Ann: Trading Halt, page-41

Morgans:

Exetel acquisition can strategically & financially excelSLC has reaffirmed FY21 guidance. This was expected, but the unexpected was SLC acquiring the last sizable private Retail Service Provider (RSP), Exetel.The acquisition is funded via capital raising, is at a reasonable purchase price, and makes good strategic sense. Exetel is a 100% organically grown RSP. It’s a clean business that should bolt into SLC’score backbone network. Getting more traffic on the SLC backbone drives margins higher and is the core business growth plan. We upgrade our forecasts materially to reflect this acquisition. Our Target Price increases to $1.33 and we retain our Add recommendation.SLC acquires Exetel, the last sizable retail service provider ▪SLC has undertakena $100m raise ($49m placement + $51m pro-rata accelerated non-renounceable entitlement offer). This,plus $10m worth of SLC sharesissued to the Exetel vendors, fundsthe acquisition of Exetel.▪The acquisition adds significant scale to SLC, generating $150m of revenue and $16m of EBITDA on a PF, post synergies basis. It takes SLC’s customerbaseto 155,000 (from ~50,000pre-acquisition).Consumer accounts for 56% of revenue. ▪Exetel is profitable and generates ~$6.5m of FCF on a standalone basis (after paying rent and tax but before any of the benefits of adding it to the SLC stable).▪There are meaningful synergies with ~$2.5m to be realised in FY22 and ~$5m to be realised in FY23. We expect SLC to invest some of these savings back into the business to drive longer term earnings growth. We still forecast SLC to generate substantial EBITDAand Free Cash Flowgrowth over the next few years. ▪This deal makes strategic sense, adding more traffic and therefore more margin,to SLC’s sizable but underutilised network.Deal metrics ▪SLC pays $110m ($100m cash via a capital raise plus $10m worth of SLC shares). ▪This equates to 10x FY21 EBITDA and 6.9x EBITDA post synergies. This is a reasonable multiple for all parties involved.▪117m new SLC shares (30% more) get issued. $10m issued to the vendors (at $1.01 per share), $49m via a placement and $51m via an entitlement (at 93cps).▪We forecast SLC to now generate normalised FCF of more than$10m (post rent)in FY22 and see this FCF more than doublingin FY23, as synergies kick in.▪SLC has sizable tax losses which meansunder the combined entity, no tax is payable, for the immediate future. Given Exetel’s limited capex and rent (<$2m pa), SLC has made a financially wise acquisition with a ~9% free cash flow yield before and 13% free cash flow after synergies.Forecast and valuation update▪The deal is materially accretive and results in ~50% upgrades to our normalised EBITDA forecasts and ~30% upgrades at the EPS level. Investment view:Add ▪Add recommendation retained, Price Target increased to $1.33 per share.Price catalysts▪Achievement of FY21 guidance was a key price and confidencebuildingcatalyst. This has been achieved so the next catalyst relates to investors gaining confidence in the FY22 outlook. We would expect SLC to provide FY22 revenue and EBITDA guidance when they release their formal FY21 result in August2021. Risks▪Acquisition risk –SLC’s acquisition of BigAir proved to be problematic. All acquisitions have theserisks. However, we see acquisition risk as lower for Exetel given it is not a roll-up storyand has gone through a long and non-competitive purchase process. Exetel is a 100% organically grown business, their business model fits well with SLC’s core business strategy, and it will leverage SLC’slarge but largely empty fibre network. Gettingmore traffic on this network makes sense. ▪SLC is a growth businessand needs to invest to grow. The amount of costs being invested in growth is unclear. We hope to have captured this in our forecasts.