In the last quarter, we discussed that we like junior telecommunication companies because of the industry consolidation. Junior telcos easily get cost synergy from acquisitions. This week we look at one of our junior telco holdings, Hubify (ASX:HFY), which has made a number of acquisitions since 2020. We see a great potential in this company.
Company overview
HFY is a diversified provider of telecommunications services, with ‘three pillars’ of strategic growth; Wholesale & Infrastructure, Consumer & Business and Specialty Services. Their services include hosted voice solutions, cloud services, mobile business data and 3CX phone system.
Immediate cost saving synergies
HFY is an acquisitive company which has a history of acquiring companies with immediate synergies from improved pricing and back office redundancy. HFY reaches a size that they are charged at an attractive wholesale price from suppliers. When HFY makes acquisitions, the company ensures that they achieve immediate cost saving synergies from by shifting to HFY's existing suppliers. For example, HFY recently acquired the customers of Queensland based telecommunication provider Nethoster for $800k. Pre-acquisition, Nethoster made $250k of EBITDA from those customers. Post-acquisition, HFY was able to reduce Nethoster's wholesale costs, resulting in an immediate $150k EBITDA improvement. This meant HFY effectively paid only 2x EBITDA for Nethoster (equating to a 50% pre-tax return on acquisition price), which is a very attractive way to grow earnings!
Back office redundancy is also a source of cost saving from acquisition. Telco companies have similar direct and overhead costs. In the Nethoster acquisition, HFY took over the overseas support team and reduced the back office costs.
Strong firepower for acquisition
HFY raised $5 mil in October, allowing the company to make further acquisitions and expand. HFY has a disciplined approach in acquisition. They usually pay around 1.5-2x EBITDA on acquisitions. HFY currently has $6 mil in cash. If HFY keeps $1 mil for working capital purposes and has $5 mil to make acquisitions, the Company has the potential to increase the EBITDA by $2.5 mil. Considering the Company is forecasted to make $2.9 mil EBITDA in FY21, HFY has the potential to double its profitability from acquisitions.
Conclusion
HFY is currently trading on 30x PE while having a low risk approach to double its profit through acquisition without using debts. We believe, if they can continue to execute their acquisition strategy, the stock has a fair value of $0.15, a 50% upside. Moreover, it has a further upside potential if they start raising debts.
Till next week, happy investing.
Michael and Kenny
