Thursday, 14 February 2008

Pipe Networks Delivers Again

After the market closed yesterday Pipe Networks (PWK) reported 1H08 earnings of $3.3m Net Profit After Tax, a 40% increase over the previous year. That was at the upper end of the company's previously forecast range of $3.1 - $3.3m. Revenue grew 47% whilst eps increased 23% as the share issue in 2H07 diluted eps growth somewhat.

Revenue growth was solid across all product areas with Dark Fibre sales growth in excess of 40%. It seems the company can't build their data centres quick enough. Their newest data centre, (DC3) completed just 6 months ago is already at capacity. A new data centre (DC4) is under construction and is expected to be fully leased by the completion date of 1st July 2008.

Pipe also stated that they have more than $300,000 per month in new contract revenue which will begin to be billed between now and July. The company was able to improve it's margins on existing assets, however that was offset by higher commission payments to personnel for securing a number of new sales contracts and continued investment in infrastructure.

The company claims the higher commission payments are one-off whilst the contracts are of a recurring nature so margins should improve over the next 6 months.

Project Runway

There was not much in the way of new information on project runway except for additional details on the funding structure. The company still sees no need to raise additional capital at this time but does not rule it out in the future.

In a separate announcement the company stated that they had secured an additional $20m in funding from ANZ taking the total debt facility to $40m. The facility gives the company the flexibility to take advantage of other strategic opportunities if they should arise.

Looking ahead, co-founder Steve Baxter has decided to step down as an executive Director whilst key appointments have been made in Jason Sinclair to the position of Chief Operating Officer for Pipe Networks and Brett Worrall as Pipe International Chief Operating Officer.

The Company also announced the 'Federation Project' which is an extension of the company's metro network in Perth and Adelaide. The project is expected to be completed by June 2008 and to be operating at break-even within 6 months of completion.

Earnings Guidance

The company made no change to their previously announced guidance for FY08 and FY09 however they were a little more specific on FY09 numbers and also offered a forecast for FY10.

Below is slide from the company's 1H08 investor presentation. As can be seen, the company is on a what can only be described as an amazing growth path. I am cautious of looking too far out into the future. Especially since the FY10 numbers hinge on the successful completion of Project Runway on time and on cost.

Given the company's consistent tack record of delivering on forecasts I expect FY08 numbers are in the bag. Also FY09 numbers are not contingent on Project Runway. They are based solely on the continued strong organic growth of the existing business and further investment in developing Australian Assets.

Thus, in the interests of being conservative I calculate my valuation of Pipe Networks on the company's earnings forecasts out to FY09 and assume nothing for project runway. Discounting back at 15% I value PWK at $3.18 per share. The current price of $4.50 is at a significant premium. That premium is obviously in some part pricing in the potential of project runway.

If I take management's forecast of $17m NPAT for FY10 and assume no further equity raising, I value PWK at $6.70 per share. Project Runway is scheduled to go live in approximately 16 months time. There is a good chance that PWK can secure additional long term contracts in that time and therefore FY10 forecasts could prove to be conservative.

The greatest risk for PWK remains the execution of project runway. Cost overruns and time delays could significantly impact future earnings beyond 2009. Given management's exemplary track record of delivering results I think they deserve the benefit of the doubt.

This will be an exciting growth story to observe in the next few years and whilst there are definite risks for investors, it is difficult to find small, profitable, ASX listed companies with comparable potential upside.