by Travis Johnson, Stock Gumshoe | May 6, 2019 2:35 pm
Most Stock Gumshoe readers are in the US and Canada, as you might imagine if you care to waste time in such musings, but we do have a number of readers in Australia, as well, so sometimes we like to jump in and cover one of the teasers from Down Under.
The selling techniques are quite similar across the English-speaking world, partly because the world of investment newsletters is dominated by a few big publishers… and one of them, in particular, the Agora group, has spawned local firms in many different countries who take their copywriting strategy and apply it to that country’s markets (and investors).
So that’s what we’ve got here today, the ad is for the Wealth Eruption newsletter in Australia, which is put out by the Agora affiliate Port Phillip Publishing. The current editor of that service is
Härje Ronngard, who signed the ad letter we’re looking at.
And other than the umlaut and the references to the ASX and some other vocabulary differences, this pitch could have come out of any of the Agora-affiliated offices in Baltimore or Florida.
The big picture is one we are very familiar with, since it has been one of the more widely-touted ‘trends’ in the economy — “5G is coming!”
Here’s some of Härje’s take on it…
“If I’m right, the Aussie 5G pioneers I’ll show you today could be just as influential as the early players in the first internet boom back in the early 90s.
“In fact, play this opportunity just right — the way I’ll show you in this letter — and a few months from now, you could be counting some big investment gains.
“And I do mean BIG.
“You could double, triple or make up to FOUR TIMES your money here.Are you getting our free Daily Update
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“That’s short-term. In the next 12 to 18 months.”
Australia has similar broadband challenges to those we have in the US — burdened by a country with lots of open spaces and with several embedded telecom companies who have not always been quick to invest in improving services… so they can even use some of the same ideas that have worked so well to get people revved up and angry about the current state of affairs, complaining about how broadband speed is so much slower than that in many other countries — this ad highlights the outrage as being that “Australia is slower than Estonia,” but you can cherry pick these things to find outrage for just about anything that frustrates you about your local telecom services. (Australia and New Zealand don’t have the best wired broadband networks, but actually have very high 4G/LTE download speeds compared to the US and many other large countries, for example, and much better wireless speeds than, yes, Estonia).
The bogeyman here is not the current state of wireless networks, but the National Broadband Network (NBN), which has been Australia’s largest infrastructure project in memory and has been, as you might imagine, a political football as cost overruns and moving goalposts provide plenty of fuel for pundits to criticize everyone involved. That network is going to be an important part of backhaul for the huge data demands that will be placed on the system by 5G, I imagine, but we’re also seeing 5G teased as a “finally we can get something better than the NBN” idea.
Here’s more from the ad:
“Australia’s shiny-new 5G network is set to be up to 800-times faster than standard NBN speeds. 100% wireless. And as soon as 30 June, it will be available nationwide….
“In 2019, the most disruptive tech advancement in 27 years looks set to officially hits Aussie shores. And the ASX-listed companies helping build it could better than QUADRUPLE your money in the next 12 to 18 months…starting with the flip of a switch!”
So… what are those stocks that they think we should buy? We start to get into some hinting now…
“… this boom won’t be driven by the usual suspects.
“I’m fairly confident the biggest 5G stock gains won’t emerge from the likes of Google, Facebook and Amazon.
“These stocks have already experienced their mammoth, turbo-charged growth phases. Their big early gains have come and gone….
“The truly epic 5G profits will emerge from the companies BUILDING IT
“And I’ve handpicked one such stock for you today.”
So what’s the stock? Here are some of the specific clues…
“5G Invasion Stock #1: This Aussie internet champion could soon become the ‘Comcast’ of the 5G revolution (and TRIPLE your money as they do it!) ….
“It’s a Brisbane-based 5G engineer. A company tasked with rolling out 5G technology across the nation….
“It’s helmed by a former BRW Young Rich Lister. An entrepreneur who has built a handful of successful tech companies in Australia and around the world.
“For example, in 2010 he offloaded one of his businesses to TPG, for a cool $373 million.
“In 2015 he floated not one, but TWO companies on the ASX. One of those listed companies has already doubled in value since December 2015.”
And a few other tidbits:
“… where Comcast was first in the cable game, your Aussie 5G play is an early player in fixed wireless internet.
“They’ve got a goal to become the go-to provider in the 5G space for retail consumers and businesses.
“That job involves laying out miles and miles of fibre to connect hundreds of 5G antennas….
“In 2014, the company oversaw 130kms of fibre optic networks in Brisbane, Sydney and Melbourne.
“Today, that network has ballooned to include a 176km fibre network connecting the business district in Singapore. Plus, a 186km fibre network that links Singapore and Sydney.”
And some numbers…
“In the last five years alone, its revenue has jumped from nothing to just over $125 million. Like I said, this company is growing fast.
“Yet, the market values the company and its assets at $349 million. I don’t think the mainstream financial players are taking into consideration this firm and their 5G prospects…. Right now, you can buy in for around $1.40 per share.
This one is the Aussie telecom company Superloop (SLC in Australia, no US ticker), which offers broadband to some markets in Australia but primarily sells cloud and managed tech services and offers fibre and other backhaul and connectivity across Asia (though mostly Hong Kong and Singapore, including connections between data centers in those countries and from those countries to Australia).
The company has indeed been growing revenue quite quickly (revenue was at A$125 million in 2018, more than 100% growth from 2017, fueled by some big investments) and turned profitable last year… they posted three cents per share in earnings in 2017. That growth isn’t going to be repeated in 2019, and according to the FT the forecast is for losses in both 2019 and 2020 on very tepid revenue growth.
So Härje is certainly an outlier in expecting a huge surge for Superloop, though that doesn’t mean he’s wrong. I can’t say that I know much at all about the Aussie and Asian telecom sectors.
And the share price has jumped well above A$1.40, closing at A$1.89 today… so what’s the story?
What’s really driving the stock right now isn’t a newsletter recommendation, despite the fact that the jump in the share price late last week seems coincident with the teaser pitch from Härje… no, what’s driving the stock right now is the fact that Superloop revealed on Friday that they had received an unsolicited bid from a private equity fund, QIC Private Capital. The stock started this rise about three weeks ago, in mid-April, so I don’t know if it was word leaking out about the acquisition that got the shares moving, or maybe it was this newsletter pitch or some other press coverage.
That bid, we now know, was for A$1.95 and was apparently received about two weeks ago, and the company also said it had received an earlier (lower) bid from the same firm a month ago… so they are now in an exclusive “due diligence” period of a few weeks to see whether they can agree on a takeover.
Sounds like it rhymes a bit with the fiber/data center deal that’s been percolating in my portfolio, as Zayo Group (ZAYO), similarly believed to hold fiber assets in the US that will be important for 5G, negotiates with private equity buyers as investors wait for dropped hints to indicate whether and at what price a deal might actually happen. I know ZAYO a lot better than I do Superloop, but I have no certainty about whether a deal will happen in either case — I’ll happily hold ZAYO mostly because I think “plan B” is also appealing, but all I really know about Superloop is that the guy behind the company is a dealmaker and has created and spun out several companies, so it probably won’t be boring. It will, however, likely be a risky near-term investment — either there will be an agreed-upon acquisition in the next few weeks, presumably at a price not lower than the A$1.95 that we already know about (and maybe much higher, I have no idea), or it will fall through and the shares would probably fall by 20% or so.
If any of our Aussie colleagues want to jump in with more wisdom about this company than I’ve shared here (wouldn’t be hard, sadly), then now’s the time — just use that happy little comment box below.
And we do have one more hinted-at stock as well…
“The second 5G stock I’ve ring-fenced for you isn’t directly involved in constructing this new internet network.
“Still, once it goes live, this firm could see its revenue, customer base and stock price ramp up in a massive way….
“It’s what I call a 5G ‘offshoot’.”
Why is it an offshoot? Turns out, mostly because he thinks this company will be a beneficiary of higher internet speeds.
“I think its core business and bottom-line profits could experience a sharp and sudden boost as 5G becomes THE internet standard across the country.
“And I believe you could score a quick 400% profit on the back of this firm’s rising profile.”
What do they actually do, you ask?
“They’re a cloud-based software developer. Specifically, for the superannuation industry….
“… superannuation is destined to be a $3.5 trillion Australian industry by 2025….
“And if this company can get a leg-up like it plans to and collect a bigger share of the superannuation market…it could mean big things for this company, and your wallet, too!”
Wait, why would that have anything to do with 5G? More from Härje…
“Today, 76% of financial advisors that dabble in super don’t use software that’s provided over the internet — that’s what cloud-based software is.
“Even though switching to cloud-based software could be more efficient and maybe even cheaper…most advisors won’t go near it.
“My research suggests the primary reason cloud-based superannuation is avoided comes down to connection speeds.”
That seems silly. Financial services applications are not generally the ones that place a high demand on broadband internet — you can connect with your bank or retirement accounts quite fast and easily in most US towns using your phone and 4G/LTE internet access, I imagine, and from what I can tell Australia’s wireless internet is not dramatically worse than the US (arguably better, in fact), and you don’t need world-leading internet speeds for that kind of data.
Yes, you do need fast speeds if you’re offloading your whole system to the cloud, as many Supers have done in Australia (often using AWS, it seems, which I guess had early market leadership in Australia much like it did here in the US), but I find it hard to believe that basic 4G/LTE and NBN broadband speeds are the major impediment (not having broadband at all definitely would be an impediment to any kind of cloud rollout for a fund administrator, since critical data would all be off-premises and they’d presumably need to access it all the time, but the move from broadband to 5G won’t necessarily change things… or give any particular company in that business an advantage over others).
But, of course, faster software is always better. Maybe this really is a big deal.
If you’re unfamiliar with “Supers,” by the way, Superannuation funds are essentially pre-tax retirement funds — similar in concept to US 401(k) plans but relatively larger in scope because employers are required to contribute a set percentage of salary for their employees (who can also contribute to these funds)… as with US IRAs and 401(k)s, there are several different alternative structures, including Self-managed super funds (SMSFs), but most of the money goes into a few hundred very large funds… there’s an interesting analysis of the industry from KPMG last year here if you’re curious.
So I don’t know whether “faster internet could be the catalyst that sends this company and its share price soaring,” that seems a bit of a stretch to me, particularly in the short term, but we can at least throw out a guess for you… there are several different “super” service and software providers, all of which are offering some sort of cloud-based service to their advisers and customers, but this one seems likely to be… Class Limited (CL1.AX, there is an illiquid OTC ticker in the US at CLLQF)
Class Super is the name of their key product, here’s how they describe it:
“Class Super is the leading cloud based SMSF administration software, used by accountants, administrators and advisers. Over 1,400 firms across Australia rely on Class Super to quickly and efficiently administer over 160,000 SMSFs.”
I’ll go out on a limb and say that even though I don’t know much about Australia, 5G is not likely to make a difference for this investment. It might be that Class grows or takes more share as a provider in the superannuation market, they are one of a half dozen or so companies that I noticed offering software and services for fund managers, advisors and investors, and I don’t know how their services or prices compare… though I would hesitate, personally, at the idea of investing in this industry.
That’s not because it’s a bad company or that financial services is a bad industry, but just because my assumption (without having researched Australia’s financial services marketplace at all) is that it will follow other countries, particularly the US, in moving toward lower and lower fees and more and more low-cost offerings for individual investors who bypass traditional or higher-cost advisors. That crimps margins, probably leads to more consolidation to cut costs, which would cut into the market for software… and presumably, as we’ve seen in other countries, each generation will be more focused on lower costs than their parents.
So far things seem to be working pretty well for Class — their investor presentation from last summer showed some strong growth that seems to be driven by a consolidating sector, and their latest quarterly update seems to be along the same lines.
But analysts are not particularly convinced that growth will bring much reward from here — they see revenue continuing to grow around 10% a year, but they also expect profits to be flat for the next few years and the average price target is 20% below where the shares now stand. I don’t know if those analysts are correct, of course, nor do I know for sure if Härje is picking this particular stock (I didn’t see any others that matched the clues, but the clues are a bit squishy), about all I know for sure is that all those analysts must know the stock a lot better than I do after a few minutes skimming through their reports.
So I won’t go too much further out on a limb here and reveal more of my ignorance about the Aussie markets and these particular stocks, but I’ll send it over to you for your thoughts — 5G is certainly an international investment trend and will very likely remain so over the next few years as the infrastructure is built and the services on top of that infrastructure begin to be sold, though winners and losers may well be different in different markets… have any favorites to commend to us? Like these Aussie small-cap ideas, or do you prefer something bigger (or better)? Let us know with a comment below.
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