Initiate coverage of MTU with a Price Target of $1.95 and a BUY recommendation: We believe that MTU generates a quality earnings stream across a diversified customer base, with a positive working capital cycle, low gearing and minimal infrastructure requirements.
Summary comments: Full year impact of recent acquisitions: In FY10, MTU will benefit from the full year impact of the People Telecom and Commander businesses, which were acquired in 2HY09. We forecast total revenue will increase from $202m in FY09 to $410m in FY10.
Favourable earnings impact from supplier contract negotiations: MTU is currently in the process of renegotiating its supply contracts with its major suppliers of both fixed line and mobile services. We expect the new commercial arrangements to reflect MTU’s increased scale (through the People Telecom and Commander acquisitions) and its role as a major wholesale customer.
Our 12 month Price Target of $1.95 implies an FY10 PE multiple of 8.8x on adjusted EPS of 22.1cps and an FY10 PE of 11.1x on reported EPS of 17.5cps. We consider these multiples undemanding given the defensive earnings stream and strong organic growth potential over the medium term.
