NetComm Wireless (NTC) - Baillieu Holst Online HOLST RESEARCH Netcomm Wireless Limited (NTC) Baillieu Holst Ltd ABN 74 006 519 393 Please …

BAILLIEU HOLST RESEARCH 27 May 2016 INTERNAL ONLY

Baillieu Holst Ltd ABN 74 006 519 393 www.baillieuholst.com.au Please read the disclaimer at the end of this report. Page 1

RECOMMENDATIONS

Rating BUY ▲ Risk High

Price Target $3.35

Share Price $2.81 SNAPSHOT

Monthly Turnover $21.5mn

Market Cap $415mn

Shares Issued 146.0mn

52-Week High $3.67

52-Week Low $0.56

Sector Information Technology

BUSINESS DESCRIPTION NetComm Wireless develops and manufactures industrial-grade data communications devices. These include fixed broadband modems and wireless 3G/4G devices for the Machine-to-Machine (M2M) market. Within the latter, NTC has carved out a significant niche in the global Fixed Wireless Broadband (FWB) market.

12-MONTH PRICE & VOLUME

RESEARCH ANALYST Luke Macnab, CFA

+ 612 9250 8930

[email protected]

Nicolas Burgess, CFA

+ 613 9602 9379

[email protected]

Nick Caley

+ 613 9602 9283

[email protected]

Disclosure The author owns no shares in NTC.

NetComm Wireless (NTC)

INITIATION OF COVERAGE

Rise of the machine-to-machines

We initiate coverage on NTC with a BUY rating: Our 12-month price target is $3.35 (+19% on current price). NTC develops and manufactures data communications devices, which connect the ‘end user’– which may be a person or an electronic device – to a network. Its legacy business is supplying modems to enable consumers and businesses to connect to the internet, but its future growth will come from the M2M market.

Rise of the M2M market creates myriad of opportunities: Estimates suggest the number of connected Machine-to-Machine (M2M) devices will grow at a CAGR of 15-30% to 2020, when 20-50 billion devices will exist. NTC’s strategy is to focus on verticals where there is limited competition and a clear problem to solve. These include transportation ticketing (NTC was involved in the Opal system in Sydney, NSW), emergency services, healthcare and utilities (NTC makes smart energy meters).

Fixed Wireless Broadband (FWB) the near-term driver: Winning the contract with Ericsson in 2011 to deliver the FWB component of the National Broadband Network (NBN) in Australia has given NTC world-leading expertise. NTC leveraged this experience to win a similar contract with a major US telco in 2015, which we believe is potentially up to 10 times larger. These projects will underpin strong near term revenue growth.

Strategy leverages partners’ global networks: NTC has partnerships with a number of large global M2M players, including network providers (Telstra, AT&T, Vodafone, Verizon) and equipment manufacturers (Ericsson, Hitachi, Alcatel-Lucent). It is using this ‘riding the coattails’ strategy to target ‘large niches’ in the market.

Financials show rapid growth: NTC reported very strong growth in 1H16, with revenue of $46.4m (+54% on 1H15), EBITDA of $5.1m (+124%) and NPAT of $2.3m (+538%). This was driven by increased revenue from the NBN project and marked the first time that the M2M business (which includes FWB) was over 50% of revenues. Increased costs from expanding the business in 1H16 are behind the slight decrease in FY16 NPAT, with NTC expected to triple its FY16 revenues in FY18.

Investment view: We value NTC at $3.35, using a DCF analysis with a risk-free rate of 5.0%, market risk premium of 6.0% and Beta of 1.3. NTC is set to undergo rapid growth as the NBN and US carrier FWB rollouts occur over the next few years. We also believe there is potential upside to our current forecasts from additional contract wins in FWB and other M2M markets as well as growing the size of existing contracts.

INVESTMENT SUMMARY

Year End: 30 June 2014A 2015A 2016E 2017E 2018E

Revenue $mn 64.5 74.2 85.8 133.3 259.2

EBITDA $mn 5.2 7.2 6.4 13.1 46.1

EBIT $mn 1.5 3.4 2.7 9.2 42.2

Reported Profit $mn 1.0 2.5 1.6 6.5 29.6

Adjusted Profit $mn 2.9 4.6 3.7 8.5 31.6

EPS (Reported) ¢ 0.8 1.9 1.2 4.3 19.8

EPS (Adjusted) ¢ 2.3 3.6 2.8 5.7 21.2

EPS Growth % 185.2 55.9 -21.5 104.8 270.4

PER (Reported) x 352.5 147.1 228.0 64.8 14.2

PER (Adjusted) x 123.3 79.1 100.7 49.2 13.3

Dividend ¢ 0.0 0.0 0.0 0.0 0.0

Yield % 0.0 0.0 0.0 0.0 0.0

Franking % 0 0 0 0 0

BAILLIEU HOLST RESEARCH Netcomm Wireless Limited (NTC)


Financial summary NETCOMM WIRELESS

Code: NTC Rating: BUY

Analyst: Luke Macnab Price Target: $3.35

Date: Upside/downside: 19%

Share Price: $2.81 Valuation: $3.35

Market Capitalisation: $420m Valuation method: DCF

Financial Year End: June Risk: High

PROFIT & LOSS (A$m) FY14A FY15A FY16E FY17E FY18E EARNINGS FY14A FY15A FY16E FY17E FY18E

Operating revenue 64.5 74.2 85.8 133.3 259.2 EPS - Underlying (cps) 2.3 3.6 2.8 5.7 21.2

COGS -45.2 -51.1 -59.3 -93.3 -181.4 EPS Growth - Underlying -255% 142% -35% 252% 357%

Gross profit 19.3 23.2 26.6 40.0 77.7 EPS - Reported (cps) 0.8 1.9 1.2 4.3 19.8

Expenses -14.2 -15.9 -20.2 -26.9 -31.6 Diluted shares (m) 128.8 129.0 132.4 149.4 149.4

EBITDA 5.2 7.2 6.4 13.1 46.1 DPS (cps) 0.0 0.0 0.0 0.0 0.0

Depreciation -1.0 -0.8 -0.8 -0.9 -0.9 Dividend Yield 0.0% 0.0% 0.0% 0.0% 0.0%

EBITA 4.2 6.5 5.6 12.2 45.2 Payout Ratio 0% 0% 0% 0% 0%

Amortisation -2.7 -3.0 -2.9 -2.9 -2.9 Franking 0% 0% 0% 0% 0%

EBIT 1.5 3.4 2.7 9.2 42.2

Net Interest expense -0.7 -0.5 -0.5 0.0 0.0 VALUATION FY14A FY15A FY16E FY17E FY18E

Minorities 0.0 0.0 0.0 0.0 0.0 P/E - Underlying (x) 124.4 79.1 100.7 49.2 13.3

Underlying PBT 0.8 2.9 2.2 9.2 42.2 EV/EBIT (x) 282.6 122.7 142.9 41.3 8.5

Tax 0.2 -0.4 -0.5 -2.8 -12.7 EV/EBITA (x) 100.3 65.0 68.2 31.3 7.9

Underlying NPAT 1.0 2.5 1.6 6.5 29.6 EV/EBITDA (x) 81.5 58.0 59.8 29.2 7.8

Underlying NPATA 2.9 4.6 3.7 8.5 31.6 Price/Book (x) 16.3 14.7 4.3 4.5 3.4

Price/NTA (x) 24.1 22.8 4.9 5.2 3.9

Significant items (net of tax) 0.0 0.0 0.0 0.0 0.0 Price/FCF 67.1 72.7 -42.7 60.4 14.8

Reported profit 1.0 2.5 1.6 6.5 29.6

GROWTH FY14A FY15A FY16E FY17E FY18E

BALANCE SHEET (A$m) FY14A FY15A FY16E FY17E FY18E Revenue growth 51% 15% 16% 55% 94%

Assets COGS growth 56% 13% 16% 57% 94%

Cash 4.3 3.4 35.5 38.0 62.0 Expenses growth 8% 12% 27% 34% 17%

Receivables 10.7 13.6 19.7 30.6 59.4 EBITDA growth 611% 40% -11% 103% 253%

Inventories 7.4 10.1 27.5 27.5 27.5 PBT growth -131% 249% -24% 325% 357%

Other Intangibles 7.2 8.7 11.1 11.5 13.8 Underlying NPAT growth -288% 142% -34% 297% 357%

Investments 0.0 0.0 0.0 0.0 0.0 Reported NPAT growth -288% 142% -34% 297% 357%

Other assets 8.2 8.6 14.3 19.0 23.6

Total Assets 37.8 44.4 108.2 126.7 186.4 MARGINS & RETURNS FY14A FY15A FY16E FY17E FY18E

EBITDA Margin 8.0% 9.7% 7.5% 9.8% 17.8%

Liabilities EBITA Margin 6.5% 8.7% 6.6% 9.1% 17.4%

Payables 9.3 14.8 18.3 27.7 49.0 NPBT Margin 1.3% 3.9% 2.5% 6.9% 16.3%

Provisions 1.1 1.2 0.2 0.7 3.1 ROIC 12.8% 18.9% 10.4% 16.0% 54.5%

Tax payable 0.0 0.2 0.8 2.1 7.2 ROE 4.9% 10.5% 2.9% 7.2% 27.5%

Other liabilities 5.2 3.6 2.5 3.3 4.6 ROA 11.8% 15.7% 7.4% 10.4% 28.9%

Total Liabilities 15.6 19.8 21.8 33.8 63.9 Effective Tax Rate 30.0% 30.0% 30.0% 30.0% 30.0%

Equity GEARING FY14A FY15A FY16E FY17E FY18E

Share capital 15.3 15.4 75.4 75.4 75.4 Net Debt/(Cash) 0.5 -0.1 -35.5 -38.0 -62.0

Retained earnings 6.1 8.6 10.2 16.7 46.2 Enterprise value 420.2 419.7 384.2 381.8 357.7

Other equity 0.7 0.6 0.8 0.8 0.8 Net Debt/EV (%) 0.1% 0.0% -9.3% -10.0% -17.3%

Total shareholders equity 22.2 24.6 86.4 92.9 122.5 Net Debt/EBITDA (x) 0.1 0.0 -5.5 -2.9 -1.3

EBITDA/Net Interest (x) 0.0 0.0 0.0 0.0 0.0

BV per share (cps) 17.2 19.1 65.3 62.2 82.0

NTA per share (cps) 11.7 12.3 56.8 54.5 72.8 SEGMENT REVENUES (A$m) FY14A FY15A FY16E FY17E FY18E

Broadband business 31.3 40.5 28.3 29.7 31.2

CASH FLOW (A$m) FY14A FY15A FY16E FY17E FY18E M2M business 33.2 33.8 57.6 103.6 228.0

Cash at Start 3.9 4.3 3.4 35.5 38.0

Cash from operations 5.7 6.4 -4.4 10.3 33.5

Capex -0.3 -1.4 -4.3 -3.3 -5.2

Free cash flow 5.4 5.0 -8.7 7.0 28.3

Cash flow from investing -3.6 -4.5 -5.6 -4.5 -4.2

Cash flow from financing -1.4 -1.4 46.4 0.0 0.0

Cash at end 4.3 3.4 35.5 38.0 62.0

Free cash flow per share (cps) 4.2 3.9 -6.6 4.7 18.9

GOCF / EBITDA 130% 100% -53% 91% 100%

FCF / Underlying cash NPAT 530% 202% -534% 107% 96%

27 May, 2016



Investment view Rise of the M2M market creates myriad of opportunities: We initiate coverage on NTC

with a BUY rating and 12-month price target of $3.35 (+19% on current price), based on our valuation. NTC’s strong future growth is tied to the rapid expansion of the Machine-to-Machine (M2M) market globally – various estimates suggest the number of connected M2M devices will grow at a CAGR of 15-30% to 2020, at which time 20-50 billion connected devices will exist.

Fixed Wireless Broadband is the near-term driver: NTC has already carved out a significant niche in the Fixed Wireless Broadband (FWB) sector, which will drive very strong revenue growth over the next few years. This was built on the back of winning the contract with Ericsson to deliver the FWB component of the National Broadband Network (NBN) in Australia. NTC leveraged this success to win a similar contract with a major telecoms carrier in the USA, which we believe is potentially up to 10 times larger.

Other verticals also have strong potential: NTC has partnered with large global firms to develop M2M applications in additional verticals, with the aim of increasing efficiency and creating value. These include transportation ticketing, business services, emergency services and health, utilities, manufacturing and construction. The company has demonstrated experience in each of these fields and is seeking to leverage the global networks of its partners to find opportunities where limited competition exists.

Replacement cycle creates ongoing need: With the constant upgrading of hardware and software with which M2M devices interoperate, older devices and solutions become obsolete and require replacement (as has been seen with NTC’s legacy modem business). This creates a new wave of demand and can potentially provide a recurring revenue stream for the original supplier, who will often have critical intellectual property and expertise.

Potential risks: (1) Personnel - NTC has a strong management team with significant industry experience. If key personnel were to depart, it may be difficult to adequately replace them. (2) Customer - Circumstances outside NTC’s control may cause customers to cancel, reduce or not renew existing contracts, which could adversely impact forecasts. NTC also has customer concentration risk. (3) Timing - Much of NTC’s revenue is tied to staged rollouts of contracted projects, with timing dictated by third parties. As such, the period in which products are delivered and revenue is received may be subject to change.

Valuation using DCF: We value NTC at $3.35, using a DCF analysis with a risk-free rate of 5.0%, Market risk premium of 6.0% and Beta of 1.3, slightly above the observed betas of ICT stocks of around 1.1, to reflect that NTC is still in the growth phase of its life cycle. With an assumed D/E ratio of 25/75, 6.5% pre-tax debt cost and 3.0% terminal growth, this gives a WACC of 10.7%.

FIG.1: GLOBAL M2M/IoT DEVICE FORECASTS2

1 Compound Annual Growth Rate 2 Includes all autonomous connected things (each forecaster has own definition

but excludes computers, tablets and mobile devices). IoT = Internet of Things

Source: IoT Analytics

BUY rating, $3.35 target. NTC is part of the rapidly-growing M2M market, which has 15-30% forecast CAGR to 2020

Fixed Wireless Broadband is the key near-term driver

NTC’s large partners have global networks to source opportunities from

Replacement cycle offers potential for ongoing recurring revenue

Key risks are personnel, customer, concentration and timing risk



Company overview Background

NTC develops, manufactures and sells data communications devices, which are used for both consumer and commercial purposes. Its products are generally used towards the ‘edge’ of the network, connecting the ‘end user’ to the internet – where the ‘end user’ may be a person or an electronic device.

NTC’s headquarters are located in Sydney, Australia and it has offices in the US, Europe/UK, New Zealand, the Middle East and Japan. Manufacturing is done offshore and is highly scalable. The company has two operating segments: a Broadband business and a Machine to Machine (M2M) business. Fixed Wireless Broadband is emerging as a major subdivision of M2M.

NTC’s products include wireless 3G/4G broadband devices, fixed broadband communication devices and custom-engineered technologies. Its primary customers include telecom companies, ISPs, systems integrators and corporations.

Its base business is manufacturing and selling broadband modems and routers to ISPs in Australia and New Zealand. However, the future growth of the company is tied to the rapidly-expanding ‘Internet of Things’ (IoT), as it develops products for the rapidly-expanding machine-to-machine (M2M) communications market.

FIG.2: M2M APPLICATIONS

Source: PTC

Company timeline

NTC was first listed in 1993, when it was a manufacturer of PC modems. Over the next few years, it entered a number of alliances, with ISPs (Connect.com.au), product manufacturers (ADC Telecommunications) and telecommunications companies (AAPT) to expand its business. In 1997, NTC sold its manufacturing operations to Hartec, who also took a 10% stake in NTC via a share placement.

Also in 1997, NTC merged with Banksia Technology and together they had around 60% of the total market for modems in Australia. Banksia was a privately-held company, founded in 1988 by David Stewart, who took over as Managing Director of the merged entity. Banksia had previously purchased a number of smaller competitors and took 52% of the shares in the merged entity, which was subsequently renamed Sirius Technology. Sirius was marketing the brands Dataplex, NetComm, Banksia, Simplecomputing and Avtek.

The company was also restructured: its 33% stake in the ISP business was sold, ADC’s stake in NTC was bought out by David Stewart and NTC’s stake in Aurora (a subsidiary devoted to developing ADC-related products) was spun off. A 10% share placement was completed in 1998, which along with other measures, reduced debt to zero.

NTC develops data communications devices, which connect the ‘end user’ (a person or a device) to a network. Most of its revenue is from industrial 3G/4G wireless devices

NTC was listed in 1993 and combined with other telco-related businesses. In 2008 it acquired Call Direct and expanded into 3G wireless industrial applications



In 1999, there was a failed proposal to merge with Hypertec Pty Limited, a privately held manufacturer of PC memory and processor upgrades. Instead, Sirius signed an agreement with Alcatel to use their chipset in new modems. The company was also rebranded to Netcomm Limited with the ticker NTC.

The early 2000’s saw the demonstration of NTC’s capabilities in ADSL as it became an equipment supplier for a number of Australian retail ISPs. In 2008, NTC acquired Call Direct, a company specialising in industrial 3G wireless technology applications, such as remote wireless fire safety monitoring devices and other unmanned safety systems. This gave NTC an industrial customer base for the first time.

In 2011, NTC was selected by Ericsson to provide the fixed wireless devices which it will use to deliver the rural component of the National Broadband Network (NBN) in Australia. This technology is to be used where land-based technologies (ie fibre, cable) are not practical. This success provided the springboard for NTC to win another rural broadband contract in 2015, this time for a major US-based telecommunications carrier, which we believe is potentially up to 10 times larger than the NBN contract.

Broadband business

This segment designs and manufactures broadband internet devices aimed at the consumer and small/medium enterprises (SME) markets. Products include ADSL and VDSL routers, filters, switches, splitters and powerline devices. Their customers are primarily RSPs in Australia and New Zealand, who typically sell the products to consumers as part of a broadband package.

NTC’s base business has been selling modems, from 56Kbps analog versions in the late 1990s to the 1Gbps digital products sold today, to connect consumers to the internet. They also sell powerline products, which can provide broadband connections between powerpoints in a house. The penetration of internet connections into homes and businesses has increased steadily over the past 20 years and now an estimated 84% of households in both Australia and New Zealand have one, with 99% of these being broadband.

FIG.3: BROADBAND PENETRATION1 FIG.4: MODEM TECHNOLOGY SPEEDS1 (MBPS)

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

FY

02

FY

03

FY

04

FY

05

FY

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FY

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FY

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FY

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FY

10

FY

11

FY

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FY

13

FY

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FY

15

Mod

em 1

4.4

Mod

em 5

6k

AD

SL

Lite

AD

SL

AD

SL2

AD

SL2

+

VD

SL

VD

SL2

G.f

ast

0.01

0.10

1

10

100

1000

1 As a percentage of Total Australian Households

Source: NBN Co, ABS

1 Estimates over short distances of copper wire

Source: ITU-T

Whilst penetration is likely to increase incrementally going forward, the development of new technologies (eg analog to digital, ADSL to VDSL) and faster modems will mean that there is a constant product upgrade cycle occurring. For NTC, this means that there will always be a base level of demand for these products, though the room for growth is limited. Most of its sales are made to larger corporations who are involved in the provision of broadband services or services delivered over the broadband network.

M2M

This segment specialises in the development of industrial-grade wireless or cellular broadband products and solutions for various industries. These typically use 3G or 4G networks for a variety of purposes, including asset tracking, environmental monitoring, safety systems and general remote M2M connectivity. NTC produces devices for customers in a number of verticals, including transport (eg Opal card readers), energy and utilities (eg smart meters), security, surveillance, banking, healthcare and mining.

What is M2M? At a basic level, ‘M2M’ (Machine-to-Machine technology) refers to the capability for data to flow between electronic devices, without the need for human interaction. Many of these devices have network connectivity, which has given rise to the

In 2011, winning the Fixed Wireless Broadband contract for the NBN was a transformational event

The legacy broadband business is stable with low growth. Technology upgrades will provide ongoing revenue streams

The M2M business is experiencing rapid growth with many potential opportunities opening up



‘Internet of Things’ (IoT), a global network of sensors, equipment, smart devices and applications that can collect, exchange, process and react to data in real time.

M2M allows objects and conditions to be sensed and controlled remotely across existing network infrastructure, with the aim of improving efficiency, accuracy and ultimately providing an economic benefit for the user. It is the technology at the heart of a number of modern concepts, including smart energy grids, home automation, smart buildings and cities, intelligent transportation, remote healthcare monitoring and asset tracking.

There have been suggestions that M2M generally refers to the commercial or industrial sectors, whilst IoT generally refers to consumer or mass-market sectors. Ultimately, M2M and IoT are slightly different, but the two terms are often used interchangeably.

FIG.5: NTC’S TARGETED VERTICALS

Source: NTC

Industry experts estimate that by 2020, the IoT will consist of 20-50bn objects and that global spending on M2M and IoT devices will reach $150-300bn pa. The installed base of M2M connections is forecast to grow at a CAGR 15-30% between 2015 and 2020 as 4G technology is incorporated into more devices. According to Verizon, IoT usage in 2015 in the energy/utilities sector grew by 58% on the pcp, with the home monitoring (50%) and transportation/distribution (49%) verticals close behind.

NTC’s M2M business has grown rapidly in recent years and is expected to continue doing so. The M2M market is very diverse and fragmented, meaning that competition in specific verticals can often be limited.

NTC’s partnering strategy: NTC has a strong foothold in the M2M market as it has entered a number of partnerships with larger global participants, including equipment manufacturers (eg Ericsson, Hitachi, Alcatel-Lucent) and network providers (eg Telstra, AT&T, Vodafone, Verizon). It is using this ‘riding the coattails’ strategy to target ‘large niches’ in the M2M space, where there is limited competition and clear problems that need solving. NTC’s ultimate aim is to partner with 10 of the Top 20 telco companies globally.

FIG.6: FORECAST MARKET FOR M2M APPLICATIONS ($BN) FIG.7: SELECTION OF NTC’S PARTNERS

0

25

50

75

100

125

150

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2011

2012

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2014

2015

2016

2017

2018

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2020

Source: Visiongain (2010-16), NTC (2017-20) Source: NTC

M2M market expected to grow by 15-30% CAGR to 2020 when there will be 20-50bn connected devices

NTC has benefited from M2M growth by partnering with large global players



NTC is focused on the business-to-business (B2B) market and not the business-to-consumer (B2C) market, where the likes of Apple, Google, Amazon and others are focusing. The following M2M industry verticals have been targeted: Utility smart grids (electricity and water); E-health (connected in-home devices which need central monitoring); Business services; Manufacturing and Construction; and Transportation.

The ‘upgrade cycle’ dynamic is already being seen in various M2M markets, with many 2G networks being switched off by telcos around the world over the next 12 months. This includes Telstra (Australia – December 2016), AT&T (USA – January 2017), Optus (Australia – April 2017) and Starhub, Singtel and M1 (all Singapore – April 2017). As a consequence, old 2G-compliant devices now require replacement in order to work with 3G and 4G networks, creating demand for new devices and opportunities for NTC.

In the telecommunications space, the switching off of copper wire networks will also present NTC with opportunities as older products will need to be upgraded. A simple example of this is that most emergency telephones in elevators are connected to such networks – and won’t work after they are switched off. Another opportunity highlighted is that as various forms of fibre and cable replace copper, new equipment will be required to connect. Other verticals of interest to NTC include:

Healthcare: The high cost of hospital beds and medical care means there is a huge potential market for mobile health (mHealth) monitoring. As a result, it is currently forecast that the mobile health ecosystem will grow to more than 650m devices by 2020.

As an example, many patients need to manually take and record readings related to their condition and then consult with a doctor (eg monitoring of the heart, cholesterol, blood glucose, blood pressure, body temperature etc.). This method can lead to sub-optimal results for a number of reasons, including failing to take readings (forgetfulness or inability), using improper technique, omitting poor readings etc, which is compounded by the delay in submitting and analysing the data.

To overcome this problem, smart electronic measurement devices can be used to get accurate readings and NTC’s n-hub device can be used to relay the information to a central database for analysis immediately. It is designed to connect with a variety of mHealth devices and to any global mobile broadband network.

FIG.8: WIRELESS REMOTE PATIENT MONITORING DEVICES FIG.9: NTC-20 N-HUB DEVICE

Source: Phillips Source: NTC

Smart homes: NTC is participating in a trial alongside Hitachi and Daikin, which aims to increase the efficiency of home heating and reduce its cost by 30%. The system manages algorithms controlling when to start generating heat and when to stop in order to eliminate peaks and troughs and keep the temperature constant. The trial in Manchester, England required 1,000 devices to be built and is expected to take 12-18 months to complete.

There are literally hundreds of verticals and thousands of potential applications in the M2M market. These will be considered through NTC’s decision process, where the first hurdle is to be able to ‘solve a clear problem’, which usually means increasing productivity and revenue and/or decreasing cost in a specific circumstance. Then NTC will look for a big player which is interested to partner with and also lack of competition in the specific space.

NTC focused on industrial applications of M2M, where obsolescence of devices is a critical issue

Healthcare is a targeted vertical for NTC

Smart homes is another targeted vertical for NTC



Fixed Wireless Broadband

Within its M2M business, NTC has built a major presence in the provision of devices for Fixed Wireless Broadband (FWB) networks. As governments and corporations are looking to upgrade and expand existing communications networks, obsolete technologies are being phased out. Whilst fibre and cable infrastructure can be rolled out in populated areas, this is not cost-effective or practical in rural areas. FWB technology is highly suited to providing data communications services in these locations.

Huge global opportunity: Boston Consulting Group (BCG) estimates that the global market for FWB is around $80bn. NTC is in a very strong position as it has won the only two contracts for large-scale rollouts of FWB globally to date and has world-leading technology. As they deliver these projects, the expertise gained will give them a significant advantage against other companies when bidding on future large-scale contracts.

NTC is focusing on the US and European markets as they are at the high end of the value chain. Governments and consumers in these areas are able to pay a premium for highly engineered and robust solutions, with guaranteed performance levels, which is what NTC provides. There is a big opportunity for NTC to grow its FWB business in these regions; for comparison, we estimate that NTC will provide up to 1.1m devices for the NBN contract.

The FCC in the US defines ‘broadband’ as any data service with 25Mbps download and 3Mbps upload (25/3) speeds. It has stated that 39% of rural Americans lack access to this level of service, compared with only 4% of urban Americans. The FCC is keen to close this gap and the potential size of this market is 23m people (around 8-9m households). BCG estimates that this rural American market represents a $2.5bn opportunity.

Additionally, the EU (with 500m inhabitants) is aiming to provide access to 30Mbps connectivity to every European by 2020. They have noted that only 25% of rural households had access to 25/3 Mbps speeds in 2014, equating to around 7.7m households. This means there is a potential remaining market of 23m households.

FIG.10: GLOBAL BANDWIDTH COMPARISON1 FIG.11: GLOBAL BANDWIDTH COMPARISON2

1 FWB download speeds in Mbps. Source: Ovum 2 FWB upload speeds in Mbps. Source: Ovum

NBN contract: NTC’s FWB business has been built on the back of winning the contract for the wireless portion of the National Broadband Network (NBN) in Australia, in partnership with Ericsson in 2011. It will be a 2.3 GHz LTE wholesale-only network, serving urban fringe and rural areas, where satellite and fibre technologies are not suitable.

Ericsson engaged NTC to provide software and hardware for 500,000 network devices, but we estimate the total opportunity could be up to 1.1m devices. NTC provides the antennae on users’ roofs (which communicate with transmission towers) as well as the internal connection box (which provides internet connectivity and voice services). The proprietary software provided by NTC enables remote monitoring and management of the network.

NTC believes that once the NBN rollout is complete, there will be an ongoing requirement for upgraded devices as new technology develops. As evidence, the original devices for the NBN provided for data speeds up to 12/1 Mbps, whilst the newer Series 2 and 3 devices will provide up to 25/5 and 50/20 Mbps respectively.

Given that the software is tailored to the network and is proprietary to the owner, it will be difficult to displace the existing supplier when upgraded technology becomes available. As such, NTC is in pole position to obtain future contracts to provide devices to upgrade the network, as a piecemeal replacement strategy with a new vendor may create problems with the network. This would potentially mean refreshing the devices every four to five years and recurring revenue for the peak number of devices over a number of upgrade cycles.

NTC has already carved out a significant niche in FWB for rural regions

The global opportunity in FWB is huge; NTC is focusing on high value countries (US and Europe)

The NBN contract was the foundation of NTC’s FWB success

NBN contract could be upsized to 1.1m devices



FIG.12: NBN FIXED WIRELESS BROADBAND EQUIPMENT FIG.13: PRODUCT UPGRADE CYCLE

Source: NBN Co Source: Baillieu Holst

US contract: The experience gained from the NBN project laid the groundwork for NTC winning another big FWB contract in late 2015, this time to provide devices to a large US-based telecommunications carrier. Once again, this network will be primarily built in remote areas and engineered to have guaranteed minimum upload and download speeds.

Press reports suggest that the US carrier is AT&T and that NTC will work with Ericsson to deploy Fixed Wireless Local Loop (FWLL) equipment in rural and regional parts of the US. AT&T confirmed recently that it is testing FWLL technology in selected areas of the country and is seeing speeds of around 15 to 25 Mbps. We understand that the design of the FWLL technology being trialled is very similar to the NBN.

We note that under an agreement with the US Federal Government, AT&T will receive US$2.5bn in funding over six years to upgrade internet connections to 1.1m rural homes and businesses. This covers 18 states and will provide speeds of at least 10/1 Mbps. The contract does not stipulate the type of connection, but FWB is the logical solution, due to its relatively low costs and reliably fast speeds. It is also worth noting that other US telcos have agreed to similar deals, potentially providing more customers for NTC’s products.

If AT&T is indeed the US telco in question, the size of the deal with NTC could increase substantially if the company decides to proceed with a plan announced in 2015. As part of its $US49bn acquisition of pay TV provider DirecTV, AT&T proposed to offer upgraded internet services, with speeds up to 15-20Mbps, to 13 million customer locations in 48 states.

This infrastructure would then be used to offer bundled broadband, pay TV and voice services to rural customers. However, this was not a binding condition of the merger and at this stage we believe it has not been officially confirmed by AT&T management.

FIG.14: POTENTIAL AT&T FIXED WIRELESS BROADBAND ROLLOUT IN THE US

Source: AT&T

Rural FWB contract for US carrier could be up to 10 times larger than the NBN contract



Financial metrics and outlook

NTC reported a strong result in FY15, with revenue of $74.3m (+15% on FY14), EBITDA of $7.3m (+40%) and NPAT of $2.5m (+140%). The M2M business reported $34m of revenue (+2%), which was driven by higher NBN income offsetting the loss of AusNet smart meter income from the previous year. The base broadband business reported $41m of revenue (+29%), driven by higher sales of powerline products to a key customer, though this is likely to revert to historical levels of around $30m going forward.

Total borrowings in FY15 were reduced from $4.8m to $3.3m, with the net position moving from a small debt ($0.5m) to small cash balance ($0.1m). A $14m debt facility was established during the period for working capital purposes.

NTC reported very strong growth in 1H16, with revenue of $46.4m (+54% on 1H15), EBITDA of $5.1m (+124%) and NPAT of $2.3m (+538%). This was again driven by increased revenue from the NBN project and marked the first time that the M2M business (which includes FWB) was over 50% of revenues. Guidance for FY16 is for $85m revenue and $6.4m EBITDA (the latter slightly down on FY15), largely due to $4.3m of additional costs from expanding the business to deliver on its contracted growth opportunities.

FIG.15: NTC’S REVENUE ($M) FIG.16: NTC’S EBITDA

0

50

100

150

200

250

300

FY14A FY15A FY16E FY17E FY18E

Broadband M2M

0

10

20

30

40

50

FY14A FY15A FY16E FY17E FY18E Source: NTC, Baillieu Holst forecasts Source: NTC, Baillieu Holst forecasts

Net debt increased to $9.8m as the scale of the business increased. Over the past 18 months, NTC has increased the number of engineers in Sydney and expanded their offshore sales teams. In April 2016, NTC raised $60m equity to further increase their engineering and sales teams, to support the rollout of existing projects and future expansion. The remaining debt was also repaid from the proceeds.

We believe the outlook for NTC is positive, with strong growth expected over the coming years as the rollout of the NBN project gathers pace and the rollout for the major US-based telecommunications carrier commences. The latter is expected in CY17 after formal technical approval is received. NTC is also pursuing a number of opportunities in the large and rapidly-growing M2M market that provide further potential upside.

FIG.17: NTC BUILDING SCALE TO SEIZE OPPORTUNITIES FIG.18: NBN FIXED WIRELESS ROLLOUT

38

2620

122

50

25

0

20

40

60

80

100

120

140

Engineers Sales & Marketing Support

Employees

1H14 2H14 1H15 2H15 1H16 FY17E

0

100

200

300

400

500

600

700

20

14

20

15

20

16

20

17

20

18

20

19

Total premises ('000)

Source: NTC Source: NBN Co as at May 2016

NTC reported strong growth in 1H16 as M2M revenues were a majority for the first time

Additional resources were added in 1H16 and a $60m raising was done in April. This was to support rolling out existing projects and winning future ones



Additional information Key management personnel

David Stewart (CEO, Managing Director): Founded modem manufacturer Banksia Technology in 1988 and in 1996, successfully acquired a number of his competitors, including NTC. On completion in 1997, he assumed the role of Managing Director of the merged entity and remains the single largest shareholder of NTC.

Ken Sheridan (CFO, Executive Director): Joined NTC in early 2011 after six years as Managing Director of Acelero, a software company. Previously, he spent 11 years with KPMG before moving into finance and administration roles with large multinational companies. His roles included Finance Director for Rothmans Holdings in Australia and Malaysia and 5 years as Group CFO for Tenix, a large private Australian company.

Steve Collins (Chief Technology Officer): Joined NTC in 2009 and is responsible for managing the Product Development Group. Previously spent 12 years in R&D management and engineering roles with Minorplanet Systems, GPS Online and Antron communications, with specific expertise in in-vehicle telematics devices and mobile workforce solutions.

Justin Milne (Non-Executive Director, Chairman): Has substantial telecommunications industry experience and is an experienced multinational company director. From 2002 to 2010 he was Group Managing Director of Telstra’s broadband and media businesses and was previously the CEO of OzEmail. He currently serves as Chairman at MYOB Holdings and is a Non-Executive Director of NBN and Tabcorp, among other companies.

Stuart Black, AM (Non-Executive Director): Is an experienced Company Director and former Managing Partner of accounting firm Chapman Eastway. Has extensive experience in agribusiness, professional services, manufacturing, import, distribution, IT and biotechnology. He is also a Non-Executive Director of Australian Agricultural Company and a former Non-Executive Director of Coffey International.

Ken Boundy (Non-Executive Director): Has significant marketing, distribution and international business experience across a range of sectors. He is currently Chairman and/or Non-Executive Director on five boards and has previously held a number of prominent management positions including MD of Tourism Australia, Executive GM (International) of James Hardie and CEO of Goodman Fielder Asia.

Risks

Technological: The M2M market and electronic device industries are evolving rapidly and NTC relies on its ability to anticipate and adapt to new technological developments and changing technological requirements of customers. A strong management team and customer focus will mitigate this risk.

Competitive: The M2M sector is very large and competitors may have greater financial, technical and marketing resources than NTC. This is mitigated by NTC’s strategy of partnering with large multinational corporations that have a global brand recognition and reach. Such partners include AT&T, Verizon (large US telcos), Hitachi, Ericsson (global ICT solutions providers) and Vodafone (global mobile network operator).

Personnel: A number of staff in NTC’s management team and in key positions in operational divisions have significant industry experience and expertise. If one or more of these key personnel were to depart, it may be difficult to replace them adequately, in which case there could be an adverse effect on NTC’s ability to execute its strategic plans.

Customer: Service disruptions, financial difficulties, incentives from competitors etc. may lead NTC’s customers to cancel, reduce or not renew existing contracts. This could have a significant negative impact on NTC’s finances and forecasts if it was one of NTC’s bigger customers. This risk is mitigated by the proprietary software and expertise which NTC has developed in its key verticals. NTC also has concentration risk, where a large percentage of their revenue comes from just two customers.

Timing: A material portion of NTC’s future revenue is likely to be tied to the staged rollouts of contracted projects, the timing of which will be dictated by third parties. As such, the period in which products are delivered and revenue is received may be difficult to predict and NTC’s financial forecasts will reflect this.

Strong management team with significant experience in technology sector and managing a multi-national enterprise

Key risks are personnel risk, customer risk, concentration risk and timing risk



Further product examples

NTC-1100 Smart Meter Communications Hub: Designed to be installed into the communications bay of Landis+Gyr U-Series smart meters, it enables them to communicate using 3G mobile broadband networks. It has an embedded penta-band 3G module, making it compatible with most 3G networks worldwide.

FIG.19: SMART METER COMMS HUB FIG.20: WIRELESS 4G M2M ROUTER

Source: NTC Source: NTC

NTC-140 Wireless 4G M2M Router: Built for industrial applications with extreme temperature, shock and vibration conditions, this device enables complex M2M and industrial IoT deployments. It is suitable for mobile asset monitoring, supporting vehicle voltage power supply, an Ignition sensing port and built-in stand-alone GPS.

N4FV VDSL/ADSL WiFi Gigabit Modem Router: This consumer-targeted device includes a VDSL/ADSL modem and a Gigabit WAN port, which means it can support ADSL broadband now and NBN (via VDSL) or Fibre in the future. It can be used to create a WiFi network, connect wired devices, make VoIP calls and allow shared access to USB devices.

FIG.21: VDSL/ADSL WIFI GIGABIT MODEM ROUTER

Source: NTC

BAILLIEU HOLST RESEARCH

Baillieu Holst Ltd ABN 74 006 519 393 www.baillieuholst.com.au Page 13

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Baillieu Holst Ltd ABN 74 006 519 393

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Analysts’ stock ratings are defined as follows:

Buy: The stock’s total return is expected to increase by at least 10-15 percent from the current share price over the next 12 months.

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Baillieu Holst Ltd (Baillieu Holst) and/or its associates may receive commissions, calculated at normal client rates, from transactions involving securities of the companies mentioned herein and may hold interests in securities of the companies mentioned herein from time to time. Your adviser will earn a commission of up to 55% of any brokerage resulting from any transactions you may undertake as a result of this advice.

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Past performance should not be taken as an indication or guarantee of future performance, and no representation or warranty, express or implied, is made regarding future performance. Information, opinions and estimates contained in this report reflect a judgment at its original date of publication and are subject to change without notice. The price, value of and income from any of the securities or financial instruments mentioned in this report can fall as well as rise. The value of securities and financial instruments is subject to exchange rate fluctuation that may have a positive or adverse effect on the price or income of such securities or financial instruments.

Baillieu Holst Ltd assumes no obligation to update this advice or correct any inaccuracy which may become apparent after it is given.

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