Stock pick: QVG Capital

Opticomm (ASX: OPC) builds, owns and operates private fibre-to-the-premise networks in new residential houses and apartments across Australia. Think of it like a mini National Broadband Network. We like the company because it has a high degree of earnings certainty, a strong pipeline of organic growth, high returns on capital, a net cash balance sheet and founding management who own a lot of stock.

OPC is unique as the developer pays for the installation of the fibre but OPC gets to keep and operate it. This is because housing developers are not permitted to sell a housing lot or apartment without utilities – such as water, gas, electricity and internet – installed and do not have the desire, scale or expertise to run these assets themselves. Developers choose OPC over NBN as they are cheaper, easier to deal with and offer more services than NBN. We believe these other services, such as TV, Wifi, CCTV, security and access control will increasingly become standard as customer expectations around smart homes increase and more devices within the home become connected to the internet. We expect an increase in demand for bandwidth from the trend to working from home and streaming of entertainment taking share from free to air TV.

OPC faces risks including slowing housing demand as net migration falls, and threat of substitution from 5G. Fortunately, OPC has a large backlog of lots passed and lots contracted which provide near term earnings visibility. Aside from the bandwidth and performance constraints of mobile, we consider the threat posed by 5G as very modest to the broadacre part of OPC’s business as 5G needs a tower density which makes it uneconomic in suburban areas.

OPC is a hidden gem; it has infrastructure-like defensiveness but high growth and still flies under the radar as its just outside the ASX300. 

This information has been prepared and provided by QVG Capital. To the extent that includes any financial product advice, the advice is of a general nature only and does not take into account any individual’s objectives, financial situation or particular needs. Before making an investment decision an individual should assess whether it meets their own needs and consult a financial advisor. This stock pick was published on 22 May 2020 and is subject to change.