Sunday 06-Nov-2022: This is a reply to @Invmum - and their "#Moats" Straw on Swoop (SWP). Which went like this:
#Moats
@Bear77 - curious to know if you still have the same opinion of Swoop.
It appears to me that the initial run up in share price was due to the board, Tattarang backing, and similar roll-up strategy that has likened this to Uniti (UWL) - as you mentioned.
UWL timed the sale of their business extremely well, getting a peak market valuation of 26x EV/EBITDA
Seems unlikely that Swoop will achieve this. Their margins are much lower - Alex has indicated long term EBITDA margins of 20% vs UWL's >60% and unlikely we will see such good times again in the market for a while.
Feels to me like Swoop is competing in a commoditised market with very little competitive advantage other than capital investment.
I could be missing something? Interested to hear the bull case for Swoop / similarities to UWL
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Hi @Invmum - thanks for the straw. Firstly, I agree 100% that the initial run-up was (1) the Tattarang (Andrew "Twiggy" Forrest) backing, (2) the roll-up strategy, and (3) similarities to other succesful roll-up strategies like Uniti (UWL), M2 Telecommunications, Vocus (in their early years), etc. I also think there was (4) an attraction there to the Board and Management quality, and their past experience and track records. The bulk of them are ex-Superloop (SLC) (Matthew Hollis, Alex West, Louise Bolger, Julian Breen) but there is also James Spenceley who was the founder and former CEO of Vocus (VOC), Tony Grist who was the co-founder and Chairman of Amcom (which was acquired by Vocus), plus the NodeOne guys (including Richard Whiting, Sean Clarke and Nick Van Namen) and Tom Berryman, Swoop's CTO (Chief Technology Officer) - Tom was the founder and Chairman of Anycast Networks which was acquired by Swoop in 2020.
First off, the company has NOT performed as I would have liked. Certainly the share price graph is horrible.
The arrow there points to the point where Swoop began trading after the reverse takeover of Stemify (SF1) which was Swoop's "backdoor listing" on the ASX. Prior to that point, the graph refers to Stemify (SF1) which was suspended from trading during that period. Everything to the right of that point is Swoop. Everything to the left of it is Stemify and has nothing to do with Swoop. This behaviour is not particularly unusual. Michael Simmons did much the same thing with Uniti Group by taking over Uniti Wireless and then getting rid of the founders of Uniti and bringing in his old pal Vaughan Bowen so they could run the company together.
However, there really aren't a lot of similarities between Swoop and Uniti, and the many differences do include their respective EBITDA margins, as you have correctly pointed out @Invmum . Uniti was a lot more profitable and they certainly did time their run and the takeover to perfection.
What did originally attract me to Swoop was the calibre of their Board and Management, which I have discussed in other straws and forum posts, and the fact that they appeared to be going after a segment of the market that didn't have as much competition, being remote and rural properties where the NBN would be unlikely to ever be rolled out - or else would take a fair while to arrive. Swoop initially seemed much more focussed on high speed wireless internet that targeted a demographic that had been largely ignored. One of the reasons why there isn't much competition in that area is that the margins tend to be lower because the customers are so spread out and there is much more infrastructure required per customer than there is in high-population-density areas such as Australia's capital cities. Rural and remote internet customers are NOT low-hanging fruit - they're the fruit that's harder to reach and takes more effort - and in profit terms, they are clearly less profitable as a target demographic.
However, the bulk of my investment thesis around Swoop centres around their management, and their combined track records and knowledge of the industry. My thoughts are that those guys know the Telco industry and the ISP operating environment a LOT better than I ever will, and they are unlikely to collectively invest their time and energy in something like this unless they believe they can make it work.
So far, that confidence that I have had in Swoop's management has certainly not paid off in terms of share price appreciation. The opposite has occurred. Their share price has been on a strong south-east trend, i.e. heading the wrong way with no signs of turning around.
I am not the only one that thinks that the sell-off has been OTT. Swoop's own management thinks they are significantly undervalued, hence engaging in an active share buyback at current levels with money that they had originally raised at much higher prices to make earnings accretive acquisitions. Now if anybody is going to think their company is worth more than what the market thinks it is worth, it is likely to be the company's own management, so that's not really a surprise, however I think it pays to note that they are putting their (or their company's) money where their mouth is in terms of this share buyback. They would be profitable, except for ongoing acquisitions (national mobile virtual network operator Moose Mobile being the latest) and the share buyback. Their commentary around the buyback was along the lines that while their business strategy is still to grow both organically and inorganically (via M&A), they see buying back their own shares at these levels as being an outstanding opportunity because they are currently one of the cheapest telcos on the market.
I like that when they do report, they split their growth into organic and inorganic growth: Swoop-30-September-2022-Quarterly-Activities-and-Appendix-4C-Cash-Flow-Report.PDF
@Invmum said: "Feels to me like Swoop is competing in a commoditised market with very little competitive advantage other than capital investment."
I think that's fair. They certainly aren't going to generate the hype that UWL did, and they are clearly a very different company with lower margins. However I would consider their Board and Management to be their biggest competitive advantage, and perhaps one of their only competitive advanages, and while it's hard to quanitify how that has helped the company thus far, I expect that their experience in the industry is going to shine through in future years, through the decisions that they make, and where that takes the company.
I accept that is a very intangible and unmeasureable competitive advantage - and that many people will not consider it to be a competitive advantage at all - and fair enough. In terms of Swoop being one of my FY23 Stock (Company) Picks - they are now very unlikely to outperform in FY23 because they've fallen so much in the first 4 months of FY23. They've fallen -40% from 56c/share to currently 33.5c/share. Then again, when a company has been smashed as hard as Swoop has, when they eventually DO turn around, they can regain a fair bit of ground in a reasonably short period of time. But I accept that the chances of them going back to over $2/share in the next little while is between slim and zero.
However, I'm not selling Swoop down here. I do think they're oversold and that they are going to be trading at higher levels in the future, so I haven't sold any shares. And nor has Twiggy's Tattarang Ventures. Or the Swoop Board members (three of whom are substantial shareholders - James Spenceley, Tony Grist and Paul Reid) or Nick Van Namen (N & J Enterprises (WA) Pty Ltd). I note that Geoff Wilson's WAM Microcap (WMI) did exit Swoop in early August at around 60c (between 54c and 66c/share), so they've moved on. WMI's Telco exposure now is mostly via Tuas (TUA) which is where David Teoh went when he left TPG in March last year (2021). Teoh owns 37.3% of Tuas, Washington H Soul Pattinson and Co (SOL) own another 25.3% of Tuas, and while WMI are not listed as subs for Tuas, Tuas is listed as a top 20 position of WMI.
So WMI have moved on, but the rest of us haven't. We're still on the ride and hoping that we're nearing the bottom of this big dipper.
But, yeah, other than the pedigrees and prior track records of Swoop's management and board, I can't offer any other examples of competitive advantages that Swoop has. So I think you've made some good and fair points there @Invmum
Further Reading:
Vocus and Amcom founders steer Swoop Telecommunications in $61M listing deal - ARN (arnnet.com.au)
https://www.albioncapital.com.au/who-we-are/tony-grist
That last link there about Tony Grist also explains that Tony and James Spenceley were backers of Uniti (UWL) -
Tony Grist's Albion Capital Partners took a cornerstone position in Uniti alongside James Spenceley (after he retired from Vocus). Tony and James helped to arrange funding for Uniti and helped to arrange for new management - presumably Michael Simmons and then Vaughan Bowen, and ultimately the UWL IPO. So in some respects, James Spenceley (the Chairman of Swoop) and Tony Grist (the deputy Chairman of Swoop) were two of the people behind the success of Uniti Group, at least in terms of helping Uniti get started and getting the management right.
Other significant technology projects initiated by Tony Grist and Albion Capital Partners include the private purchase from Mayne Health, and subsequent IPO, of Mayne Pharma Ltd (MYX) and the co-founding and syndicated funding of geo-spatial technology group Spookfish Ltd, its subsequent IPO, and eventual takeover by the world’s largest geo-spatial group, Eagleview.
These guys have been succesful in prior years, and they aren't dumb. Swoop's track record to date in terms of their share price has been dismal, but the company itself isn't doing too badly, and they're really only just getting started.
Some of the newer faces are worth commenting on I think. Simon Robson, Swoop's Chief Integration Officer, spent over 6 years as the "Head of Transformation and Projects" for Vocus Communications (Nov 2012 - Dec 2018) before taking a 17 month break and then taking a job at Macquarie Group. Sean Clarke, Swoop's Chief Revenue Officer, was previously Swoop's Group Head of Sales, the Chief Sales Officer for NodeOne, the Sales Director for CIC Technology and before that held various sales roles for just over 9 years at Amcom and Vocus. Finally, Louise Bolger, Swoop's General Council and Company Secretary, performed the same roles at Superloop (SLC) for almost 3 years and was also a non-executive director of SLC for over 3 years prior to that. She was with SLC for over 6 years. Louise is also currently a non-executive director of Viva Leisure (VVA) - since July 2021.
I think I briefly mentioned Simon Robson in one of my forum posts about Swoop over in the "FY23 Stock (Company) Picks" forum thread, and possibly Louise as well, but Sean has joined the team since I wrote that stuff in August. Well, he hasn't recently joined the company - he was already working for them in sales, but he's now joined the "Key Management Personnel" list on the Swoop website (link above, and here) as their Chief Revenue Officer. All of the others on that list (on the Swoop website) I've discussed in previous straws or forum posts, and highlighted their prior experience with companies like Pipe Networks, TPG Telecom, Amcom, Vocus, Uniti Group, NodeOne, Anycast and Superloop.
Further Reading (historical):
https://www.crn.com.au/news/spenceley-forrest-back-cirrus-communications-comeback-539126 (Mar 2020)
https://www.afr.com/rear-window/forrest-backed-swoop-accused-of-swooping-in-on-name-20210523-p57udv (May 2021)
Disclosure: I hold SWP shares both here and in real life. I do not currently hold SLC, VVA, MYX, WMI, TPG or TUA. I did hold shares in UWL, VOC, AMM (when they were Amcom, not Armada Metals), and MTU (M2 Telecommunications), and I made money out of all of those - before they were all acquired by other companies. I have also briefly held TUA shares and TPM/TPG shares (TPM being the old ticker code for TPG Telecom and TPG being the company's new ticker code). I sold all of my TPG shares on the day David Teoh left TPG (with zero notice), because quality management is very important to me and my investment theses. Succesful companies clearly need more than just good management, but good management is usually a pretty good starting point, and when management that I'm prepared to back packs up and leaves with no warning, I often do the same - in terms of selling out of that company.
Saturday 29th April 2023: Six months on, and the Swoop Share Price has continued to plumb new depths:
The only way that chart could bring you joy is if you were shorting the company. Otherwise it's about as bad as it gets. However, as a company, they aren't that bad. Here's their Quarterly Report for the March 2023 Qtr (released on Thursday):
Swoop March 2023 Quarterly Activities/Appendix 4C Cash Flow Report [edit: I just fixed that broken link - on Sunday 30-Apr-2023]
While companies in their position are likely to cherry pick the metrics that make them look good and ignore the others, this lot isn't too bad:
SIO = Service In Operation. Refers to an active telecommunications service provided to an end-user.
Swoop CEO Alex West comments “We are very pleased to report what is our strongest free cash flow and organic SIO growth quarterly results since listing almost 2 years ago. Our efforts to automate and improve the business has not only resulted in lower operating costs but also delivered us record organic growth over the period. The business is in great shape, we are well capitalised and demonstrating strong organic growth and the ongoing consolidation of our systems is delivering real differences. Forward sales are at record levels meaning we are on track for neutral free cash flow exiting FY23 all while continuing to invest in the business for future growth.”
Highlights of Q3
- Consistent QoQ growth in customer receipts (up 9.3% annualised from Q2) driven by accelerating organic growth.
- Companywide record sales and connections month for March (which will deliver an increase in customer receipts in Q4).
- Invested in exciting regional capex projects showing early signs of success.
- All acquired businesses performing better than at time of acquisition and are well progressed in terms of integration.
- Largest acquisition (Moose) providing strong free cash generation and performing ahead of expectations with SIOs increasing from 94,348 to 106,236 (up 13%) in the 9 months since announcing the acquisition in July 2022.
- Fixed Line and Fixed Wireless business had the best organic quarterly growth since listing.
- Streamlining of the business continues to improve operational performance while reducing overheads.
- Cash Balance of $19.7m at the end of the Q3.
Summary: Not bad. Could certainly be worse. While Swoop are clearly not a company with a strong moat who are head and shoulders above their competition/peers, they are grinding away and making progress. With the benefit of hindsight, I paid way too much, but I do feel they have become "silly-cheap" down here. However, it's hard to see what would make the market get excited about Swoop at this point. They are a company that is really easy to ignore if you don't already own their shares.
The reason I keep hanging around with this one, giving them more and more time, and allowing a little thesis creep, is because of their management and board, and their various track records with other companies prior to Swoop. I just can't imagine assembling a team like that unless you had a good plan, and I can't imagine all of those people signing on to work at or for Swoop if they did not think they could create shareholder value, especially considering the high insider ownership of the company. They are prepared to eat their own cooking, so they have to be planning to cook something a little less bland and boring at some point. They can't be clueless.
My best guess is that the competitive landscape has changed. There aren't the opportunities there were previously in the telco space. And other companies and assets aren't priced attractively enough, hence Swoop being over half way through an active on-market share buyback that will buy back and cancel up to 10% of their shares on issue, because they see their own shares as one of the most attractive opportunities in the market currently.
They also chose a difficult space to play in, in terms of providing high-speed wireless internet solutions for regional areas. It's certainly needed, but the margins are low because you don't get the same economies of scale that you can in the cities. That's not all they do, but that area of their business is unlikely to shoot the lights out from a profit perspective.
But, yeah, they're doing OK, in terms of this report and the metrics they've chosen to share with us, but unless they get a takeover offer or make a series of takeover offers themselves, I think the market will probably continue to ignore them. And shareholders with less patience than me (which is probably around 99% of them) will probably continue to throw in the towel and sell out, putting even further downward pressure on the share price. Especially in May and particularly in June. Tax losses anyone?
I think I may close my eyes and open them again in July or August, probably August...
Not buying any more down here (except in my Strawman virtual portfolio perhaps) but also not selling any either. Not at these levels.
They expect to be Free Cash Flow Neutral (FCF-neutral) by the end of FY23, so I think it would be reasonable to expect them to become cashflow positive some time in FY24, unless they get blindsided by something large and unexpected. And that's the risk. Expectations not met. We shall see.