Dirty little thing called growth and why I think Symbio is good value
Like in most market downturns, small cap growth stocks are being punished hardest by a market that now views growth as a dirty word. This is great news for investors, as it creates opportunities to invest in businesses whose share price decline is due to changing sentiment rather than deteriorating fundamentals. In this climate, one company we think deserves investor attention is Symbio Holdings (ASX:SYM).
The Symbio share price has dropped from around $7 in October 2021 to around $4 today. To be honest, I don’t think it was expensive before the pullback. But getting re-classified as a tech company in late 2021 seems to have been a red flag for some investors.
Symbio is a telecom system and services provider, with a twist. It provides services to customers directly and to other telcos to help them run their networks, just like normal telcos do. But it also provides services to a new breed of telecom network user, via CPaaS and UCaaS solutions. That’s the tech part. Don’t worry if you don’t follow the fancy tech jargon-orientated descriptions below, or Symbio’s website description.
UCaaS (Unified Communications as a Service) is a software orientated cloud-based service delivery of key telecom functions – voice, video, conferencing and messaging. CPaaS (Communications Platform as a Service) is a software development platform with pre-built services, that makes it easy to integrate telecom related services into another IT environment.
Two use cases for Symbio’s solutions
Simply put, telecom networks we have today were designed and built long before the Smartphone-enabled future was considered. And that Smartphone has given rise to (unforeseen) business models that want/need access to these old-world legacy telecom networks as part of their customer proposition in ways that were never envisaged. Symbio’s CPaaS tools enable that access and connectivity.
And that’s a game changing growth (that dirty word again) scenario. You see, when Zoom needs to offer voice access to a video call conference it needs to be able to seamlessly join that call to its Zoom stream and have the audio terminate on the traditional telecom network. In Australia, Symbio’s software helps do that. When you are trying to find your ride-share driver, you don’t want them to have your number and vice versa, but you do want to place a call to find out where that driver is. Symbio’s software helps do that. These are just two of the many and growing use cases for Symbio’s solutions.
These customers, and many more like them, want seamless access to the existing legacy telecom network, and they want it to work without human intervention, natively from inside their own technology stack. They want to be able to do this without having to work through a large technology project with every telco in every market they want to operate in. Moreover, they want to be able to evolve their technology stack, as that’s where their competitive advantage lies, without having to continually re-work connections to all these telcos every time they make a change. Symbio takes care of maintaining the connections to the telcos, and makes available the services on those networks as lines of software code which are easily embedded into the core technology stacks of their customers.
Zoom and Ride Share companies are in the business of helping you work from home and get home from the pub, not building and maintaining non-core technology links with many telecom companies in many markets. Symbio’s tools let them focus their efforts on their core proposition.
The numbers behind Symbio
Now let’s deal with that dirty word. Growth. Well actually it turns out in Symbio’s case you don’t have to. You see our net present value (NPV) model says you need to believe in precisely zero growth forever and still make a return north of 10 per cent per annum with Symbio on its current share price. That’s worth a bit of explanation.
Symbio delivered $15.7 million of free cash flow in FY21 – yes, Symbio is profitable, growing, free cashflow generating, and investing costs and capex for growth (but don’t let that put you off).
If you assume free cash flow of $15.7 million per annum, with no growth, at 10.7 per cent (weighted average cost of capital) WaCC (see calc below) you get $4.13.
WaCC assumptions – Symbio had $51.6 million of net cash on its balance sheet at 1H22 (Yep, no debt – Symbio has $63 million of undrawn facilities, Symbio is bankable). So let’s use that inefficient capital structure against them in our WaCC calculation, and let’s assume the entire business remains equity funded. Australian 10-year bonds at 3.5 per cent (almost today), equity risk premium (ERP) 6 per cent (what we have always used) and a beta of 1.2. Historically it’s been sub 1 for Symbio, but we are trying to make this a discussion about how obviously cheap the current cashflows are and not about what beta we choose to use that illustrates that. Those inputs get you to a Cost of Equity of 10.7 per cent, which, if we assume zero debt forever, means WaCC = CoE, in this case 10.7 per cent.
Put another way Symbio at $4.13, FY21 free cash flow (FCF) grows at 0 per cent forever, but the net present value (NPV) model says will give you a perpetual return of 10.7 per cent per annum. For those that are more inclined to look at short-term earnings metrics, Symbio is on 8.4x F22 (June 22, i.e. last year) EV/EBITDA, and 7.6x consensus F23. Cheaper than the market at almost 10x.
CPaaS and UCaaS are growing markets and Symbio’s business has been growing with that. Consensus has Symbio growing EBITDA at 12 per cent CAGR, faster than the bottom-up consensus market EBITDA growth expectations of 7 per cent over the same period (which is unlikely to happen in our view, but that’s another story).
Symbio’s medium-term growth strategy
We haven’t invested in Symbio because it’s pricing zero growth; that’s just a nice to have. And we aren’t investing in Symbio for next year’s earnings. We are there because we think that medium-term growth strategy looks plausible. Let us explain.
Symbio is a dominant provider of CPaaS services in Australia, and has an enviable client list of global technology and consumer facing growth businesses. Those businesses offer telecom related features in their services in Australia and, as discussed above, Symbio enables that capability. In other markets in Asia, it’s not so straightforward for these customers to turn up and gain access to the local telecom markets, and those customers want a SYM like player in those markets. That’s Symbio’s medium-term growth opportunity.
Symbio has laid all this out, identifying six Asian markets as 2022-2025 growth regions to enter – Singapore, Malaysia, Taiwan, Japan, South Korea and Vietnam. Management’s 2030 vision is for 100 million phone numbers – the unit revenue driver for CPaaS. This compares to 6.4 million numbers Symbio hosts in its Australian CPaaS today. That’s a giant shift in addressable market.
The unit economics of this move in our view should be compelling, as Symbio’s toolset is software based, it should scale well, as this is not a heavy infrastructure capex build story. To help size this potential opportunity, Symbio’s CPaaS business made $18.6 million of gross profit in 1H22 – that’s an annual gross profit of just over $6 per annum per number. There will be some/lots of overhead as Symbio enters these markets, and we can’t be sure the unit economics above will be the same. But there is a lot of room to compensate for that and for error in 100 million numbers x $6 GP per number per annum = $600 million gross profit per annum versus Symbio’s current EV of $295 million.
Clearly a lot has to happen before the market will price in a $600 million gross profit per annum scenario from this Asian growth strategy. It’s early, but Symbio is getting some runs on the board having just gone live in Singapore with 10 clients (1H22) won already, and has plans to enter Malaysia this year. Do we think it’s all going to go smoothly? No. Is it going to take more time than Symbio plans? Probably. Can we tell today if 100 million numbers is a realistic opportunity? No. But neither is paying the costs and capex of market entry and getting nothing for it as the share price implies today. Plus this Asian Growth strategy is lower risk than a normal move to find overseas growth by an Aussie company as it involves servicing many of the same clients Symbio serves in Australia today – yep, its Symbio’s clients that are pulling them into these markets. This isn’t build it and they will come; many of those clients are already operating there, but without telecom access capability, and they want it built.
In any case you aren’t paying for it. Zero is priced in for growth of any kind, let alone an opportunity to address a market more than 10x what Symbio successfully addresses today.
In more “normal” markets you would expect to pay for the underlying growth you are getting today (which isn’t the zero the parsimonious NPV assumption-driven calculation suggests) and you would put some option value for the Asian growth strategy. That same NPV tool suggests Symbio’s Asian growth strategy succeeds is worth many many multiples of the current share price if it gets delivered.
The Montgomery Small Companies Fund owns shares in Symbio. This article was prepared 13 July 2022 with the information we have today, and our view may change. It does not constitute formal advice or professional investment advice. If you wish to trade Symbio you should seek financial advice.
Current share price $1.50 – are you still positive on this company?
Hello Marty, Gary Rollo is currently on leave, but he made these comments 21/12:
Based on what I can see today it’s hard to take the same view as the market price for the shares imply. At $1.60 – I think that’s roughly right after today – it’s implies the business shrinking by more than half, let alone the zero chance of success in Asia. That’s not a credible probable outcome, of course it’s a possible scenario as this is equity investing, but it’s far less likely based on what we can see today than SYM having success in Asia.
The announcement yesterday obviously doesn’t help, it upsets investors and fund managers just step back. But investors are fickle. Especially in markets we are in today. I tend to think that demonstrating success in rolling out in Asia is going to change investor perceptions.
Gazza, surely a screaming buy at these levels……..time to load up????
Richard. Thanks for your message. We have no special insight (or time-machine) that assists in market timing, but in our opinion we can see that the share price is discounting a decline in the cashflows from here, let alone the growth opportunity in Asia that we see. So we have made sure that the fund’s exposure to SYM hasn’t dropped back with its price. Hope that helps. G
Telecommunications Networks tend to be nationalistic and protected by governments, authorities, watchdogs etc. These bodies provide oversight for protectionism against terrorism, hacking etc. What regulatory barriers do you expect Symbio to face whilst they attempt to enter into the other foreign markets?
Alex, thanks for your question. Regulation in each market determines rights of access and use, and these include principles and practical requirements to protect against those challenges you list and more. SYM will have to meet the regulatory requirements in each of the markets they seek to operate in, including in many (if not all cases) acquiring telecom carrier licenses (which affords obligations & rights of operating as a Tier 1 telecom player). Regulators won’t compromise on those requirements for SYM. On the other hand regulators also want their telecom networks to be a platform that benefits their economy and society, and allowing new players (like SYM) to operate on their networks allowing new services and/or competition to arrive in their markets is most usually welcomed. Hope that helps. G
” management’s vision is for 100million phone numbers ” How much of the potential market in those countries mentioned, does that represent ? Is it an optimistic number ?
Wayne. Total Addressable Market? Great question. Lets set the scene. Today we have 80mn phone numbers in Australia & New Zealand for roughly 31mn people, thats over 2.5 phone numbers per person! With around 6.4mn (1H22) phone numbers hosted by SYM that gives them a 8% share of the total market in ANZ today. SYM’s share of ANZ phone numbers has consistently grown. But what about Asia? SYM is targeting 6 countries – Singapore, Malaysia, Vietnam, Taiwan, South Korea & Japan, and these countries have 368mn people (at the last census counts we tracked). Whilst we don’t know the number of phone numbers in each market we can set up a scenario, extrapolating the ANZ experience and see what that tells us. 368mn people at 2.5 phone lines per person = 920mn lines. Give or take. Historically both population and the number of phone lines per head has grown, as has SYM’s market share, which is being driven by their relative technology advantage. So 100mn numbers would be c.11% of that market today v SYM at 8% in ANZ today, we’d expect the market to be bigger by the time we get to 2030 (populations and phone per head increase continuing) as well as SYM’s market share to grow (as it has done consistently in ANZ). There is also the opportunity to enter into more markets over time too. Hope that helps. G
Thanks for your thoughts/insights Gary. Appreciate you taking the time to provide such considered responses.
Thanks for your response Gary. In retrospect I was assessing your analysis of a growth stock through a value lens (clearly overlooking the title of your article whilst doing so). As a growth play it does seem to have a lot of potential. What sort of timeframe would you ordinary put on a stock like this (to reach anticipated inflection point)?
Matt Thanks for your question. Timing? Ask me an easy one why dont you! The process of international expansion has a three major phases. 1. Preparation – this looks to have been done, as the product has been taken to a point where it can elegantly “travel”, markets have been identified and strategies for entry have been honed and in Singapore (new market 1) SYM have entered. 2. Execution – this is the phase we are in now, uncertainties here are all around how do SYM efficiently but quickly enter and achieve a platform that’s suitable to grow from in each of the markets. That ranges from organic start-up (takes time) to M&A (comes with whatever capability/problems they have when you buy them). Third phase is harvesting – where we see the scale of the potential in each market and SYM shows its ability, or otherwise, to harvest that. Phase 1-3 could take 10 years, and we are in year 2-3 right now. SYM has the potential to be a medium to long term growth story, we are approaching the point where multiple market entry events are likely to occur and success in those early markets may become visible in the next 1-2 years. Thats how we think it could play out. Hope that helps. G
Thanks for the article Gary. According to Simply Wall Street, Symbio’s net profit margin is approx 5.9%. Do you see this margin coming under pressure in the current inflationary environment? Also, would you expect this net margin improve as the grows/expands into Asia?
Matt. Thanks for your comment.
Margins? Software is a great business model, build it once (& maintain it) and sell it many times. Thats a cracking margin evolution story. The key is the ability to repeatedly sell and extract that value.
Big picture – Asia expansion provides the conditions to do just that. SYM’s market presentations suggested they have productised their software so that its fit for “travel” or deployment in new markets in an efficient manner. Of course we need that repeatable sale to release this value, but there is no need for wheel re-invention.
Little picture – this journey to greater scale will be made up of multiple market entry events, all of which will come with initial costs of market entry, and these tend to happen before revenues in that market. These all have the scope of compressing net margins in the short run, in the pursuit of expanding them in the long run. Hope that helps. G
Thanks for the clarification Gary
An interesting article. Thank you.
Hi Gary, thanks for the article and info on Symbio. Could you please provide some further detail on your DCF calculation?
At $15.7m in FCF and with ~$84.6m shares outstanding, that means Free Cash Flow per share is ~18.5c.
Assuming no growth, ~18.5c / Cost of Capital (.107) = $1.7 per share. But you get $4.13 as your base case?
Thanks for your comment. There are a couple of things that are in the value calc to consider – 1. the $51.6mn or so of net cash on the balance sheet, and 2. The $15.1mn or so of Franking credits on the balance sheet yet to be distributed. Both of those are included in the value calc. I also checked the FCF NPV calc. For the terminal part of that valuation I used my long term assumption of 1.5% inflation that I use in all my NPV calc models, you are right that should be set to zero. To help I set this to zero and that changes the NPV calc from $4.13 to $3.99. No growth embedded in the valuation of SYM. Hope that helps. G
Solid company with plenty of upside.
Thanks Stuart. Thats what we see. Gary