This sector is so boring you’ve probably never even thought about investing in it
When you send that hilarious doggo meme to your mate via Whatsapp you don’t think about how it’s going to get there, just that you get two blue ticks and a “Bessie is typing…”
The underlying information highways are the new delivery service for everything from our most private moments to top secret documents.
But the companies that build and run these modern digital thoroughfares are not nearly as exciting — to your average investor at least, judging by the dire share prices of most.
And yet the Australian arm of Canada bank RBC has, from the dizzying array of tech small caps on the ASX, picked just two companies they think will outperform when December quarterlies begin to roll in. And they’re both network stocks.
RBC analysts think cloud comms provider Megaport (ASX:MP1) could hit $5.50 and shares in the wonderfully named Asia-Pacific fibre network owner, Superloop (ASX:SLC), could make $3.50 by the end of June.
They’re forecasting profits and revenue to rise — significantly, for the former, on the back of an expansion into North America.
These two small caps aren’t the only two alternative ‘network stocks’ in Australia, even though you’d never know with Telstra, Vodafone, Vocus and TPG hogging the news limelight, and some of the 12 we found are creating their own centres of gravity.
Following the poles and wires
What we’re talking about here are not the general SIM card sellers, but the companies that build the digital and physical ‘poles and wires’ that will deliver your meme.
Most are B2B operators providing the digital roads for businesses, not consumers (so if they’re delivering that doggo message to Bessie, you’re clearly sending it on work time).
Mobilicom (ASX:MOB) is one of these building private 4G networks for oil rigs, underground robot comms and even private police networks. Field Solutions (ASX:FSG) builds networks in remote and rural areas.
This telco niche is just as littered with good companies and bad as any other, say Capital H Management boss Harley Grosser, one of the few analysts to follow it closely.
He follows 5G Networks (ASX:5GN), OverTheWire (ASX:OTW) and satellite phone network provider Beam Communications (ASX:BCC) closely, and says he’s looking for grow via acquisitions.
There is a mid-tier gap in telco-land for small caps to grow into, as the mid-sized businesses have been take out by the Telstras and TPGs, Mr Grosser says.
He says smaller private companies can be acquired for 4-5x EBITDA when the public business is typically trading higher, making acquisitions cheap. Costs can be carved out, and there are opportunities to cross-sell products.
5G Networks boss Joe Demase says cross-selling is exactly what they intend to do with the 2500-odd business customers they now have.
5G Networks bought Inabox’s (ASX:IAB) direct business last year and Asia Pacific Telecommunications Group, while OverTheWire continued an acquisitive attitude by eating two smaller companies. MNF Group (ASX:MNF) is following a similar strategy.
TMT Analytics frontman and tech expert Marc Kennis says successful network companies distinguish themselves by the service they can provide.
Vonex (ASX:VN8), for example, supplements its own fibre cable network with a range of internet and phone services but specifically for small and medium businesses. Speedcast (ASX:SDA) on the other hand provides provides hyper-secure comms for clearly military applications, such as “Airborne Intelligence, Surveillance and Reconnaissance”.
While nothing is totally safe from recession, network providers might be a safe niche to park if the first recession in 28 years actually happens.
“The year ahead is good — if you’re not doing consumer, you’re not impacted by NBN, 5G networks rollouts, the Telstra/Vodafone merger,” 5G’s Mr Demase told Stockhead.
He believes they’re reasonably insulated from a downturn: as more people more their data to the cloud, demand for network capacity will continue to grow.
Mr Grosser reckons any downturn will be an opportunity for cashed-up small caps to buy less prepared rivals — and a tougher economy will force the latter to look for buyers.
“This sector is definitely less exposed to a weaker economic environment. The market has already started to take a liking to it,” he said.