MTU - M2 Group

[craft]

The report looks a little bit weaker than some of the analyst forecasts I've seen.

Reasonable result I thought (thought = interpretation via a biased perspective)

M2 was basically created as a roll-up business model and I posted against such models in both the GEM and GXL threads. So what makes M2 different? They generally bought cheaply, the businesses were cheap because they had high churn in the customer retention, M2 then reduces the churn making what they bought much more valuable then what they paid for it. There are also true synergies of scale in purchasing power for wholesale Telco services they need to purchase.

To me the organic growth especially in NBN was pleasing. My theory was that having a established low cost structure and mentality would give them an advantage at reselling NBN, so far that seems to be translating.

The electricity offer is also quite exciting. If people are happy saving money through M2 on their telephone bill it shouldn't be hard to get them to sign up for another utility as well and the early signs are encouraging. Unique offering in the market at the moment.


Business combination accounting seems to muddy the waters on M2’s number for a lot of people. Looking through that to economic returns M2 has never seemed that expensive to me and it still doesn’t, which makes it much easier for me to hang onto.

Iprimus is an anomaly to the rest of the M2 business as it introduced a fair bit more infrastructure and understanding the effects is still early days, not assisted by lumping of so much into ‘other expenses’ (which is also muddied with new costs from Eftel and Dodo etc) P&L driver analysis is currently difficult especially at the half year because there is no further explanation via notes and whilst Facilities and Mtc have now been split out its not easy to do a sequential (past 6 months) comparison . Given this I’m not too surprised that there has been a bit of flightiness around the EBITDA number. I have been digging and am comfortable so not a major concern for me.

Better sign up for the DRP again and then back to sleep until more news. (observation – price often dips leading into the DRP pricing period)

 

[Muschu]

I'm no technical expert but what are the implications of MTU going down on increasing volume [please]?

 

[Ves]

Craft, do you know if the reports include enough information for an investor to be able to calculate the churn rate on their customer base? I had a quick look and couldn't see much detail in this respect.

It's obviously an important figure for this kind of business.

 

[Ves]

Looking at their forecasts for full year 2014 I'm arriving at ball park EBIT of around $140m post-non cash amortisation from customer contracts (given as $26m).

EBIT last year was $76.7m before adjustments to contract amortisation. $76.7m * 1.48 + $26m = $139.5m (representing a 48% increase in underlying EBIT).

Does anyone have any agree or have criticisms of these calculations?

 

[craft]

Craft, do you know if the reports include enough information for an investor to be able to calculate the churn rate on their customer base? I had a quick look and couldn't see much detail in this respect.

It's obviously an important figure for this kind of business.

Sometimes you get something specific from presentations or more likely from the questions following.

Observing efficiency ratio's over a period of many halves will give you a broad insight - I'm sure you can work out some relevant ones.

 

[craft]

Looking at their forecasts for full year 2014 I'm arriving at ball park EBIT of around $140m post-non cash amortisation from customer contracts (given as $26m).

EBIT last year was $76.7m before adjustments to contract amortisation. $76.7m * 1.48 + $26m = $139.5m (representing a 48% increase in underlying EBIT).

Does anyone have any agree or have criticisms of these calculations?

Nope

Some of the headline increase is because acquisition costs were expensed last year which supressed that result. There is also some dilution form shares issued as you move to the per share figures.

Bottom line the underlying (adjusted for customer contracts) EPS is forecast by the company to grow by 39%. Normalising last years result for traction costs I get a adjusted EPS growth figure of around 18%.

 

[Ves]

Nope

Some of the headline increase is because acquisition costs were expensed last year which supressed that result. There is also some dilution form shares issued as you move to the per share figures.

Bottom line the underlying (adjusted for customer contracts) EPS is forecast by the company to grow by 39%. Normalising last years result for traction costs I get a adjusted EPS growth figure of around 18%.

Do you mean the $7m of expenses they're got tucked away in other expenses on note 6(e) of the annual report?

I hadn't taken them into consideration.

So.... underlying 2013 NPAT = $43.78m+$14.6m (add back amortisation after tax)+$7m (acquisition costs as above ) = $65.38m

Underlying EPS = $65.38m / 163.059m shares = $0.401

Forecast underlying 2014 EPS (low-end) = $0.48

Underlying increase = (0.48-0.401)/0.401 = 19.7%

Close enough. I can also see why the market could be a bit confused about this business.

PS: I'm assuming that the acquisition costs included in the P/L had no tax effect....

 

[craft]

Interesting paragraph in Buffett's latest letter. It's an important point for MTU as they now are amortising 26Million of customer contracts p.a Does this sound familiar VES?

I won’t explain all of the adjustments – some are tiny and arcane – but serious investors should understand
the disparate nature of intangible assets: Some truly deplete over time while others in no way lose value. With software, for example, amortization charges are very real expenses. Charges against other intangibles such as the amortization of customer relationships, however, arise through purchase-accounting rules and are clearly not real costs. GAAP accounting draws no distinction between the two types of charges. Both, that is, are recorded as expenses when earnings are calculated – even though from an investor’s viewpoint they could not be more different.

 

[Ves]

Interesting paragraph in Buffett's latest letter. It's an important point for MTU as they now are amortising 26Million of customer contracts p.a Does this sound familiar VES?

Remember it fondly... You should re-read some of my earlier posts in this thread (I know there's lots more in other threads too). It obviously took me a while to get my head around the concept.

Buffett mentions it a lot.... has been for decades, so it's obviously important if he hasn't changed his mind.

What interests me about MTU (other than it's a highly cash generative, capital light, compounding machine) is their apparent ability to maintain really low churn rates as a reseller. This will be a very handy asset as the NBN (in whatever form it takes) ramps up over the next five or ten years, as other players have to rebrand as resellers due to the centralisation of ownership of the infrastructure. If there is a larger shift from infrastructure players to a higher focus on reselling and marketing, those with the lowest cost structures and people capability will be the biggest benefactors. I also see that management has been astutely diversifying their revenue streams (electricity is the newest) whilst keeping to their core advantages and competencies.

I don't hold yet.... but it looks interesting at the moment.

 

[Ves]

Further to my previous post, this article may be of interest and probably says it better and expands upon some of the concepts I briefly touched upon:

http://delimiter.com.au/2012/06/21/nbn-competition-will-rest-almost-solely-on-price/

 

[goccipgp]

Looks like the newly recalculated support and resistance is 5.8 & 6.498. Long term looks good.

 

[Ves]

The price action has been fairly gloomy since the half-year report. Looks like IIN and TPM have been similar.

I've opened a position as of this morning and would like to build over the next few months if the price is right.

 

[VSntchr]

The price action has been fairly gloomy since the half-year report. Looks like IIN and TPM have been similar.

I've opened a position as of this morning and would like to build over the next few months if the price is right.

Yeah, another connection I am seeing is that the news of the NBN taking its plan to a more "aggressive" level has been correlating with weakness in some of these telco stocks..
I think it was you that made a post on here about the playing field being levelled by the NBN, so perhaps some selling is coming through the increased awareness of the NBN drawing closer.

Interestingly though, it is MTU that is being the hardest hit lately - with IIN holding up perhaps due to persistent TPG takeover rumours, and TPG holding up with the help of a pretty good HY result and the prospect of competing more effectively with the NBN by offering the fibre-to-the-basement technology allowing them to access whole apartment blocks. However, I thought that with the NBN CO stating how much of a threat this is to them, that it remains a bigger risk for TPG investors as it seems like something that the government will be doing anything they can to take it away.

 

[Ves]

Thanks VS

I still believe that the "reseller" nature of the planned NBN will mean that companies will only be able to compete on price and how well they can build customer lists (marketing) and then maintain them (low churn). To do all of those things you need a low cost base.

MTU has been very good at the reselling caper historically, hence the perceived opportunity to increase market share.

 

[robusta]

Looking to buy Lumo
http://www.smh.com.au/business/m2-eyes-300m-deal-for-lumo-group-20140623-3amw4.html

Hopefully there will be opportunities to bundle services and create more 'sticky' customers.

 

[IFocus]

Usually troll around following the "usual suspects" discussing fundamentals to see if there is any technical correlation. MTU fitted the bill nicely so looked for a break out entry at $6.02.

My super account is a beneficiary as a result thanks gents appreciate your input to the forum keep up the good work.

Even if the how process is totally random IMHO............will be toasting you all with my finest cask of red wine tonight cheers

 

[robusta]

Usually troll around following the "usual suspects" discussing fundamentals to see if there is any technical correlation. MTU fitted the bill nicely so looked for a break out entry at $6.02.

My super account is a beneficiary as a result thanks gents appreciate your input to the forum keep up the good work.

Even if the how process is totally random IMHO............will be toasting you all with my finest cask of red wine tonight cheers

Good work IFocus, glad to see you got on board this solid business. While I don't fully understand your rationale, there are lots of ways to skin a cat...

 

[piggybank]

Melbourne-based telco M2 Group is set to acquire New Zealand’s third largest internet service provider for $245 million. The deal will see the ASX-listed telco pick up Call Plus Group and a related entity, 2Talk Limited, in a bid to sharpen its trans-Tasman appeal.

According to M2, Call Plus has a customer base of more than 400,000 services across consumer, business and wholesale market segments. The telco expects the Call Plus acquisition to contribute in excess of $NZ250 million revenue and $NZ45 million EBITDA in fiscal 2016.

http://www.businessspectator.com.au/news/2015/4/13/technology/m2-group-snaps-call-plus

As a result the stock closed at $11.55 - up nearly 11% on the day

 

[galumay]

Interesting, after 4 months living in NZ I have never seen or heard of this company! The big players here are Voda and Spark who account for over 70% of what is a tiny market. The ISP's are all resellers of Chorus infrastructure.

Just had a hunt around and one of the ISP's run by Call Plus is Orcon who I have seen advertised on TV.

Regardless they appear to be a very small operator in a very small market, not sure how optimistic the numbers being thrown round are.

 

[craft]

Is this what the Momentum traders are after?

High volume breakout with gap followed by a pull back and now a new all time high. Or does it depend on where it closes today?