Super Deal
Leading VoIP (voice over internet protocol) provider, MNF Group (ASX:MNF) has announced an acquisition which has been quite well received by the market, with its shares having rallied some 10%. The company is seeking to further expand into the Singapore market and has selected a niche player with the necessary infrastructure in place for rapid growth. We maintain our Hold rating.
Recap and What’s New?
In our last coverage of MNF Group (ASX:MNF) in late February (FAT-AUS-862), we provided a review of the company’s interim results which showed robust growth on both the top- and bottomlines on the back of the company’s Point of Presence (PoP) business.
This is reflected in the Interim Results graphic below:
Source: NF Group (ASX:MNF) 13 February 2018 Company Presentation
The PoP has since then made the company’s Telecom New Zealand International (TNZI) subsidiary the primary carrier for European and US Telcos seeking to expand in the Asia Pacific market, giving it a substantial (~86%) portion of the $25.25 million increase in revenues. As such, this has made the Global Wholesale division its largest, contributing circa 74% of revenues (2016: 69.6%).
We believe there is further growth in store for this division as it has undertaken more accretive acquisitions and is geared to expand in Asia. All in all, the company ended the interim period with statutory NPAT of $6.05 million, up 24.5% year-on-year.
Despite the impressive showing, the share price since the announcement has been under pressure and dropped circa 35% from its year-to-date high of $6.90 to its lows of $4.51. Why was this the case?
The major cause of investor discontent was the relaunch of the “PennyTel” brand, acquired in October 2013, to specifically target the baby boomers (over 50s) market. This has led to management updating their outlook for 2018 downward and taking an EBITDA hit of circa $3.5 million and NPAT hit of $2.5 million.
However, we disagree with the market on this one as the over-50s demographic has been an underserved segment and is a growing one. We also believe that this segment has been the beneficiary of multiple bull economic periods and even earning them the moniker the “richest generation”, making it a high-value segment to serve.
We also want to point out that all the investment in the relaunch is fully expensed (~$500k). The company is also using its own technology and industry partnerships to launch it, thus making it more cost effective than most “start-ups”. In fact, the company expects PennyTel to deliver positive EBITDA by FY19.
Positively, the company’s share price jumped over 10% following an announcement that it is acquiring a smaller peer in Singapore. The focus of today’s update are the details of the deal:
Super Acquisition
Last week (21 June), the company disclosed that it has signed a conditional agreement to acquire Singaporean niche operator, SuperInternet for a total of S$2.0 million. SuperInternet is a licensed Facilities-Based Operator (FBO) by Singapore’s Infocomm Media Development Authority (IMDA).
This means that it can operate its own network infrastructure, thus the acquisition includes SuperInternet’s voice network infrastructure and dark fibre within the Singapore central business district and a national interconnection with Singapore NG-NBN provider, NetLink Trust. The acquisition also includes 10 specialist staff. MNF will fund the acquisition from its acquisition facility and it is scheduled to be completed before 31 July 2018 barring any regulatory issues.
Source: SuperInternet Website
The niche FBO currently generates some S$1.6 million in revenues and is break even on an EBITDA basis. Thus, we don’t expect this acquisition to add to the bottomline right away, and that is a view shared by the company as management has reiterated EBITDA expectations of $25.0 million and NPAT of $12.5 million which are unchanged since the interim results in February.
This isn’t the company’s first foray into Singapore as it already operates a point of presence there with its TNZI operation, so we do see synergies such as allowing MNF to spread out its product offerings with SuperInternet’s network and increase its sale potential with new customers and SuperInternet’s existing ones.
The CEO, Rene Sugo provided some commentary: “The acquisition of SuperInternet in Singapore provides MNF (ASX:MNF) a rapid entry into the complex Singapore market and is part of MNF’s regional expansion strategy into Asia,” and that “this will allow the company to replicate its highly successful Australian and New Zealand based next-generation high margin recurring revenues in this additional market for consistent long-term growth and innovation potential.”
Aside from the acquisition, MNF announced that it will continue to invest in the enterprise and government sector in Singapore and deploy additional product capabilities into the market.
Turning to the daily chart, prices have entered a corrective phase of the overall technical cycle after printing a high of $6.90 as marked by the horizontal red line. On the plus side, after giving way, support has been reclaimed at the $4.89 region. Dynamic resistance holding above the 50-day moving average (red line) at $5.01 would be a positive development.
With reference to the monthly chart, structural support was recently breached at the $5.03 region as shown by the horizontal blue dashed-line. In the grand scheme of things, a solid long-term uptrend remains intact as evident from the series of higher lows and higher highs since 2012. For this reason, the probability of a retest and an eventual challenge of the February intra-month all-time high of $6.90 as illustrated by the horizontal red line, is likely at some point. A definitive break above this key level of resistance would bolster broader term upward momentum, and send prices into blue-sky territory.
Summary
MNF Group (ASX:MNF) has proven to be one of the fastest growing telecom/tech companies locally and we like that management has maintains the momentum with targeted acquisitions. The most recent being Singapore’s SuperInternet which will give the company a springboard to jump further into Asia.
The shares are currently trading on 24.4 times the FY18 earnings estimate, with this forecast to decline to 19.1 times in FY19. While slightly full (even allowing for conservative profit forecasts) these multiples are palatable in our view given the company’s solid track record of growth and first mover advantage in its niches. Though we believe the recent share price drop as unwarranted, we expect some continued pressure in the near term and reiterate our HOLD rating on the stock.
MNF Group (ASX:MNF) will remain firmly held in the Fat Prophets Porfolio.
