Morgan StanleyWe initiate coverage on Superloop(SLC) with an...

Morgan Stanley

We initiate coverage on Superloop(SLC) with an Overweight rating. We see SLC as a high-growth story followingthe completion of its initial investment/construction phase. However, we viewSLC as offering high return/high risk characteristics.

 

There are three key points in ourpositive thesis

1) Leveraged to structural growth

 

SLC is well placed to benefitfrom the rapid growth in data traffic in the Asia Pacific region from: i) Cloudcomputing; ii) Video; iii) Connected Devices; & iv) Data Centreconnectivity (Exhibit 74). SLC has built its network in locations of high datainterconnectivity, such as data centers, submarine cable landing stations, enterprisebuildings, etc to best leverage these structural drivers.

 

2) Attractive business model supportsstrong earnings growth

 

SLC generates attractiveincremental returns from: i) high incremental margins due to fixed cost leverage;ii) recurring revenue with customers on long-term contracts; & iii) strongcash flow generation as utilization rates increase. We forecast ~30% EBITDACAGR (FY19-22E), much higher than a typical telco, which normally deliverutility-like growth however, SLC is working from a lower base, enabling fasterearnings growth.

 

3. Attractive valuation in thecontext of growth.

 

SLC shares have declined by ~45%over the past six months (vs. ASX 200 -12%), after its FY18 results missedexpectations. SLC now trades on 9x FY20E EBITDA, offering ~30% EBITDA CAGR(FY19-22E). This screens favorably compared to A&NZ telco peers, whichtrade on a median of 8x and which are expected to deliver a much lower+7%EBITDA CAGR (Thomson Reuters). See Exhibit 75.

 

Price Target

 

Bull: A$4.00

22x EV/EBITDA FY20E

 

Base: A$2.50

13x EV/EBITDA FY20E

 

Bear: A$0.50

4x EV/EBITDA FY20E