What is the stock?
Over The Wire Limited (ASX: OTW) is an IT/telco business providing solutions to SME clients. The company is headquartered in Brisbane.
How long have you held the stock?
We have known the business and management team since their IPO back in late 2015, when four businesses were combined to create OTW. We first invested about 12 months ago after becoming comfortable that a lot of the original risks had been mitigated, after management successfully integrated the IPO businesses and had consistently delivered earnings growth.
What do you like about it?
Firstly, we like the management team who are very aligned with shareholders (more on this below). We like businesses that compete with large, slow moving incumbents, with low customer satisfaction levels. In our opinion, OTW fits that mould. We like the capital light business model that has delivered strong organic growth. We like that the rationale for acquisitions is focused not on cost synergies, but revenue synergies, which result in selling a more ‘holistic’ solution to more customers. Finally, it’s pleasing to see the conservative balance sheet and high cash generative nature of operations.
How is it better than its competitors?
Competitors are traditional large telco providers, where SME customers tend to ‘get lost in the organisation’, as these providers focus on other market segments and struggle to provide a compelling service offering. Simply put, OTW is solutions and service focused rather than product focused. It is nimble and works with SMEs to customise an IT/telco solution, which is best for the customer, not the other way around.
OTW offers a service that takes responsibility for all aspects of its customers IT/telco needs, including; voice, networking, redundancy, security, data storage and account management. The mantra of an “all in one service provider”, where you have one point of contact for all IT/telco services, seems to resonate well with SMEs.
What do you like about its management?
We believe OTW has a high quality management team that we’re comfortable backing to do the right thing for shareholders. Those reasons include:
- The two co-founders own over 50% of the business, creating strong shareholder alignment.
- Management is incentivised through long-term EPS growth.
- To date, the company has always delivered on its market guidance.
- Company strategy and communication is simple and consistent.
- Management has consistently delivered returns on funds employed of circa 25%.
- Management has successfully purchased and integrated numerous EPS accretive businesses.
- The internal systems are efficient and scalable.
- The company has a strong culture with high employee tenure.
What is your target price?
When valuing investments, we look for companies that we feel can achieve a total shareholder return over a three year period of 20% per annum. OTW currently hits our hurdle for achieving this return profile.
At what point would you sell it?
If our valuation was achieved, if the risk/return profile didn’t stack up, or if there was a significant deviation from the initial investment thesis.
How much has it added (subtracted) to your overall portfolio over the last 12 months?
It has been one of the top contributors to the NAOS Small Cap Opportunities Company Limited (ASX: NSC) portfolio since its December 2017 inception. Total OTW shareholder returns have been close to 100% within that time.
Where do you see the value?
OTW has recently announced two acquisitions for which they raised approximately $26 million to fund. These acquisitions are highly EPS accretive and should provide a significant boost to OTW’s earnings. If the management team can successfully integrate and achieve the revenue synergies available, we see significant value here. Furthermore, OTW’s penetration of their perceived ‘target market’ is approximately 1%, hence we see a long runway for organic growth to continue over time.
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