5G Networks Ltd (ASX: 5GN) shares could be a hidden gem in the ASX tech share sector. The company is a small player in the telecommunications carrier space, providing companies with cloud-based solutions, managed services and network services.
Could 5GN be the ASX tech share to buy in 2020?
An exciting space with improving profitability
In my view, 5GN is in a future proof space with core services similar to that of NextDC Ltd (ASX: NXT) and Megaport Ltd (ASX: MP1), 2 leading ASX tech shares that have delivered significant shareholder value over the years.
The company has shifted its focus to achieve further operational synergies combined with high margin annuity revenue. This is reflected in its 236% earnings before interest, tax, depreciation and amortisation (EBITDA) growth in 1H20 against the prior corresponding period.
In April, 5GN announced the commercial availability of its 5GN Cloud product. This private cloud platform allows for seamless integration with globally recognised servers such as Alibaba, AWS and Azure with high speed connectivity and market leading data centres. This solution aims to target mid-sized businesses that have struggled with implementing effective digital transformation in the past, as well as companies whose current IT footprint leaves them ill-equipped to handle flexible workplace requirements.
A strong balance sheet to accelerate growth initiatives
On 10 June, 5GN initiated a $18.3 million institutional placement at a fixed price of $1.23 per share. The company reported that the funds would be used to expand its fibre network in Sydney and Melbourne, and new builds in Brisbane and Adelaide, focused on CBD demand and key data centre locations.
The additional funds would also allow the company to explore M&A opportunities and additional unique growth opportunities. In the release, 5GN advised it will have a pro forma net cash position (as at 31 March 2020) of $16.4 million on completion of the placement.
Acquisition of ColoAU
On 8 July, 5GN announced the acquisition of ColoAU, a leading wholesale provider of data centre services and hyper-speed global networks. The purchase price for ColoAU is $2.4 million in cash and $500,000 in 5GN shares, with an earn-out of up to $500,000 in 5GN shares if revenue growth targets are achieved.
Normalised annual revenue for ColoAU is reported at $4.2 million and normalised EBITDA at $700,000. 5GN expects to realise significant synergies between the two businesses, in the range of $500–$700,000 per annum.
This acquisition will allow 5GN to fast track its wholesale business, utilising ColoAU's automated systems and on-demand provisioning platform to meet the growing demand for high-speed connectivity across cloud platforms and data centre hosting in Australia and international markets.
Foolish takeaway
In my opinion, 5GN represents a high risk, high reward investment opportunity given its size and market capitalisation of just $100 million. However, I believe the company is in an exciting space, with recent growth in revenue to EBTIDA conversion. Its capital raising provides the company with much needed balance sheet flexibility and 5GN has also evidenced its growth initiative in acquiring ColoAU.
While 5GN may not be fit for all investors, it is certainly a high growth ASX tech share to watch. At the time of writing, the 5GN share price is trading for $1.16 per share, which is down 4.53% on last week's close but up 48% year to date.
