CHRIS JUDD Invest
By Thomas Galanti
Webcentral Group operates in the Australian telecommunications space – a fast pace, high growth industry – where it has established itself as one of the largest full-service digital service agencies for small and medium business. As with all other small and mid-cap players in this market, they are usually defined by their success in finding bolt on acquisitions, purchased at an EBITDA multiple discount. With historically low rates of real interest and easy-to-tap equity capital markets, businesses operating under this ‘roll-up’ framework, have become key targets for investors with an appetite for risk.
This telco’s story began in the late 90s as the well-known Melbourne IT, where it listed on the ASX and has since developed many times over into the current, Webcentral. The story is one really of a turnaround since its takeover by 5G Networks (ASX: 5GN) in September 2020, where it entered a Bid Implementation Deed with 5GN in respect of an all scrip off-market takeover bid. While 5GN didn’t complete a takeover, post WCG’s most recent raising they are left with management control and a 44.6% stake of WCG. WCG in turn, currently have a ~$41m debt owed to 5GN which will eventually be paid back through either a capital raising, from future free cash-flows or a combination of both.
Once investors get comfortable with the capital structure of WCG, attention then turns to the business itself. A common heuristic used by investors is “have I seen this story before” when analysing market opportunities. In WCG, under the management of Demase, they don’t have to look very far back to see a similar story. 5GN have bought many different businesses since going public, but the purchase of Inabox (IAB) will be the one providing WCG shareholders with the most comfort and may partly explain WCG’s strength since it’s 17c raising in late 2020, to currently being over 50c per share. The Inabox acquisition ended up contributing 80% of 5GN’s group revenue and was purchased for 2x EBITDA once immediate synergies were recognised. The key being the “immediate synergies” or the costs that were able to be ripped out of the business due to a level of disfunction from the management team at the time. The costs out and streamlining of operations story is now being played out at WCG.
Reduction in costs is giving WCG management a renewed focus on driving profitable product lines, realising 5GN synergies, significantly reducing the labour headcount, disposing the Netallaince business and cutting under-utilised property costs. WCG has recorded an operating profit and generated positive operating cash flows each month since the change of control by 5GN in October 2020, with the non-recurring restructuring activities that led to the loss for the period now complete. As of February 2021, the Group expects the business to generate EBITDA between $7-10m p.a., with plenty of low hanging fruit yet to be plucked. WCG is looking at surrendering the lease of the Sydney offices from the 14th of March 2021, which will generate a positive cashflow impact of ~$2m p.a. and the return of the $1.78m bank guarantee. Forecasts suggest for the period to February 2022 the group will be generating a positive operating cashflow and will not require further funding from 5GN or capital markets.
Whilst interim results showed declining revenue in the first half of FY21, with management pointing towards the impact of Covid-19 in 2020 and an overall poor customer experience – the focal point of Webcentral’s restructure. Three main issues were outlined by management in their commentary, with the team confident their initiatives will return revenue growth across all four core services. The ‘customer first approach’ outlined in their Business Transformation Update (29 January 2021) discusses how poor customer service and complex online products presented them with significant opportunities for improvement. Direct customer service will be migrated to Australia over time and improved second level and infrastructure support will be integrated with 5G Networks, a stark difference to the previous outsourced customer service.
While cost reductions and improved customer service have been major focus areas for management, driving revenue growth in its four core services is key to beating investors’ expectations. On April 12, 2021 new licensing rules surrounding the .au domain (auDA) are set to take effect. WCG believes the industry transformation will drive “considerable market expansion” and expects a ~30% take-up rate on its 500k+ domains register. The policy change offers the company an outstanding opportunity to accelerate revenue growth in this core service, with the potential to generate $8-10m revenue and $4-5m EBITDA p.a.
With further cost saving measures to come, organic revenue growth a focus through improved customer interaction and the additional .au service ready to be rolled out, the $7-10m EBITDA p.a. estimate begins to look conservative. As cash begins to steadily build over the coming year – with annualised free cash from March 2021 to be $10-12m – and management becomes confident the restructure is complete, investors should expect focus to be returned to finding strategic acquisitions to accelerate the roll-up process.
Disclaimer: This article should not be construed as investment advice and is for information purposes only. It does not take into account your investment objectives, particular needs or financial situation. Before making an investment in anything, do your own research and contact your investment advisor.