In the post-COVID economy, telco sectors such as broadband and cloud services are facing significant disruption — and ASX investors are watching closely.

Tech innovation and demographic shifts are two key trends driving that shift, both of which provide opportunities for smaller players looking to pick up market share.

This February summary on Stockhead highlights the momentum of recent entrants in multiple telco segments, from wireless connectivity to cloud services.

And it’s reflective of some “fragmentation” across the $35 billion sector, says Harrison Quirk — analyst at advisory firm Evolution Capital Advisors.

There’s now multiple examples of “smaller companies acting as disruptors, and quickly winning market share from legacy institutions,” Quirk said.

“That’s effectively catalysed this fragmentation, so we still see a lot of potential for these smaller players to further disrupt this space.”

Speaking with Stockhead this week, Quirk and ECA managing director Stephen Silver provided an overview of those sector tailwinds and highlighted two emerging companies that are primed for strong share price appreciation.

On the move

For starters, telecommunications is one of a number of sectors adjusting to changes in population demographics in the wake of the pandemic.

The expansion of regional growth corridors outside of the capital cities is reflected in changing property values, with house prices in regional centres doubling that of capital cities over the past 12 months.

“There’s a lot of human geographical forces at play in terms of that decentralisation and urban sprawl,” Quirk said.

“That’s been fuelled in part by these working from home patterns, and we’re seeing the growth of these rural epicentres.”

As a result of that shift, the demand for connectivity — whether it’s 4G, 5G or NBN services — has also grown.

And those tailwinds are particularly evident for small cap telco Field Solutions (ASX:FSG), Quirk said.

Broadband to the people

FSG’s core focus is on building out connected broadband networks across rural, regional and remote Australia.

In the wake of some key contract wins, shares in the company have climbed from below 5c to around 15c so far this year which leaves it with a market cap of around $80m.

But for Silver, the company’s growth trajectory means it’s on track to “comfortably be a $200m company by the end of 2021”.

While the big three telco providers — Telstra, Optus and Vodafone — provide coverage to 99pc of Australia’s population, they only cover around a quarter of the actual land mass, ECA says.

FSG is looking to capitalise on that discrepancy by setting up broadband infrastructure for remote regions. And as a small cap disruptor, it’s benefitting from large-scale government spending initiatives.

Last month, the company announced it had been awarded $20.475m to build out network infrastructure in five different states, as part of the federal government’s $82m Regional Connectivity Program Fund (RCP).

It means FSG is the first telco player outside of the big three to receive major government funding, which Quirk described as a “huge validation” for its growth strategy.

Once the RCP networks are constructed, FSG said it expects to generate additional average revenues of $12m per year for the next seven years, starting in the second half of FY22.

To Quirk, broader government investment in the space could still be in its early stages, and FSG’s first-mover advantage will leave it well-placed to participate in future projects.

“The team at FSG estimate that there’s going to be about $600m in total funding across federal and state initiatives,” Quirk said.

“Even if you get, say, 10% of the total, that’s still an additional $60m in play in the near term. So I think there’s definitely a lot more scale this business can achieve because they’ve established themselves as pioneers in the space.”

Roll-up play

At the larger end of the telco spectrum, the ECA team also like the look of high-speed broadband provider Uniti Wireless (ASX:UWL).

Since listing in February 2019 at 25c, shares in UWL have now 10-bagged, with the stock currently trading just shy of $3.

Given the broader tailwinds behind telco disruptors, Silver said that growth largely reflected the UWL management team’s ability to execute on a growth-by-acquisition strategy.

“UWL have been a huge roll-up play; they’re doing a fantastic job of it,” Silver said.

Both Silver and Quirk pointed to the company’s $694m takeover of OptiComm last November — after winning a bidding war with fellow telco provider Vocus Group (ASX:VOC) — as a highlight of UWL’s recent M&A activity.

“Obviously Vocus coming out of that space helps them, and I think the view in wider markets is that they’ve paid ‘unders’ for it, so look at that (acquisition) as very much earnings accretive,” Silver said.

Migration of the Opticomm broadband platform is set for completion by June, with UWL also planning the migration of Telstra’s Velocity broadband assets it acquired in December.

As part of that deal, Telstra agreed to operate as a Retail Service Provider (RSP) on Uniti’s FTTP network.

For Quirk, UWL M&A activity is evidence of a company that can build out a complementary product portfolio.

“If you look at the Velocity deal, they (Telstra) agreed to come on as a partner, which really increases the amount of customers — both households or commercial clients,” he said.

“It’s all very synergistic in the sense they’re building out an advertised portfolio of telecom services.”

Disclosure: ECA managing director Stephen Silver owns a position in FSG.

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