Following its latest acquisition, Echelon Wealth Partners analyst Gianluca Tucci has raised his price target on Tucows (Tucows Stock Quote, Chart TSX:TC).
This morning, Tucows announced it will acquire wholesale domain name registrar Ascio Technologies from CSC for $29.44-million.
“This acquisition makes perfect sense for Ascio’s resellers, our business and our shareholders,” David Woroch, Tucows’s executive vice-president of domains said. “Ascio’s resellers get a customer-focused provider that is investing in its wholesale channel. Tucows gets an excellent business with a deeply experienced team, additional domain products, including more than 50 ccTLDs, and a high-quality customer base that strengthens our European presence. And our shareholders get the benefit of Tucows’s even greater scale and efficiency as the world’s largest wholesale domain registrar.”
Tucci says he likes this pickup, but says the best parts of TC’s business lie elsewhere.
“We view the acquisition as opportunistic and positive and would not be surprised to see other accretive tuck-in announcements like today’s down the road to realize greater global efficiencies and economies of scale,” the analyst says. “However, we note that organically, Tucows’ domains business is not the growth driver it once was –our thesis is predicated on its Ting Fibre business being the next growth leg while its domains business provides robust, steady free cash flow to internally deploy. We also wish to note reported Adj. EBITDA is likely to be ‘messy’ in the coming quarters as purchase accounting rules dictate – recall this also occurred in the ensuing year when TC acquired eNom in early 2017. We look for further commentary on Ascio on its Q119 earnings call.”
In a research update to clients today, Tucci maintained his “Buy” rating on Tucows, but raised his one-year price target on the stock from $120 to $130, implying a return of 22 per cent at the time of publication.
Tucci thinks Tucows will generate Adjusted EBITDA of $56.3-million on revenue of $369.6-million in fiscal 2019. He expects those numbers will improve to EBITDA of $76.2-million on a topline of $403.6-million the following year.
The analyst says Tucows future lies in its burgeoning fibre business.
“We continue to believe the next major growth catalyst for TC lies in its fibre business,” Tucci adds. “Today’s 7K fibre customers add roughly $7.0M in run-rate gross profit. We believe we could see fibre customers and homes passed of approximately 15-20K and 50-60K, respectively, by 2019-end, which would yield $15-20M in incremental annual run-rate gross profit. For context, fibre customers and homes passed ended 2017 and 2018 at 4.5K/16.0K and 7.0K/28.1K, respectively, showing impressive early stage growth. We believe TC will continue to add strategic Ting towns that fit its profile and grow the addressable opportunity and resulting visibility in its next growth leg of fibre internet access to the home.”
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