Bell Potter downgrades Pentanet’s valuation

Stockbroker Bell Potter released a note on Friday, outlining its downward readjustment of the valuation for Perth-based diversified internet service provider Pentanet Limited (ASX: 5GG).

Analysts have valued Pentanet at 26cps, down from 31cps. The company provides wireless internet subscriptions, video gaming services, and instals mobile phone towers.

For clarity, the broker has revised downward its internal valuation for Pentanet, as opposed to a price target.

Why the revision? 

Bell Potter analysts highlighted reduced gaming revenues and overhead uncertainty in regards to Pentanet’s full-year FY23 earnings and cash balance. 

The revaluation follows the release of the company’s interim results announcement published on Tuesday. 

While revenue was up 9% YoY at $9.7m, Pentanet outlined a number of undesirable operating conditions. 

“We have adjusted our [Earnings Per Share] EPS by -1.0cps, -0.9cps and -0.5cps across FY23e-FY25 which largely reflects downgraded Cloud Gaming revenues in a competitive market, and discount our EV/Revenue valuation by 50% to reflect rising near term uncertainty in regards to cash flows and 5GG’s current cash balance,” analysts wrote.

The Bell Potter team also recommend Pentanet scale-up the rollout of “next-gen network and cloud gaming services.” 

“[This could] meet global trends in entertainment and data proliferation,” the team wrote on Friday. 

The company recently opened a campus-style office designed for workers to use as a hybrid work and recreation space in Perth’s Central Park, an area which boasts one of the highest CBD rents in the west coast capital. 

Not all bad news 

Bell Potter expects Pentanet’s ongoing rollout of 40 different 5G phone towers to increase the users that can access internet services at any given time, allowing for user and subscriber growth. 

Analysts also highlighted Pentanet’s ongoing rollout of its ‘neXus’ wireless internet package, which the company reported on Tuesday had seen 9% customer growth YoY. 

Pentanet did reference “issues” with its neXus product on Tuesday. 

“Significant progress on the neXus network rollout was made in Q2FY23, and neXus is now performing well, with an average of 98.8% service uptime over the last month. The Pentanet team have worked hard with vendors to remediate the hardware issues identified in the phase one rollout,” the company wrote. 

“The Company will now continue to activate all installed units, of which 319 units are online as at the end of January 2023, and resume the staged deployment of new neXus connections in H2 FY23.”