Capital H Research - 25 November 2016. Spirit Telecom....

Capital H Research - 25 November 2016.

Spirit Telecom.

http://www.capitalhresearch.com.au/2016/11/25/spirit-telecom-asxst1/

The company is led by a quality management team with significant skin in the game as the largest shareholders. Their experience suggests they should be well equipped to build a successful brand, grow Spirit’s market reach and integrate acquisitions.

Acquisitions will play a critical role in the Spirit strategy. The company finds themselves in a favourable position to consolidate the smaller end of the market with attractive multiples on offer and the funding (debt and equity) available to do so. The balance sheet is strong enough to allow further debt funding for the first one or two smaller acquisitions while the market is likely to provide strong support in the event of future capital raisings. Most importantly, the significant stakes of the two founders, as well as their options that remain well out of the money, suggest they will minimise dilution as it is in their best interests to do so.

While acquisitions will provide the real kicker to growth and potentially the game changer (similar to what occurred for MyNetFone or BigAir), the attractive aspect of Spirit is that the strong organic growth alone is enough to justify taking a close look. Revenue is growing at ~30% p.a and management have indicated FY17 will see strong growth in gross margins and EBITDA. Given the company is in the early stages of growth and recently turned profitable it is the view of Capital H that the margin of safety is large enough to more than justify taking a decent stake.

In recent weeks the stock has performed very well. While a pause or pullback is normal, as we move closer to the start of FY18 we expect the stock to continue to re-rate as the market wakes up to the earnings potential for Spirit. If an acquisition was made in the near term that could bring the share price catalyst forward.

The above was enough for Capital H to justify making Spirit a large position for the Fund and we look forward to watching how the growth story plays out as well as what management acquires in the near term.

Gw