Eureka Report

Eureka have a NTC as a 'hold'.

'NetComm Wireless (NTC)
It has been five months since we first flagged the potential for NetComm Wireless to win a large contract in rural broadband to expand on its successful work with the NBN (see NBN rolls out higher earnings for NetComm, June 29). Since then, the NTC share price has rocketed by more than 280 per cent.
Last week, we indicated that the market was hotly anticipating NetComm to make an announcement on this front (see NetComm flies as Capitol slips, November 23). On November 25, that announcement came — and it’s a genuine game-changer.
NetComm has been successful in its tender to provide devices to telco giant AT&T’s US rural broadband project. These devices will let up to 13 million households in rural areas across the US connect to a fixed wireless network that AT&T will build.
We broadly agree with managing director David Stewart’s comments that this is “a key milestone in NetComm Wireless’ global growth strategy for regional broadband… we see potential for this technology solution in many different countries”.
Earnings impact
The value that NetComm extracts from this contract will depend on a variety of factors. Some are dependent on consumer behaviour, while others remain confidential. As a refresher, here are the variables — taken from a report AT&T lodged with US regulators.

It’s worth noting that the US opportunity extends beyond these initial figures. To begin with, AT&T would likely extent the contract beyond its initial four to six year duration, assuming NetComm does as good a job in the US as it has for the NBN. That could see the take-up rate rise to as high as 90 per cent as late adopters grasp the value of the service.
Then there is the concept of technology refresh. As NetComm continues its investment in research and development, a service that might commence offering download speeds of 25 Mbps should develop over a few years into a faster service provided by a new device. If we assume this technology refresh to come over five years, it could boost NetComm’s device sales by more than one million units per year, kicking off when the initial contract is winding down. This could give NetComm’s program an ongoing lifecycle as its rollout peaks — giving its contract almost a perpetual quality.
Beyond the AT&T contract that should cover 13 million homes, there are another 20 million homes in the US that could become available in future through other telco providers.
From Australia, to America, to the world
The Boston Consulting Group values the rural broadband market at around $80 billion. NetComm is close to cementing the first-mover advantage in this sector.
In several places around the world, telco operators are replacing their copper delivery networks with fibre. They are trying to solve the problem of how to economically deliver good bandwidth to rural customers beyond the reach of a fibre rollout.
Having successfully demonstrated its capability in solving this problem for the NBN, and now having won the contract to do a larger project for AT&T, NetComm is in the box seat to win the next prize — a contract to cover 750,000 rural households in Ireland.
If NetComm wins that contract, it is unlikely that any competitor will have an in-field demonstration case of its capability for at least three years. That would put NetComm streets ahead to win more rural broadband work in Mexico, Latin America, Japan and across Asia.
At gross margins of around 20 per cent, this work does not attract super profits and therefore should not see competitors flocking to take away NetComm’s work. The firm now has a golden opportunity to own the sector globally.
We have updated our model to account for the present value of the AT&T contract, which we forecast as $1.24 per share. We have added a premium for the likelihood of winning further contracts in rural broadband. Our valuation rises from $1.38 to $2.49 per share.
Today we reiterate our hold rating and point out that NetComm’s strong price action has propelled the stock into “ten bagger” territory — up nearly 1,000 per cent at last week’s peak from when we initiated on NTC with a buy rating at 34.5 cents (see Earnings season: Expect the unexpected, February 5, 2014).
We want to retain some exposure to NetComm’s growth prospects but it would be prudent to take gains off the table here. On that basis, at tomorrow’s open we will trim three percentage points from our portfolio holding in NTC. The way we see it, having bought low, we’re now lightening up with the stock on a high — while its prospects remain rosy.