BAILLIEU HOLST RESEARCH - 27/5/16. Netcomm Wireless Limited...

BAILLIEU HOLST RESEARCH - 27/5/16.
Netcomm Wireless Limited (NTC)
We note that under an agreement with the US Federal Government, AT&T will receive
US$2.5bn in funding over six years to upgrade internet connections to 1.1m rural homes
and businesses. This covers 18 states and will provide speeds of at least 10/1 Mbps. The
contract does not stipulate the type of connection, but FWB is the logical solution, due to its
relatively low costs and reliably fast speeds. It is also worth noting that other US telcos have
agreed to similar deals, potentially providing more customers for NTC’s products.
 If AT&T is indeed the US telco in question, the size of the deal with NTC could increase
substantially if the company decides to proceed with a plan announced in 2015. As part of
its $US49bn acquisition of pay TV provider DirecTV, AT&T proposed to offer upgraded
internet services, with speeds up to 15-20Mbps, to 13 million customer locations in 48
states.
Blue Ocean 23/11/16.
NETCOMM WIRELESS COMPETITVE ADVANTAGE
NetComm Wireless has now won all of the three large tenders it has competed for in the high speed broadband sector, namely the NBN fixed wireless contract with around $350 million in total revenue; a contract with a large North American telco (which we suspect to be AT&T), potentially worth over $1 billion in total revenue; and the NBN FTTC contract worth between $110 million and $485 million in revenue over a number of years.
In our opinion, this 100% success rate almost guarantees that NetComm Wireless will be included in all major discussions that involve the rollout of fixed-wireless and FTTC technology around the world. These conversations could lead to their involvement in any future tenders and their success rate to date suggests the Company could win at least additional major contract in the future.
DCF VALUATION
We value NetComm Wireless using a Discounted Cash Flow approach. Our DCF valuation has increased to $4.70 per share from $3.90 per share as the net result of the forecast changes listed above.
The key assumptions underlying our valuation are a Beta of 1.2, WACC of 9.9% and terminal growth rate of 3% pa from FY21 (which arguably is conservative given the projected industry growth rates).
STRATEGIC VALUATION
The opportunities available to NetComm Wireless in the high speed broadband market are numerous and very large. The potential size of this market is upwards of US$80 billion.
Our Strategic Valuation assumes NetComm Wireless could win additional contracts worth approximately A$500 million in revenue over time, most likely from an increase in the size of the Australian FTTC contract and the US fixed wireless contract.
Our Strategic Valuation has increased to $9.00 per share from $6.00 per share.