Telcos represent a massive Australian industry. Market leader Telstra (ASX: TLS), for instance, has a whopping $62 billion market cap, while smaller but still well known players such as TPG Telecom (ASX: TPM) and M2 Telecommunications (ASX: MTU) boast nearly $3 billion and over $1.2 billion market caps respectively.
One much smaller player, BigAir Group Limited (ASX: BGL), has just a $106 million market cap.
Perhaps unsurprisingly, all four of these companies have outperformed the S&P/ASX 200 index (Index: ^AXJO) (ASX: XJO) over the last five years — as internet and mobile phone usage have grown tremendously. In fact, TPG, M2 Telecommunications and BigAir have all risen over 1,000% during this time, as shown in the chart below. Simply click for a larger view.
Spotlight on BigAir
While the bull/bear cases for TPG and M2 are better known, BigAir has been flying under many investors’ radar. Yet this under-the-radar status may not be entirely deserved.
In case you’re not familiar with the company — BigAir provides fixed wireless broadband internet and related services to customers in business and higher education (that is, student accommodation). Yet unlike many of its competitors, BigAir owns its own network — which is among the largest metropolitan fixed broadband networks in Australia — and does not have to depend on Telstra’s.
BigAir has been expanding through both organic customer growth and small, bolt-on acquisitions, and this has translated to strong sales and profit growth. In 2012, its revenues grew 47% to $22.9 million, while underlying net profit after tax rose 114% to $4.3 million.
Valuation versus risk
Today, the company has a little over $1 million in net cash. The shares trade at around 4 times sales, 24 times earnings and an EV to EBITDA of 10 — all of which reflects the risk/reward profile. In short, while there’s no doubt the business is growing quickly, this is also an industry understood to be subject to disruption, especially among junior players.
For instance, in June 2012, CEO Jason Ashton commented on the NBN threat to The Sydney Morning Herald: “The fact is that nobody really knows what’s going to happen when the NBN comes in. It will definitely lower the barriers to entry for the sector, meaning increased competition, and lower profit margins.”
The takeaway for investors
Even with the shares up over 1,000% in the last five years, this little company may have more in store for investors. You’ll want to do your due diligence, of course. Put this promising small company on your watch list while you investigate further.
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Motley Fool contributor Catherine Baab-Muguira has no financial interest in any of the companies mentioned in this article. Take Stock is The Motley Fool’s free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.
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