Is Netcomm Wireless Ltd a screaming buy after Nokia deal?

Netcomm Wireless Ltd (ASX:NTC) announces a deal to supply industry titan Nokia.

a woman

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Netcomm Wireless Ltd (ASX: NTC) today announced that it has signed a worldwide purchase agreement with Nokia Corp for the supply of its fixed-wireless devices for Nokia's FastMile initiative. FastMile enables operators to provide broadband internet services to rural and regional areas.

Fixed wireless enables the connection of two fixed locations through the air rather than using cables. This makes it an attractive solution in rural locations where it is uneconomical to lay cable infrastructure.

Netcomm has been a standout performer over recent years with its share price up 725% since the start of 2014 as it continues to execute on its global strategy. This latest contract win further demonstrates that the company is well placed to capitalise on the expected increase in global use of fixed wireless internet solutions.

The company has two main business lines. Firstly, its Australasian-based broadband division provides routers to internet service providers including Telstra and Vodafone and retailers such as Officeworks. However, the more exciting part of the business is its global machine to machine (M2M) and fixed wireless operations, with clients such as the NBN, a major US carrier and now Nokia.

The company's strategy for the fixed wireless opportunity is to be "first to market" and it has so far been successful with a string of recent contract wins. Regarding M2M, Netcomm is taking a more tailored approach and plans to work with customers to meet their individual requirements.

The NBN roll-out has gathered pace over the past year with coverage growing by 107,000 premises since June 2015 to 376,000 at 28 April 2016. Research business Ovum places the NBN top amongst global peers in a price and performance comparison of fixed wireless products.

This is good news for Netcomm and could strengthen its position when competing for new business overseas especially when many carriers have indicated they are going to shut down their copper networks. Fibre is only expected to replace copper in urban areas and so carriers could use fixed wireless to serve the remaining 10% of customers who live in remote locations.

For 2016, the company has guided for 14.4% revenue growth to $85 million and earnings before interest, tax, depreciation and amortisation (EBITDA) of $6.4 million which is down slightly on 2015. However, the company notes that this EBITDA figure includes $4.3 million invested in "staff, skills and infrastructure to deliver on the substantial growth opportunities available" and $0.7 million of non-cash expense related to share rights.

I do not think that the share rights expense should be excluded for the purposes of valuing Netcomm given share based compensation is a real cost to the company. Furthermore, I question the logic of adjusting for money spent on new staff and infrastructure since there is no guarantee that Netcomm will be able to successfully exploit growth opportunities.

Looking back over previous years the company capitalises a significant amount of R&D costs and arguably these should also be expensed. Regardless, after paying tax Netcomm generates little in the way of cash yet commands a market capitalisation of over $400 million.

Netcomm has done well to win some major global contracts but without any details it is hard to know what these are really worth. It could be argued that the company's anaemic cash flow is unimportant since it is investing ahead of the revenue curve, but for me the current share price is a lot to pay for a low margin manufacturer reliant on continually winning new contracts.

Motley Fool contributor Matt Brazier has no position in any stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

More on ⏸️ Investing

Close up of baby looking puzzled
Retail Shares

What has happened to the Baby Bunting (ASX:BBN) share price this year?

It's been a volatile year so far for the Aussie nursery retailer. We take a closer look

Read more »

woman holds sign saying 'we need change' at climate change protest
ETFs

3 ASX ETFs that invest in companies fighting climate change

If you want to shift some of your investments into more ethical companies, exchange-traded funds can offer a good option

Read more »

a jewellery store attendant stands at a cabinet displaying opulent necklaces and earrings featuring diamonds and precious stones.
⏸️ Investing

The Michael Hill (ASX: MHJ) share price poised for growth

Investors will be keeping an eye on the Michael Hill International Limited (ASX: MHJ) share price today. The keen interest…

Read more »

ASX shares buy unstoppable asx share price represented by man in superman cape pointing skyward
⏸️ Investing

The Atomos (ASX:AMS) share price is up 15% in a week

The Atomos (ASX: AMS) share price has surged 15% this week. Let's look at what's ahead as the company build…

Read more »

Two people in suits arm wrestle on a black and white chess board.
Retail Shares

How does the Temple & Webster (ASX:TPW) share price stack up against Nick Scali (ASX:NCK)?

How does the Temple & Webster (ASX: TPW) share price stack up against rival furniture retailer Nick Scali Limited (ASX:…

Read more »

A medical researcher works on a bichip, indicating share price movement in ASX tech companies
Healthcare Shares

The Aroa (ASX:ARX) share price has surged 60% since its IPO

The Aroa (ASX:ARX) share price has surged 60% since the Polynovo (ASX: PNV) competitor listed on the ASX in July.…

Read more »

asx investor daydreaming about US shares
⏸️ How to Invest

How to buy US shares from Australia right now

If you have been wondering how to buy US shares from Australia to gain exposure from the highly topical market,…

Read more »

⏸️ Investing

Why Fox (NASDAQ:FOX) might hurt News Corp (ASX:NWS) shareholders

News Corporation (ASX: NWS) might be facing some existential threats from its American cousins over the riots on 6 January

Read more »