up 15%, page-7

re: up 15% (report) Summary
NTG is a telecommunication solution provider selling a bundled suite of business communication products and services under the Synergy brand. It commenced business in 1992 and in December 2000, listed on the ASX. The company has a sound balance sheet and is growing by making small bolt on acquisitions.


Investment View
NTG has since listing, performed strongly with a string of positive achievements, but recent unfavourable media commentary about certain NTG business practices, (though in the main unsubstantiated), has driven the share price down. It's difficult to interpret the impact such allegations might have on NTG’s business but we do anticipate some backlash. However, we believe the share price correction is an overly harsh adjustment and maintain a BUY.


Earnings Outlook
Earnings growth will be driven by NTG’s ability to develop its newly acquired businesses as well as its continued success at cross-selling products and services to both new and existing customers. We anticipate to see some margin contraction but we are forecasting FY03 NPAT growth of 42% to $14.9M.


Key Financial Issues
NTG has a very sound balance sheet. As at 30 June 2002 it had net cash of $16.6M. The company has minimal capex requirements of about $1.5M per annum and is expected to pay a fully franked dividend of 4 cents per share offering a yield of 3.3% in FY03 up 33% pcp. Assuming NTG does not make further acquisitions in FY03, which is unlikely, we would expect it to generate free cash flow of $12M.


Primary Share Price Catalyst
NTG aims to provide growth through acquisition, purchasing small bolt-on companies and extracting value by utilising the group’s purchasing power and the cross selling of products. While this strategy affords potential growth there is the associated risk that management struggles to control and drive forward these separate businesses. Since listing NTG has made nine acquisitions, solid evidence that these purchases can provide sustained earnings growth will drive the share price up.


Secondary Share Price Catalyst
Already operating on quite thin margins, these could come under pressure from three areas in the next 12–15 months: - increased competitive pressure in the SME market – reduced reseller product purchasing power with NEC and Alcatel - product mix shifting toward lower margin products and services (eg Computer hardware). Significant margin contraction would be a share price negative if it impacted earnings growth.


Strategic Direction
NTG has a simple customer driven business strategy focusing on the provision of a suite of technologically proven telephony products to the SME market. NTG intends to grow through acquisition making small bolt on acquisitions (<$2M) of provincial generally profitable service providers and system integrators expanding revenue and margins in these businesses by utilising its direct marketing team and leveraging its product purchasing power, which exists with Alcatel and NEC.


Risks
Though NTG`s small bolt-on acquisition strategy provides potential growth opportunities, the integration and management of these acquisitions may prove to be problematic resulting in cost escalation, margin contraction and defocusing management to the detriment of NTG’s core business.


Capital Structure
In December 2000, the company listed on the ASX. The IPO raised $14.8M at an issue price of $0.50 and there are approximately 120M shares on issue. NTG`s founders hold 45% of shares on issue. The company operates a DRP with a 5% discount rate on shares. NTG has established EXOPs and ESOPs and there are currently 2.75M options with strike prices ranging between $0.50 - $0.75.


Historical Price Trends
The stock listed in December 2000 at $0.50. Over the past year the stock has traded strongly rising by over 120% and out performing the All Ordinaries index by 5%.


Management
Managing Director - Anthony Hakim founded the company and has driven the company forward from being a small provincial systems integrator into an entrepreneurial multi faceted communications company. In FY01 the company delivered a pro forma profit of $6.3M 24% ahead of prospectus expectations. The key challenge for management is to manage the various acquisitions and deliver sustained earnings growth.

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