An Amayzing target for AGL

Martin Pretty

Equitable Investors

If AGL Energy (AGL) wants an entry into the telecommunications space, Amaysim (AYS) would fit its strategy well and would be a much lower-risk opportunity than the aborted bid for Vocus (VOC).

In terminating its discussions with VOC, AGL stated that it will continue to explore investment opportunities across three focus areas:

  1. Optimising its existing portfolio for performance and value

  2. Evolving and expanding its core energy markets offerings

  3. Creating new opportunities with connected customers.

Equitable Investors, a shareholder in AYS at the time this is written, sees AYS as a very logical target for AGL that certainly assists it with the second and third focus areas and potentially with the first.

AYS straddles both retail energy and the mobile telecommunications markets. For anyone who was concerned about the size of the investment required in VOC (~$4 billion including debt or around 30% of AGL’s $13 billion market cap), the size of a deal with AYS would be far more manageable.

AYS’ current market cap of ~$211 million (+ a premium) is easily digestible by AGL, which indicated at its last results that it had more than $1.26 billion of cash and undrawn debt facilities.

Those who are focused on earnings accretion would be placated as AYS currently trades on a Price/Earnings ratio of just under 10x analysts’ expectations for FY19, compared to 13x for AGL. Both companies trade on similar EV/EBITDA multiples.

But there has to be a lot more to it than EPS-accretion to make such a deal an exciting proposition to AGL. Here’s what Equitable Investors sees as the key reasons a bid for AYS would make sense:

  • AYS had 1.17 million mobile phone subscribers when it last reported, making it Australia’s 4th largest mobile services operator and the leading “Mobile Virtual Network Operator” (MVNO - meaning it uses the mobile infrastructure of another carrier). AGL would have an opportunity to market the mobile offering to its 3.6 million customers, including over two million already buying multiple services from AGL (“dual fuel” - electricity and gas).

  • Unlike VOC, which is reputed to have a dissatisfied customer base in its consumer business, in its telecommunication business, AYS has consistently been recognised for value and service.

  • AYS does not possess the fibre infrastructure and data centres that VOC holds but could be treated by AGL as an initial “toe in the water” before making more capital-intensive bets on data and telecommunications.

  • AYS possesses a leading challenger brand in energy with 194,000 subscribers when it last reported - running with this brand and AYS’ alternative pricing structures would further AGL’s second focus area (evolving and expanding its core energy markets offerings).

  • AYS is already investing in a unified technology platform across multiple products (ie energy and telecommunications) and could provide AGL with infrastructure to deliver focus area three (creating new opportunities with connected customers via a digital-only platform).

  • AYS’ digital-only business model appears, based on the two company’s published figures, to be delivering significantly higher gross marginal profit per customer than AGL.

  • With gross margins of >30% in telecommunications and ~28% in energy, based on recent AYS results, there would be scope for AGL to lift AYS’ earnings with the removal of stand-alone corporate costs.

It is easy to set out the case for such a deal but buying AYS would likely require a substantial premium to be offered over the current share price, particularly with a small number of large and committed shareholders. German investor TGV disclosed this week that it now holds 18% and heads the group of top twenty shareholders that in aggregate owned 80% of the company at the time of the last annual report.

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2 stocks mentioned

Martin Pretty
Equitable Investors

Martin established Equitable Investors and the Dragonfly Fund in 2017 after serving as an investment manager with Thorney Investment Group. Equitable seeks out unique opportunities with intensive research and constructive corporate engagement

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