This ASX tech share will get a massive boost in July

A stock that’s growing, profitable and undervalued? A fund manager reveals the company expecting a nice tailwind coming soon.

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rising asx share price represented by investor with look of happy surprise

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Technology growth shares have done it tough over the past few weeks, with the market turning on them in favour of other more ‘value’ sectors.

However, Capital H Management portfolio manager Harley Crosser reckons he’s found a gem that’s undervalued, profitable and with plenty of room to grow.

It’s digital services provider Webcentral Group Ltd (ASX: WCG). The Webcentral share price was trading at 53 cents at market close on Monday.

“With a clean balance sheet, sticky/recurring revenues, strong cash flows, growing top line and an appetite for acquisitions I’d argue WCG deserves 20x [price to] EBITDA,” Crosser posted on Livewire.

“That would put the stock above $1.”

That’s double the current price.

Capital H Management holds the shares so it’s in Crosser’s interests to see the stock do well. But here are the reasons he outlines:

A huge tailwind coming in July

Australian Domain Administration (auDA) is the authority that administers internet names under the .au domain.

According to Crosser, July this year will see history created as auDA will allow registrations of first-level domain names directly under .au. For example, instead of fool.com.au, this publication could grab the name fool.au.

auDA denied to The Motley Fool that July has been set as the open date for registrations. The Motley Fool understands it could be later in the year.

Regardless of when it happens, first-level domains under .au has never been allowed before and is expected to see a surge in business for domain name registrars like Webcentral.

Australians that already have web addresses will have a 6-month grace period to flag their interest in the equivalent new .au name. This is to stop opportunistic ‘squatters’ from nabbing existing business names.

“If you think from the perspective of a business owner, the logical decision is to just buy the domain in order to protect your brand,” said Crosser.

“The risk is that someone else buys it and either you have confused customers sent to the wrong website, or a fight on your hands. It’s a small outlay each year for this security and peace of mind.”

He added that when a similar move occurred in the UK, the industry saw a 20% to 30% increase in revenues.

“Webcentral has given early guidance around why they expect domain registrations to rise by a similar amount on the release of .au domains,” Crosser said.

“.uk domains have since become the dominant extension and I would think that in a few years the same will happen here.”

Pre-sales of .au names open from 12 April.

While it’s a one-off event, the new incoming clientele has very sticky potential.

“It’ll be recurring every year as domains need to be renewed. It also kicks in at the very start of FY22, which is nice from a timing perspective for the financial markets,” said Crosser.

“Domains are typically the pull through for other Webcentral services too. You buy a domain, then hosting, emails, security, online marketing, etc. so the other parts of the business should benefit.”

New management after a bidding war

Webcentral was the company originally named Melbourne IT, which was Australia’s first internet domain name registrar.

So for three decades, Australian businesses and residents have engaged with it to register their .com.au and other .au internet addresses. But in recent times the business has been in huge trouble.

“Late last year, the company was still saddled with debt and the ‘for sale’ sign was put up by the previous board,” said Crosser.

A bidding war then ensued between US giant web.com and 5G Networks Ltd (ASX: 5GN).

According to Crosser, both parties “significantly” undervalued the business with their initial bids. But just as the purchase price went up, web.com dropped out of the race.

5G Networks’ final offer was rejected by Capital H Management and another large shareholder. But 5G ended up with a part shareholding and took board and executive control of Webcentral.

“The stock started to rally almost as soon as the offer period closed, reflecting the fact that: 1, new management could fix the company, with some very low hanging fruit in front of them; and 2, the debt issue, which was the main reason the stock was so depressed, had effectively been removed.”

Crosser believes the new management’s interests are synchronised with minority shareholders.

“The MD, Joe Demase, owns 15% of 5GN and 10% of Webcentral personally. He’s taking no cash salary,” he said.

“His Webcentral options vest on hitting $10m of annualised EBITDA in that company. He bought another $100k of stock on-market earlier this month.”

Erasing the debt

According to Crosser, new management has taken control of the debt.

“As part of the all-scrip bid, 5GN paid back the $46m of debt to Webcentral’s bankers and assumed it themselves. That has since been reduced down to $40m of net debt, or 3 to 4x free cash flow.”

The company has committed to the market that the remainder of the debt will be paid off. Management has a few different options to reduce it even further, according to Crosser:

  • Capital raise or external bank funding
  • A merger with 5G Networks
  • Eventually pay it off with cash (it has $10 to $12 million of yearly free cash flow)
  • Debt to equity conversion
  • A combination

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Returns as of 15th February 2021

Tony Yoo has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. recommends 5G NETWORK FPO. The Motley Fool Australia has no position in any of the stocks mentioned. 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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