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Is Superloop Ltd the next Vocus Communications Limited?

Shares in fibre-optic internet specialist Superloop Ltd (ASX: SLC) climbed 2.5% to $2.89 in morning trade after the company updated the market on its progress in creating fibre-optic networks to connect internet points of presence across Asia Pacific metro regions.

The company has 10kms of fibre optic networks in Brisbane, with the densely populated urban metropolis of Singapore having 120kms of existing duct through all of its major data centres and landing stations. It has also executed a deal to lay a 110km fibre optic network under the streets of Hong Kong with construction 38 per cent complete as at June 30 2016.

Building fibre-optic networks across urban metropolises requires heavy upfront investments with Superloop investing a total of $30.8 million over the year ending June 30 2016. As a result its full year EBITDA loss ballooned to $5.6 million from $3.5 million over the prior year. The company has cash on hand of $45.9 million, which it described as “sufficient funds for upcoming planned projects”. Annualised contracted recurring revenues are $11.9 million as at 30 June 2016.

Financial markets fans will also note that Superloop has invested $5.9 million alone in building a ‘superloop’ of 17kms specifically centred around the Singapore Stock Exchange, with over 70 members of the Singapore Exchange already signed up as part of the loop. This looks a blueprint project as Superloop has ambitions to expand across other Asian financial services and trading centres.

As an aside it’s worth noting fibre-optic connectivity and the time it takes data to travel to and from securities exchanges has become a hot topic ever since Michael Lewis’s book Flash Boys. The book alleged that high frequency traders in the US were gaming the market by effectively executing trades and receiving data price feeds faster than other market participants as they were using superior fibre-optic networks to connect to the exchanges.

It’s also notable that in many respects Superloop is attempting to emulate what Australian operator Vocus Communications Limited (ASX: VOC) achieved in building the tech infrastructure required to provide fast and secure internet services to corporate customers and urban city centres across entire nation states. As such both companies enjoy strong operating leverage as additional revenues translates to increased margin due to the low additional operating costs of selling spare capacity on available dark fibre.

Both businesses also enjoy the powerful tailwinds of the exploding demand for data, cloud services and high-speed internet connectivity, although Superloop has a long way to travel in terms of building its infrastructure and then generating sufficient sales to turn a profit.

Outlook

The company has received strong support ever since it hit the ASX boards last year and it’s not hard to see why as its valuation closes in on $300 million in anticipation of a bright future. Investors should be wary that the business has hurdles to jump and goals to kick yet and with a volatile share price I’ll be keeping it on the watch list for now.

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Motley Fool contributor Tom Richardson owns shares of Vocus Communications Limited.

You can find Tom on Twitter @tommyr345

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.

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