Pipe Networks (PWK) a compelling growth story

PWK first came to my attention in November when the company upgraded it's FY07 earnings forecast to $4.7m - $5.0. Digging a little deeper I found a company that is going through a phase of rapid growth by exploiting a niche position in the fast growing Australian network infrastructure services industry. Currently PWK runs Australia's largest Internet exchage reaching across 6 capital cities and operates Australia's third largest metropolitan fibre optic network. PWK also provides secure sites for their clients IT equipment needs.

After a placement and rights issue in FY06 the company has significant cash reserves ($9m as at 30 Jun 06) and a newly negotiated debt facility of $10m to fund further expansion. In addition the company generaterd $7.6m cashflow from operations on $13m in revenues in FY06. Earnings are underpinned by medium term contracts of 3 to 5 years for their services and with the potential to extract more revenue through add on services such VOIP in the future. A recently signed MOU with VNSL to build a submarine cable from Guam to Australia to increase Australia's international fibre capacity gives PWK further scope for growth.

I have followed the company's guidance for FY07 earnings forecasts and given their short track record as a listed company may surprise to the upside. My forecasts for FY08 are fairly conservative given the company's strong balance sheet and earnings growth opportunities. I've also been conservative on margins considering the opportunites to extract further revenues from new service offerings. Whilst the company has been a stellar performer and is trading at 27x FY07 earnings I believe this is more than justified given it's current growth profile and potential.