From M&A to new internet regulations, here’s WebCentral’s CEO on its major ‘upside opportunities’
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Demase said the WCG management team is focused on ‘doubling hosting revenues’ over the next 12-24 months.
Diversified data centre and web hosting group WebCentral (ASX:WCG) is laying the groundwork for strong long-term growth, as its marquee merger with 5G Networks (ASX:5GN) proceeds towards completion at the end of this year.
The merger, first announced in July, will create an ASX 300 company with the size and cross-selling opportunities to build material scale.
Combined with WCG’s recent takeover offer for Cirrus Networks (ASX:CNW), it’s a busy and exciting time for the company, and Stockhead caught up recently with MD Joe Demase to get an update on the near-term outlook.
One of the early synergies the combined group is looking to capitalise on takes advantage of the respective strengths of both companies.
WCG provides web hosting services for an established small business customer base of more than 330,000 companies that it previously managed through an external cloud provider.
That dovetails with 5GN’s core business offering – integrated cloud services managed through its own network of physical data centres.
“We’ve been progressively moving (WCG’s network) onto our private cloud, and consolidating some of the rack space and cloud capacity they’ve got in other data centres,” Demasse said.
“Bring that WCG infrastructure onto our platform, we can also beef up some of the hosting specs so customers get better bang for their buck.”
“And there’s definitely cost savings compared to using someone else’s cloud infrastructure, so that gives us a real competitive advantage as well,” he said.
WCG is also ideally positioned to benefit from pending changes to Australian internet protocols, as governing body auDA gets set to release .au domains.
By early next year, Australian companies will be given the choice to shorten their domains from ‘.com.au’ and ‘net.au’ to the suffix ‘.au’.
And Demase said it represents an “significant upside opportunity” for WCG in FY22.
“We think that around 80% of our client base will be able to add a .au domains if uncontested, and it will be a really clean refresh for the market,” Demase said.
In that context, the WCG management team estimates those industry tailwinds could flow through to a $4m-$6m increase in recurring revenue from March ‘22.
“It will give companies an opportunity to refresh their name and potentially update their website alongside that.”
“So that could be quite a big revenue driver for us, because we think a lot of companies will keep both addresses — .com.au and .au,” Demase said.
In addition to its operational momentum, WCG also continues to strengthen its position with respect to its on-market takeover bid for Cirrus Networks (ASX:CNW).
While the CNW management team is yet to engage on further due diligence discussions pertaining to the bid, WebCentral has now increased its strategic stake in the business to over 18%.
In a note to shareholders last Wednesday, WCG advised that it continues to see material strategic value in its decision to pursue control of Cirrus.
“WebCentral knows and understands the IT services business undertaken by Cirrus and believes it can be turned around and operated more profitably,” the company said.
While Cirrus commissioned an independent expert report that valued its business at 3.8c – 4.2c per share, in the absence of further due diligence, WCG stands by its current valuation bid of 3.2c.
“In any valuation calculation, you’ve got to normalise the one-offs. The independent valuation actually cited potential synergies relating to our takeover bid, along with one-off items such as JobKeeper and tax losses,” Demase told Stockhead.
“Our potential synergies or savings can’t be attributed to the valuation of the company. So when you strip it back and assess CNW’s operations in a normal year, our view is that it puts the company’s actual value closer to the 2.8c level it was trading at when we first made the bid.”
In addition, shares in CNW haven’t climbed to the level of the independent report, and are currently trading at 3.2c.
So with a key M&A move still in play, WCG has exciting opportunities to pursue growth through both organic and inorganic channels.
“We think can double WCG’s hosting revenue growth over the next couple of years, from around $10m to $20-$25m,” Demase said.
“There’s the opportunity in web domains, but we’re looking at launching Office365 backups and we’ve also got an NBN product in the works, which will combine web hosting and internet access all in one package.”
“Through this (WebCentral/5GN) merger we’ve now got 330,000 customers we can go out to market with and start offering NBN-type services.”
“So that’s where the organic growth is going to come from, and we’re pushing ahead aggressively with all of that regardless of what happens with the merger.”
This article was developed in collaboration with WebCentral, a Stockhead advertiser at the time of publishing.
This article does not constitute financial product advice. You should consider obtaining independent advice before making any financial decisions.