Deutsche Bank downgrades SLC on disappointing outlook - PT $1.28

Caught in an infinite loop

Downgrade to Hold, PT $1.28

This result capsoff a period of high mgmt turnover, lacking in strategic clarity. Mgmt'sintention to refocus the group on its core network and broadband businesses isa step back, but in the right direction. However the continued lack of salesmomentum on SLC's HK and AU networks is concerning. Despite the valuationsupport, with the stock trading on ~1x NTA, we feel it will take time for SLCto demonstrate traction on its new strategy. Downgrade to Hold.

Slow salesmomentum, $31m cap raise to fix balance sheet

1H19 revenue of$60m, up 18% YoY on a LFL basis and 3% below DBe. Underlying EBITDA of $4.5m iswell below pcp ($7.5m) and DBe. Margins impacted by increased network andemployee costs. Sales momentum was weak in Connectivity (particularly in HK andAUS) +7% on pcp. Managed Services revenue declined 22% on pcp, with mgmtrefocusing on network services. SuperBB revenue grew 107% on pcp and was aheadof DBe. Net debt increased to $89m on weak OCF ($2m) and capex spend of $30m.The company announced a $31m capital raise to reduce ND, provide WC and fundfurther capex.

Outlook andearnings changes

SLC providedEBITDA guidance for FY19 of $13-18m (DBe ~$24m post AASB15 adj) and FY20 of$26-30m. Mgmt noted some greenshoots in sales momentum in the half andhighlighted cost-out across the group to be realised over 2H19 and FY20. Wehave reduced our FY19f EBITDA by 58% to $13m on accounting

changes and slowsales momentum.

Valuation andrisks

Our DCF based PTreduces to $1.28 (prev $2.80) driven by earnings changes. Key inputs: WACC11.7%; & TGR 3.5%. Upside risks: corporate activity, strong sales, strategicdeals, industry momentum. Downside risks: competition and pricing, loss ofsales momentum, network disruption & FX.