Pac Partners sees 75% share price upside in Vonex

A fortnight ago, telecommunications innovator Vonex Limited (ASX:VN8) provided a promising update on its retail business with the group achieving total contract value (TCV) of new customer sales of $3.7 million in the June half.

This represented year-on-year growth of 65%, illustrating its resilience during the height of the COVID-19 period.

Of further encouragement was the exceptional growth in annualised recurring revenue which grew 89% to $16.4 million in fiscal 2020.

This news was well received with the company’s shares surging nearly 20% from just shy of 10 cents to 11.5 cents.

However, analysts at PAC Partners believe there is significantly more upside, and the broker has set its price target at 20 cents per share, representing a premium of 75% to the company’s current share price.

As well as citing the recent strong operational performance, the broker noted that the last capital raising has boosted the group’s cash to nearly $5 million, leaving it well-placed to fund growth initiatives in fiscal 2021.

Upcoming earnings catalysts

PAC Partners pointed to a number of factors that are likely to drive earnings growth in fiscal 2021.

The broker expects the number of registered users and customers on VN8’s PBX platform to expand through increasing channel partners and relationships like Qantas Business Rewards who have access to thousands of SMEs (small to medium enterprises).

PAC Partners is also anticipating average revenue per customer to increase through the sale of additional products and services saying, ‘’The hero product to date has been ONDESK a hosted cloud solution, while in time the company will layer on NBN fibre, business-grade fibre, and mobile services with 5G expected to come via the Optus relationships acquired through 2SG acquisition.’’

The 2SG acquisition was an important development for Vonex as it added an additional 100 wholesale customers, providing scale to the group’s wholesale business and numerous cross-selling opportunities.

PAC Partners also noted advantages in terms of improved margins as a result of being able to go direct for NBN as 2SG dispenses with payments to other wholesalers.

Commenting on the impact of NBN, PAC Partners said, ‘’While NBN is reaching the end of the build, there are many premises “ready for service” but not yet activated, so we see a positive industry backdrop for Vonex as these churn events create opportunities.

‘’We would also expect a big tail of activity just before the Core Access Network is turned off and SME’s are mandated to evaluate their telco services.’’

Vonex undervalued by any measure

Using the most relevant valuation metrics, Vonex represents outstanding value on all counts based on its current share price.

PAC Partners crunched the numbers and made peer comparisons on July 9 when Vonex’s share price was 10 cents and this is how the numbers stacked up.

The broker sees Spirit Telecom (ASX: ST1) as Vonex’s nearest peer, and it trades on an enterprise value/EBITDA fiscal 2021 forecast multiple of 12.5.

However, to adopt a more conservative approach, PAC Partners has used the group average multiple of 11.8 which translates into a share price of 20 cents.

One of the most compelling statements made by PAC Partners was its take on Vonex in the context of how it compares with early-stage players that had a similar business strategy/product offering in their infancy.

On this note, the broker said, ‘’We see VN8 through the same lens as MNF and TPM when they started their journeys through single products and layered more and more services and acquisitions to create the businesses of today.

‘’MNF started with hosted PABX, and TPM started with layering DSL over its own network and accessing the last mile via DSLAMs installed in the exchanges.’’