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Back in May this year the Aussie technology sector was struggling – the ASXIJ technology index was down 23% since its peak in 2010 – while our mining sector continued to take the lion’s share of investment dollars. Oh, how times have changed. 

Take a look at the six-month price chart of our tech index, the ASXIJ:

Buried in the sector are companies engaged in online technology operations of varying kinds. Internet usage is not only growing in terms of numbers of users but in the types of transactions as well. In a March 2012 report, the US based Boston Consulting Group highlighted the impact the internet will have on the global economy.

According to the BCG, within the G20 economies, internet related economic activity will expand 8% a year over the next five years, outperforming all traditional economic sectors. In emerging countries BCG sees growth rates of 18% annually.

The research group notes that retailers will experience a dramatic shift as more revenue is derived from online transactions, in a similar vein to what’s transpired with the media sector and advertising revenue. The exploding capacity for mobile searching and shopping (with smartphones and other portable devices) means that businesses that rely on the consumer will suffer without an Internet presence.

However, the report argues that Small and Medium Sized Enterprises (SMEs) have a real growth opportunity here. Their research shows that SMEs with a “high web” presence have enjoyed revenue growth 22% higher than SMEs with no or low web presence.

On the whole, Boston Consulting reckons that Australia has lagged behind other developed countries and that most retailers and businesses have been slow to maximise their internet presence. The research house currently values the Australian Internet economy at $44 billion – expanding 6% a year – reaching $67 billion by 2016. The report sees substantial opportunity for all businesses and especially small businesses to use the NBN to extend their businesses into new and larger markets.

The NBN will increase Internet usage here, but it may surprise you to learn it is already substantial, relative to other countries. The following chart shows Internet usage as a percentage of population:

Note that as a nation, less than 10% separates us from the Internet penetration of the US. Dominant players in the online market like Carsales.com and REA (realestate.com.au) are thriving in a depressed market, up 33% and 15% year over year respectively. There are other ASX listed companies who stand to benefit from the anticipated growth in the Internet economy. Here are nine to watch:

Company

Code

Market Cap

share Price

52 Week High

52 Week Low

Annittel Group Ltd

AYG

$11m

$0.00

$0.01

$0.00

Vocus Communications

VOC

$128m

$1.72

$2.06

$1.30

Stratatel Ltd

STE

$191.1m

$0.02

$0.04

$0.02

iiNet Ltd

IIN

$588m

$3.65

$3.83

$2.15

M2 Telecommunications

MTU

$557m

$3.55

$3.73

$2.46

Eservglobal Ltd

ESV

$35m

$0.18

$0.53

$0.17

Bravura Solutions

BVA

$111m

$0.18

$0.21

$0.12

Melbourne IT Ltd

MLB

$146

$1.73

$1.90

$1.26

NextDC

NXT

$286

$1.90

$2.36

$1.40

 

The first five stocks in the table were featured in the fastest 50 high-performing tech companies by Deloitte Consulting Group’s for 2011. There are only six publicly traded companies on the list and we have included the five Internet related companies. The list is ranked by annual revenue growth and the 2011 winner was micro-cap Annitel Group with three year revenue growth of 1022%.

Annitel Group Ltd (AYG) is a thinly traded company generating little market enthusiasm as evidenced by its 6-month price chart:

The company has spent heavily in the last year, acquiring 10 different Australian-based Internet related service providers, amassing $8.8 million in debt with gearing of 126% along the way. The acquisitions should enhance their position as a full service technology provider to SMEs throughout Australia. They have 17 offices across Australia providing internal IT and internal and external telecommunications support, cloud services, and development of internet connections from basic to complex multi-site networks. This is the second time AYG made the Deloitte list and the company is one to watch.

Vocus Communications (VOC) made the top ten in the Deloitte list – displaying 20% year over year revenue growth. Vocus serves Internet Service Providers (ISPs) in Australia and New Zealand, connecting them through the company’s global telecommunications network to the broader Internet. First listed on the ASX in 2010, the company has made several acquisitions to expand its data centre storage capability for its customers. VOC also acquired a Dark Fibre provider that offers customers private networking, or direct Internet access. The company’s gearing and debt picture at 84% and 25 million is better than AYG and VOC stands to benefit from ISP future growth. Below demonstrates share price performance since listing:

Stratatel (STE) offers cloud, web hosting and related web services and is a Deloitte Fast 50 company. But high management turnover in the past year is always a worrying sign for investors.

Chart: Share price over the year to versus ASX200 (XJO)

In July this year, the Managing Director stepped down, followed by the resignation of the CEO in May and the replacement of the Chairman of the Board of Directors in the same month. The share price is down 40% year over year. Stay away until the dust settles.

iiNet (IIN) is one of Australia’s largest Internet Service Providers offering both DSL and broadband and has shined in the ASX year over year. Here is the company’s chart:

The company has gearing of 105% and $297 million in long-term debt with a slowing subscriber base.

Due to its impressive history, most analysts on the market rate them a BUY or Outperform – with just two analysts showing any sign of bearishness. Credit Suisse has iiNet as an UNDERPERFORM due to the subscriber slowdown and on valuation grounds; Deutsche Bank recently downgraded IIN from BUY to HOLD on valuation grounds. On the other hand, RBS Australia upgraded the company from HOLD to BUY based on improved cash flow and earnings certainty.

Investors should note the potential for IIN to impact the SME market with the company’s full range of website and cloud solutions.

M2 Telecommunications (MTU) is primarily a telco provider with 10 years experience developing broadband business solutions, specialising in Small to Medium Enterprises. M2 Telecommunications is highly profitable, generating a 20% increase in net profit after tax and an 18% increase in earnings per share from FY 2011 to FY 2012.

The recent acquisition of Primus Telecom led to substantial increases in MTU’s 2013 guidance, with forecasts for 60% revenue growth, 38% NPAT growth, and 53% increase in free cash flow. With increasing broadband penetration and more SMEs moving into e-commerce, the demand for MTU’s integrated solutions bodes well for the future. Its share price appears to reflect the performance and the prospects for MTU. Here is the chart:

eServGlobal (ESV) is a provider of mobile payment technology. The company’s flagship offering, HomeSend, makes it possible for people to transfer money with their mobile phones. Payment capability via mobile phones is a desirable feature for any phone service provider but the explosive potential with ESV is in emerging economies. The payment system can be used to refill prepaid phone accounts, which are common in emerging economies.

Despite the potential and the fact the company has no debt, investors are cautious. A history of declining revenue is perhaps one point of contention; revenue has fallen from $147 million in 2009 to $78 million in 2010 and $42.8 million in 2011. Here is ESV’s one-year price chart:

In contrast, the market loves financial services software provider Bravura Solutions (BVA). Their software platforms allow the customer’s end user online access to account information. Bravura serves transfer agents, life insurance companies, superannuation funds, and investment firms.

With Bravura software solutions, companies in these sectors can offer their users 24 hour access to account information. The company had a 5% revenue increase and a 29% increase in operating cash flow from FY 2011 to FY 2012. JP Morgan downgraded the stock in March this year from OVERWEIGHT to NEUTRAL due to regulatory concerns and general economic woes that could befall the financial sector from a global slowdown. Here is BVA’s one year chart:

Melbourne IT (MLB) has performed strongly over the past year. The company operates in 10 countries serving small and large businesses as well as government agencies. In a nutshell, they provide everything needed for Internet business use such as domain name and website design services, web hosting, and online brand promotion and protection. They have an impressive list of strategic partners, from Yahoo and Microsoft to Cisco and VMware. The company’s balance sheet is good, with 42% gearing, $34 million in long-term debt, and net operating cash flow of $19 million. Here is the one year price chart for MLB:

NextDC (NXT) is in the data centre business in Australia and New Zealand. The company first listed on the ASX in 2010 and although they are still ramping up to meet growth in internet traffic and data storage, the goal is to become Australia’s largest independent data centre operator.

In May this year, US based Cisco Systems released its Visual Networking Index to 2016, making the remarkable claim the “Internet will be four times as large in four years.” All that traffic means more data centres.

NextDC currently has state of the art data centres in Brisbane, Canberra, and Melbourne, with additional centres in Sydney and Perth scheduled to open in 2013. Despite the capital expenditures, the company’s gearing is a mere 3.8% with only $6.8 million in long-term debt.

The company sees no problem filling these facilities from the anticipated growth in mobile computing, social media, virtualisation, cloud computing, and data centre outsourcing.

As traffic increases, more companies will look to move their data centres or utilise cloud providers, which require data centres to operate. NextDC also provides clients with cutting edge technology that enables access and control of the information stored in NextDC data centres.

Indeed, NextDC is a stock to watch. RBS Australia and Citi have BUY ratings. RBS states: “the company will eventually fill its data centres; it’s just a question of when, not if.” Here is its one-year price chart:

Please note that TheBull.com.au simply publishes broker recommendations on this page. The publication of these recommendations does not in any way constitute a recommendation on the part of TheBull.com.au. You should seek professional advice before making any investment decisions.