Tucows is a buy, says Echelon Wealth

In a research update on Monday, Tucci reiterated his “Buy” rating and $130.00 target price for TC, representing a projected return of 18 per cent at the time of publication.

Tucows on Monday announced that Fullerton, California, will be the next to receive gigabit fibre Internet through the company’s Ting division, in partnership with international fibre-optics network developer SiFi Networks.

“Fullerton is a solid market for us, with a strong, dense and diverse population of families along with colleges, beautiful public spaces, and businesses big and small,” said Elliot Noss, CEO, in a press release. “Fullerton will be great for our business. We are pleased to embark on a California footprint, to test the Ting brand and customer experience through direct competition, and to see alternative models emerging in the ongoing fiberization of America.”

Fullerton represents the eighth town in the United States that Tucows has selected for fibre Internet access and represents approximately 50,000 shared serviceable addresses.

Tucci says there are pros and cons to the partnership with SiFi Networks. SiFi will handle the construction, ownership and operation of the fibre infrastructure while Tucows will provide the Internet service and customer support. The analyst adds that TC can scale more quickly this way and focus on its core business strengths in service provision but he notes that Tucows will not control the build speed or quality, that there will be competitors and that gross margins will be tamed as TC pays its builders a circuit cost.

“One competitor in particular in the town of Fullerton, CA, is that of GigabitNow, a division of IsoFusion,” Tucci writes. “We look for additional comments when TC reports Q119 however note the positive contribution margin the additional serviceable addresses could have once ‘lit up’. Tucows expects to light up its first customers in Fullerton towards the end of 2019. We leave our estimates unchanged for now with upside bias contingent on timing of conversion of serviceable addresses to ‘lit up’ customers.”

Tucci says he expects TC to continue to add strategic Ting towns as the company pursues the next growth leg of fibre Internet access to the home. The analyst says that TC is currently trading at multiples of 2.5x, 16.8x and 40.9x of his 2019 estimates for EV/Sales, EV/EBITDA, and P/E, respectively, which compares to its Domain peers at 8.5x, 19.6x and 62.9x and its Internet peers at 2.4x, 6.8x and 35.9x, respectively.

Tucci expects Tucows to generate 2019 revenue and Adjusted EBITDA of $369.6 million and $56.3 million, respectively, and 2020 revenue and Adjusted EBITDA of $403.6 million and $76.2 million, respectively.