Here’s how Webcentral adds value as part of 5GN’s data infrastructure network
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5GN MD Joe Demase spoke with Stockhead about WCG’s value proposition in the wake of last year’s acquisition.
The company is coming off a disruptive year, which saw 5GN fend off a takeover offer from the US-based Web.com before winning control of WCG in September.
As part of the resulting deal, WCG has continued to run as a separate listed company, with 5GN MD Joe Demase overseeing the operations of both businesses.
With shares in WCG up by more than 200 per cent since the deal was announced, Stockhead caught up with Demase this week to get his views on the growth outlook.
Demase highlighted that with the two businesses joining together, 5GN has an opportunity to leverage their respective strengths to add value.
“5GN is a market leader in network services and cloud infrastructure. Webcentral is a leading Domain, Email and Web Hosting Provider, but really their core strength is in software development capability,” he said.
“So as a business, WCG drives the majority of revenues through its portal, so it’s more of an automated structure with high volume and low touch.”
Through the combined entity, 5GN not only expanded its customer base but it can also drive distribution access to an additional 330,000-strong network of WCG users.
Demase said the group also has an expanded market opportunity, given that WCG’s client base is primarily comprised of SMEs while 5GN serves enterprise clients.
“If we want to launch a new product, in conjunction with our network which serves around 2,500 customers, we can put it on the WCG portal that reaches more than 330,000 customers.”
Webcentral’s technology also positively impacts how new customers interact with the 5GN service, by automating different functions such as client billing.
“We’ve taken over running the cloud infrastructure component, but we’ll also leverage WCG’s dev-ops capability to automate processes,” Demase said.
“WCG makes a margin and 5GN makes a margin. So while WCG is a significant new Enterprise client , we also bought in a gateway to that smaller end of the market where they’ve really got a strong presence.”
While 5GN’s acquisition of Webcentral gives it an opportunity to further drive revenue growth in the year ahead, Demase said the market hasn’t been as quick to recognise the value proposition following the battle for control of WCG which played out last year.
That included the acquisition of a strategic stake in the business by 5GN, to fend off a takeover offer for the business priced at ~12c per share by Web.com.
With WCG shares now trading at around 50c, Demase said the company has been vindicated in its efforts to prevent a fire-sale of WCG’s core assets.
And the business has now built it an expanded service offering, while maintaining its strategy of vertically integrating its infrastructure network – a crucial driver of further growth, Demase said.
“In the telco space, unless you own the infrastructure, your margins are quite restricted,” he said.
“Think of a cloud provider like Microsoft — you might start off with 30 basis points (0.3pc) of margin, and they have the leverage to slowly turn the dial down on the product you get so they can make more (margin).”
But once a company has built out its own data centre and fibre infrastructure like 5GN has done, margins go “through the roof” Demase said, to more like 80-90 per cent.
“Having your own infrastructure really protects you from losing customers in the future, or just being a seller of someone else’s infra which is always only a short term margin-squeeze model,” he said.
And while 5GN had to stay aggressive on the acquisition front to get control of WCG, Demase said 5GN’s current market cap of around $140m is a material discount relative to its earnings.
Adjusted for a $40m debt facility extended to WCG and its shareholding in the company – which has now increased 4x to $40m – Demase said the market is valuing 5GN’s core business at just $60m.
“We’re doing EBITDA per half of more than $6m, and we’re on track to do $13m-$15m for the full-year,” he said.
“So right now we’re valued at a multiple of only 4x core earnings for the balance of the business if you exclude the debt and equity related to WCG.”
Even adjusting for the investment in WCG, the business is still only valued at 10 times, which is notably cheap compared to industry standards.
The net result is that Demase said 5GN has the potential of a significant re-rating once the benefits of its WCG acquisition become clearer to the market.
“This was a complex transaction, but we wanted to get it done because it had a lot of advantages. And I think the market will see that as we report results through the course of this year.”
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.