PAC Partners’ price target for Vonex implies share price upside of nearly 100%

PAC Partners analyst Mark Yarwood has run the ruler across the full service telecommunications group Vonex (ASX:VN8), attributing a 12 month target price of 20 cents to the stock, implying share price upside of nearly 100% relative to Monday morning’s opening price of 10.5 cents.

Noting the group’s national network of channel partners, Yarwood is of the view that the company is set to scale up very quickly with its diversified product suite including voice, data, wireless and PBX, targeting a mix of retail and small to medium businesses, a strategy that should drive strong revenue and earnings growth.

He is forecasting income to increase from $12.3 million in fiscal 2020 to$22 million in fiscal 2021 with the latter translating into EBITDA of $2.4 million, implying earnings per share of 0.8 cents.

As indicated below, this sees the company trading on a PE multiple of 13.1 which appears conservative given earnings per share are expected to increase by 38% in 2021 and 139% in fiscal 2022.

Of course no one can guarantee future market movements, but PAC Partners' initiation is a strong sign / validation of what Vonex is doing and how it is going about getting things done.

Driving organic growth

In discussing Vonex’s key growth drivers over the next few years, Yarwood said, ‘’The group’s channel partner strategy has helped VN8 scale up rapidly, with the market for SME telco services running at $5bn+ we see plenty of headroom for the company to grow.

‘’The latest communications report from the Australian Communications and Media Authority (ACMA) forecasts industry-wide revenue to grow from $44 billion to $47 billion by 2022.

‘’The recent acquisition of 2SG Wholesale’s business and assets this calendar year demonstrates that management is capable of pursuing and executing a merger and acquisition strategy to build out cross-selling opportunities and supplement their organic growth profile.’’

Defense wins premierships

Apart from possessing a strong growth profile, Yarwood is also impressed with the company’s ability to continue to prosper despite a challenging economic and industry environment.

On this note he said, ‘’VN8 is operating in a defensive part of the market and we expect a rapid acceleration away from on-premise to solutions like VN8’s cloud-based PBX solution which should see a continual uptick in registered users.

‘’Current events see an ever increasing need to offer flexible off-premise solutions.

‘’The recent 2SG transaction highlights management’s appetite and ability to acquire smaller telco companies which we see as rich in opportunities.

‘’2SG was an asset rich purchase given its relationships with Tier-1 carriers, 100+ wholesale customers, along with direct access into NBN, offering the ability to cross-sell with the potential to build out a direct NBN presence.’’

Yarwood also noted that the group’s channel partner strategy should continue to facilitate geographic expansion.

The total addressable market builds through the greenfield and brownfield expansion of NBN as enterprise customers migrate across to NBN, with activations running at 6.5 million implying 3.5 million still to activate.

Activations are expected to accelerate as customers run out of time before the PSTN copper is decommissioned.

Record first-quarter sales in March

Vonex has started off 2020 on the front foot, having not only completed the acquisition of 2SG, but also recorded strong growth from its established businesses.

The company announced record sales in March which contributed to an all-time record quarter with total contract value of new customer sales for the three months to March 31, 2020 standing at nearly $2 million.

To illustrate how the company has grown over the last 12 months, March quarter sales were more than double that achieved in the three months to March 31, 2019.

Consequently, Yarwood’s strong growth projections over the next few years appear well within the company’s grasp.