One of the most vexing questions in the telco/information technology space is what's eating BigAir Group Limited (ASX: BGL)?
Sure, the fixed wireless and cloud services firm gave investors something to get excited about with the announcement of an earnings accretive acquisition. But even with the stock's 3.3%, or 2 cents, rise to 62 cents this morning, it is still down by a third of its value over the past 12 months.
What's more, BigAir's decision to buy Applaud IT for $1.2 million to bolster the group's managed services and cloud offering won't be enough to trigger a much needed re-rating in the stock, in my opinion.
Applaud is a fairly small acquisition for the group and generates around $700,000 in earnings before interest, tax, depreciation and amortisation (EBITDA) a year compared to BigAir's EBITDA of $15 million in 2013-14.
Perhaps the most frustrating thing about the prolonged slide in the share price is the fact that management and most analysts cannot quite explain why BigAir has lost favour with the market.
My feeling is that there are two issues holding back the stock. One is the perception that BigAir has gone ex-organic growth despite the group posting a 55% jump in revenue to $26.2 million for the six months to end December 2014, thanks to acquisitions it made in 2014.
BigAir's core offering of fixed wireless broadband has gone relatively flat and that's not a good look for a small-cap stock once seen as an emerging star.
BigAir is facing strong competition for fixed wireless from the big boys like Telstra Corporation Ltd (ASX:TLS), TPG Telecom Ltd (ASX: TPM) and Vocus Communications Limited (ASX: VOC), which recently acquired Amcom Telecommunications.
The need to find new levers to keep growth-hungry investors happy has prompted management to expand into cloud computing and managed services, and this brings me to the second potential headwind.
Managed services and cloud computing are highly competitive areas that are also the playground of its major rivals listed above and where BigAir doesn't have much of a track record in.
I think BigAir has been touched by the M2 Group Ltd (ASX: MTU) curse and the key to unlocking value in BigAir lies in the M2 Group experience.
It's hard to imagine M2 Group ever being cursed with the stock strongly outperforming recently, but the stock had been trading at a discount to the sector only a few years ago because the market didn't think there was much organic growth in the highly acquisitive business.
It was only at M2 Group's last full year result did the sceptics start to capitulate when management showed it could generate double-digit organic growth.
I think BigAir is suffering from the same issue and that is why the upcoming August reporting season is going to be particularly significant for management.
BigAir needs to show that it has the ability to cross-sell its cloud and managed services offering to its fixed wireless customer base.
The good news is I think BigAir can achieve the same re-rating that M2 Group got because of its strong management team and healthy balance sheet.
I can't find any real holes in the group's financial health with good cash conversion and net debt-to-equity estimated at around 40% post the debt-funded all-cash Applaud acquisition.
There is also potential for BigAir's student accommodation business to pleasantly surprise the market in August as it's one area that is set to experience strong growth for the next few years due to an increase in the number of beds for overseas university students.
This business accounts for around 15% of group revenue and BigAir has agreements with a number of accommodation providers to supply wireless broadband.
By default, the price of the broadband is included in the rent. This could mean a close to 100% take up rate for BigAir's service.
