,
telecommunications and communications hardware and software services. Progress is continuing and is expected to add $5m to
$15m additional revenue in FY06, as thousands of practitioners participate in the initial roll-out of products and services.
Estimates of FY07 range anywhere from 3 to 5 times this level with NPAT expected to be approximately 25% of gross revenues.
This project alone could be worth an additional 0.2 to 0.5 cents EPS in FY06 and 0.5 to 2.0 cents EPS in FY07.
Telenet Rentals Pty Ltd
Tele-IP has established Telenet Rentals Pty Ltd, a company that will provide rental finance for technology hardware to the
market. Rental finance is an incremental margin business, providing for technology hardware to be bundled with maintenance,
installation, service and support components, to provide a single fee per month for all managed services and equipment over
periods ranging from 2 to 5 years.
The incremental revenues from this business have yet to be forecast with any reliability.
The business will also have a positive effect on NTA.
DISCLOSURE & DISCLAIMER: COLLINS STREET SECURITIES LTD
This Research Report was compiled by Mr Donald Ellett, an independent analyst and a Char tered Financial Analyst
Charterholder. Mr Ellett will receive a fee from Tele-IP Limited for writing the report as will Collins Street Securities Pty Ltd for
facilitating its production.
In accordance with Section 949A of the Corporations Act 2001 this document contains general financial information only. Neither
the author of this report, nor Collins Street Securities Pty Ltd took into account the investment objectives, financial situation and
particular needs (“financial circumstances”) of any particular person. Recipients of this document should assess whether any
advice contained in this document is appropriate for their financial circumstances, contact their Collins Street Securities Pty Ltd
adviser, or their own adviser.
Collins Street Securities Pty Ltd and its directors advise that they may hold securities, may have an interest in and/or earn
brokerage and other benefits or advantages, either directly or indirectly from client transactions in the company mentioned in this
report.
Collins Street Securities and its directors do not accept any liability for the results of any actions taken, or not taken on the basis
of this report, or for any negligent misstatements, errors or omissions, whether express or implied.
DECLARATIONS
Mr Ellett, the author of this report, consulted with Tele-IP Limited for assistance with verification of facts and access to
industry/company information. It has been prepared from ASX reports and other publicly available information, and independent
of the Board and management of Tele-IP Limited.
Mr Ellett holds a beneficial interest in Tele-IP Limited.
Whilst this document is based on information and assessments that are current at the date of publication, neither Mr Ellett nor
Collins Street Securities Pty Ltd has any obligation to provide revised assessments in the event of changed circumstances. Tele-
IP Limited has subsidised the production, printing and distribution of the report in accordance with normal industry practice. 28
October 2005.