bell potter view

A fairly tough review of latest results, considering what happened last year and the fact that they keep producing above market results, but they maintain their BUY recommendation with a $1.04 price target.

1H10 adjusted net profit up 2.0% to $9.1m
MCU reported a 4% increase in its interim net profit to $8.4m. After removing the impact
of amortisation on acquisition intangibles, adjusted net profit increased by 2.0% to $9.1m. A 3.5% increase in average shares on issue resulted in adjusted EPS declining 1.4% to 3.05 cents. A highlight of the result was a 132% increasing in operating cash flow, driven largely by tight working capital management. Despite the flattish EPS result, a pleasant surprise was MCU increasing its interim dividend 21% from 1.9 cents to 2.3 cents fully franked (ex div 15 March, pay 16 April). Disappointing Diversified result lead to minor EPS downgrades

Overall we have made some minor EPS downgrades of 5% in FY10 and 1% in FY11 on the back of downgrades to the Diversified division earnings. There was no stated earnings guidance in the profit release, although management on the conference call did say it expected FY10 profit to at least match that of FY09.
Buy retained, valuation reduced to $1.04

After factoring in our earnings revisions, our DCF valuation has reduced from $1.09 to $1.04 (WACC 13.0%, terminal growth 2.0%), which represents 12.5x FY11 EPS. With no net debt and very strong interest cover of 11.7x (EBIT / Interest Expense), MCU retains its impressive track record of achieving above system advertising billings and market share growth across the cycle. While we maintain the stock is undervalued and retain our Buy recommendation, a sustained rally in the share price will require evidence of a recovery in the earnings of the Diversified division.