Price Recovery, page-8

I have been able to get a copy of the recommendation from Under the Radar which was published in June - excellent publication which I intend to resume membership once I return to active trading.. it may be of some interest to the holders out there.
MYNETFONE
The company has been around for 10 years but it was its acquisition of Symbio in July 2011, which has supercharged this company's earnings outlook.
It is the largest provider of voice over the internet protocol (VoIP) in Australia, and the fifth largest voice network. VoIP refers to voice, data and other communication services that use the internet as opposed to the standard landline.
NF: RESEARCH TIP - JUNE 2017
Published: 8 Jun 2017 / 245
We have been waiting for an opportunity to buy this quality software producing telco and now we have one. There has been some institutional selling due to a change of mandate causing the share price to drop almost 15% in the past few months.
WHY WE LIKE IT
We have been keeping a close eye on MNF because we like its business model – high growth both at the top and bottom line; low fixed costs; innovative; lots of cash and paying dividends. The problem is that it was too expensive! With some selling related to a big shareholder exiting because of a change in personnel, we believe that there is a buying opportunity for subscribers. The stock has fallen almost 15% in the past few months, but we believe that it is poised to bounced back because this company is not like other telcos and is maintaining is profit margins.
WHAT'S NEW?
MNF produced a solid interim result in February where EBITDA climbed over 20% on a high single-digit increase in revenue, showcasing the operational leverage in this business. This sort of pattern is something the company should be able to achieve for a number of years ahead. We were impressed by its $18m acquisition announced just prior to this of the Melbourne based Conference Call International, which it funded via a capital raising at $4.50 a share. The company is on track to achieve revenue of close to $200m for the full year, up 24%, net profit of at least $11m, up 22% on last year, EPS of about 15 cents, up 12.5% and dividend of 8c (interim dividend was 3.75c).
A BUYING OPPORTUNITY HAS EMERGED IN A SUPERCHARGED TELCO
When we first tipped MNF in September 2013 the software producing Telco was known as MyNetFone; it had a share price of $1.34; and a market cap of $86m. Fast-forward to today and its share have run as high as $5 and management has successfully transformed the group from an Australian orientated small cap, to one whose growth is genuinely international. And the reason we’re interested in it now is that its shares have slipped back some 15% from their level earlier in the year.
Successful telecommunications groups benefit from merger and acquisitions once the group has the infrastructure in place. Additional products don’t cost the company much, so the extra revenue drops straight onto the bottom line, and hopefully into shareholders’ pockets.
WHAT MAKES MNF DIFFERENT?
MNF is differentiated by the bigger telcos because the basis of its innovation is not reselling, or a huge infrastructure network, but the software it produces, primarily for voice over internet protocol, or VoIP. The group’s cost base is much lower than its competitors, and it can efficiently service those customers ignored by the likes of Telstra: the thousands of developers providing voice communications apps to businesses. For example, Carsales use MNF technology to provide people selling their cars with a temporary mobile number.
Before we get into the detail, it’s important to note that the reason we’re interested in MNF is the recent 15% sell off, which is associated with selling of some 2 million shares by the fund manager Ausbil whose two small caps managers left the group to set up their own shop. This provides good value for the first time in a number of years in this fast growth telco. MNF has been growing its earnings and dividends at well over 20% a year and should keep doing so.
“WE’RE IN THE MIDDLE OF A GROWTH PHASE”
At current levels, the group is trading on a one year ahead PE of about 18 times and on a dividend yield of almost 3%. “We’re in the middle of a growth phase,” Sugo tells Under the Radar. MNF has some $55m of cash and $12m of debt.
The reason we were first interested in MNF was its acquisition of Symbio two years prior to our coverage, which “supercharged the company’s earnings outlook”, as we said back then, as the largest provider of VoIP in Australia. MNF’s subsequent acquisition of the international business of Telecom New Zealand, TNZI, ensures that earnings will be supercharged for some time to come. Hence a higher valuation is justified.
THE BUSINESS
The company has three business lines – domestic retail; domestic wholesale and global wholesale. The clear highlight this fiscal year has been domestic wholesale (Australia and New Zealand), whose Symbio software delivers the Australian end of voice traffic for incoming calls from international telcos such as Orange and TATA. Gross profits in dollar terms are growing 30% in this business in the current fiscal year.
Domestic wholesale has two arms – a wholesale usage arm which generates high revenues at low margins and is low growth, and a managed services arm, which provides products such as the one used by Carsales, and for which MNF receives monthly fees. This is where MNF has added value to the Symbio business it bought in 2011 because it is able to generate high margin annuity style revenues which are growing. Symbio has 264 customers out of the total market size of about 1000, indicating that there is still domestic growth available.
THE GLOBAL POTENTIAL
The potential however, comes from the global wholesale market, based on the TNZI business MNF acquired. MNF is only now rolling out this new revenue stream. This business consists solely of the low margin usage fees and MNF is looking to attack the thousands of potential customers in its Asia Pacific focus, in the same way it did with Symbio, through delivering managed services. “It provides a global platform to sell our product capabilities,” says Sugo.
It’s worth mentioning the National Broadband Network at this point because of the margin destruction that has occurred at the big end of town as infrastructure transferring data services from the lower cost and slower DSL to the faster and more expensive fibre optic provided by the NBN. The crucial point is that MNF is not selling data, it is selling voice, which means that it is benefiting from the speed that the NBN provides, and its margins are somewhat protected (if the price for all telecommunications comes down, it’s hard to believe that MNF is immune).
FREE CASH FLOW IS WHAT INVESTING IS ABOUT
The key is that what impressed us initially about MyNetFone three years ago, continues to excite us as investors, which is the group’s intellectual property and ability to out manoeuvre its much bigger competitors. It purchased TNZI for $22m about two years ago and has spent about $10m on developing a “point of presence” in international markets (mainly Asia). It has almost completed this and ongoing expenditure is now less demanding. Operating cash flow should exceed $20m from next year onwards, its spending will be about $5m a year, which leaves plenty of free cash flow from which to keep increasing dividends to shareholders. This is what investing is about.