MNF Group Limited (MNF)

Transcription

1 MNF Group Limited (MNF) 16 February 2018 Outperform 1H18 Results: Excessive Sell-off Presents Buying Opportunity $5.14 Chris Reindler Summary (AUD) Market Capitalisation $375.2m Share Price $ week low $ week high $6.90 Ave Monthly Vol (year rolling) 2.9m Key Financials (A$ million) Year End 1H18 Act. FY18 Est. FY19 Est. Revenue ($m) EBITDA Adj ($m) EBITDA ($m) NPATA Adj ($m) Underlying EPS* (c) Underlying EPS Growth 13.2% 26.4% 22.4% Underlying PE (x) n/a DPS (c) Div Yield 0.8% 1.8% 2.5% EV ($M) EV/EBITDA (x) n/a ROE n/a 16.8% 21.9% EBITDA Margin 10.2% 10.7% 13.8% Payout Ratio 50.0% 50.0% 50.0% * Excludes non-cash amortisation of customer contracts (CCI) Share Price Graph (AUD) $7.00 $6.50 $6.00 $5.50 $5.00 $4.50 $4.00 MNF XSO Our View MNF s share price retracted 12% ($60m drop in mtk cap) following the release of its 1H18 result which was accompanied by a growth-investment initiative (Pennytel) prompting management to revise FY18 guidance (12% reported EBITDA down). We believe MNF has been oversold and offers compelling value at these levels, citing the following key factors: 1) GP guidance of $72.3m (+23%) was reiterated, underpinned by continued strong organic growth in all three high-margin business units; reaffirming our confidence in MNF s ability to deliver at least mid-teen percentage organic GP growth in its core business over the medium term; 2) The initial investment of $3.5m in Pennytel is relatively small, with a potentially considerable return (management estimate $7.9m EBITDA in FY20). We estimate the max potential loss of $5-$7m (12 month shutdown) is limited, especially considering the $60m fall in mkt cap; 3) MNF now trades on 23.1x FY18 underlying PE (falling to 18.9x in FY19) with a three-year underlying EPS CAGR (FY17-20E) of 22%. We believe MNF warrants a 25x PE applied to its average underlying EPS over the next 12 months (implying $6.17 share price), noting that ~60% of overall GP is generated from proprietary software products with high margins and recurring revenues growing at double digits YoY. Accordingly, we reiterate our Outperform recommendation. Key Points Our forecasts In line with continued strength in key business indicators, our organic earnings estimates remain largely unchanged, although we have adjusted our overall reported earnings forecasts to account for the $3.5m investment to fuel growth in Pennytel. Accordingly, we forecast underlying FY18 EBITDA of $27.3m and underlying NPATA of $16.2m, representing growth of ~21% and ~29% respectively. In line with management, we forecast a $3.5m loss in relation to the Pennytel business unit. We estimate Pennytel will make a nominal EBITDA contribution in FY19, which we view as conservative in comparison to the Company s $700k forecast. We have confidence in Management s ability to execute the Pennytel initiative and eagerly await a progress update in the coming months, upon which we will revisit our estimates. Our organic divisional outlook remains unchanged based on the following key business indicators from 1H18: Domestic Wholesale Following 17% organic increase in 1H18 gross margin, we expect this momentum to continue in line with: 1) 8% growth in new wholesale service customers to 284; 2) 19% increase in numbers ported to 703k; 3) Wholesale aggregation services in iboss grew ~47% to ~2,950. Domestic Retail 39% increase in gross margin was partially driven by a full-period contribution from CCI, which should see continued growth in line with recent Government contract wins and investments in collaboration and video technologies. Moderate growth of 6% in highmargin Virtual PBX customers (~3,600 total) was slower than anticipated. Global Wholesale Gross margin grew 27% organically following an increase in the proportion of revenue derived from recurring streams in high-margin wholesale managed services (27%) rather than usage-based (73%). 1H18 also benefited from a full-period contribution from the HK PoP, while NZ, Sydney and Singapore PoPs are also due to be upgraded and expanded in FY18.

2 MNF Group Limited Page 2 of 7 MNF Group Limited - Summary of Forecasts MNF $5.14 PROFIT & LOSS SUMMARY (A$m) BALANCE SHEET SUMMARY Year end June FY16A FY17A FY18E FY19E Year end June FY16A FY17A FY18E FY19E Total Revenue Cash** Gross Margin Receivables EBITDA Adj Other EBITDA Total Current Assets D&A (4.7) (5.1) (6.2) (6.3) Property Plant & Equip EBIT Intangibles Net Interest (0.8) (1.8) (1.4) (1.3) Other Pre-Tax Profit Total Non-Current Assets Tax Expense (2.8) (4.4) (4.4) (6.6) TOTAL ASSETS Minorities Accounts Payable NPAT Reported Finance lease liability Abnormals* Financial instruments NPATA Adj Provisions Tax Liabilities Margins on Sales Revenue Other EBITDA Adj 11.0% 11.8% 11.9% 13.5% Total Current Liab EBIT 8.1% 9.9% 8.0% 11.2% Borrow ings NPATA Adj. 5.6% 6.5% 7.1% 8.3% Other Total Non-Current Liab Change on pcp TOTAL LIABILITIES Revenue 88.1% 18.8% 19.7% 4.1% TOTAL EQUITY EBITDA Adj 45.9% 27.2% 20.7% 17.9% EBIT 28.1% 44.5% -2.6% 44.9% CASH FLOW SUMMARY NPATA Adj. 25.0% 38.9% 29.6% 22.4% Year end June FY16A FY17A FY18E FY19E EBITDA PER SHARE DATA Working Capital (3.7) (4.7) (1.9) (0.5) Year end June FY16A FY17A FY18E FY19E Interest (0.7) 0.5 (1.4) (1.3) EPS Adj (c) Tax (4.4) (3.0) (4.4) (5.5) Grow th (pcp) 18.7% 28.8% 26.4% 22.4% Other 42.9 (3.3) Dividend (c) Operating Cash Flow Franking 100% 100% 100% 100% Capex (incl intang) (6.1) (10.1) (6.0) (5.0) Gross CF per share (c) Free Cash Flow NTA per share (c) Issues of Shares Net Borrow ings (11.6) (2.5) (2.5) 0.0 KEY RATIOS Acquisition related 0.2 (17.0) Year end June FY16A FY17A FY18E FY19E Dividends (4.5) (5.1) (5.9) (7.9) Net Debt / EBITDA (x) 0.0x na na na FX impact 0.0 (1.8) Net Debt : Equity (%) 6% na na na Net cash Flow 46.3 (0.5) EBIT Interest cover (x) Free CF / NPAT 45.2% 57.7% 71.4% 110.3% V a lua tion Current ratio (x) Year end June FY16A FY17A FY18E FY19E ROE (%) 23.6% 17.7% 16.8% 21.9% PE Ratio (x) ROIC 22.3% 17.8% 17.3% 26.5% PE Ratio (x)-adj Dividend Payout Ratio 50% 50% 50% 50% Cash PE (x) Dividend Yield (%) 1.4% 1.7% 1.8% 2.5% * Non-cash amortisation of customer contracts (CCI) and FY18 investment in Pennytel FCF Yield (%) 1.2% 2.0% 2.9% 5.5% ** Cash balance excludes additional cash held for TNZI comensurate payable EV/EBITDA Adj (x) EV/EBIT Adj (x)

3 MNF Group Limited Page 3 of 7 Pennytel Overview What is Pennytel & its strategy? Pennytel is a low cost, sim-only Mobile Virtual Network Operator (MVNO) operating on the Telstra 4G network (of which MNF is one of only two wholesalers) and will initially target over 50s demographic in regional areas. MNF have partnered with a large media organisation with a significant regional audience to drive customer acquisition on a performance based model. How s it going to work? Pennytel will advertise in multiple print media publications (Newcastle Times / Bendigo Advertiser etc). Customers can then either apply online or ring the call centre to sign up. At this point, customers will be sent a sim card in the post, insert in to phone and activate online (up-and-running within 30 minutes). Pennytel will have a post-paid focus, with an indicated average ARPU of $30/month (incl GST) (unlimited calls/text, 3GB data) we expect this should suit the business model as this demographic typically does not require a higher volume of data. What is Pennytel s target demographic? We estimate the addressable market is approximately 7.5m over 50s (less after regional focus), noting MNF s partner has a reach of circa 5.5m people through its print media distribution. We view this demographic as loyal to regional print media, and therefore an engaged audience. We estimate that approximately 75% of these potential customers are currently using Telstra and paying unnecessary premiums for comparable product Pennytel represents the first time they have been given choice. In addition, Pennytel s target market represents a niche area that has not yet been targeted by other MVNO players. - Amaysim metro value seekers; - ALDI leverage store footprint; - Kogan metro and young families; - Boost adventure sport focus. Where is the $3.5m investment going? Broadly, we see the $3.5m opex split as follows: - 2/3 Fixed opex sales, operations, marketing support i.e. headcount and mostly in the Phillipines noting this is a quarantined cost that should not detract from the organic growth in MNF s core operating divisions. - 1/3 Marketing and customer acquisition spend. Management Pennytel forecast MNF s business case is based on acquiring 250k mobile SIOs (services in operation) by FY20. Starting from a zero base in Feb-18 (launch date), MNF would require implied average net adds per month of ~8,500 subscribers to reach 250k by FY20. Figure 1: Pennytel forecast EBITDA contribution and subscriber numbers MNF Group

4 MNF Group Limited Page 4 of 7 We have applied $30 ARPU and estimated 30% gross margin in relation to management s target subs, and probability weighted for three scenarios per figure 2. Figure 2: MNF Pennytel target subscriber numbers 1H18 2H18 FY18 1H19 2H19 FY19 1H20 2H20 FY20 Subs - 9,000 9,000 84, , , , , ,000 Subs growth YoY (%) na na na 1567% 1567% 140% 67% 67% Subs growth HoH (m) na 834% 78% 35% 24% Average subs - 4,500 4,500 46, ,030 79, , , ,000 Net adds - 9,000 9,000 75,060 65, ,000 52,000 48, ,000 Net adds p/month 1,800 1,800 12,510 10,990 11,750 8,667 8,000 8,333 ARPU $30 $30 $30 $30 $30 $30 $30 $30 $30 Pennytel Revenue $m % 3535% 278% 93% 146% GP Margin 30% 30% 30% 30% 30% 30% 30% 30% 30% Gross Profit % 3535% 278% 93% 146% Sensitivity - Ave total Subs #s 25% 1,125 1,125 11,633 29,258 19,875 44,000 56,500 50,000 50% 2,250 2,250 23,265 58,515 39,750 88, , ,000 75% 3,375 3,375 34,898 87,773 59, , , ,000 Sensitivity - Revenue $m 25% % % Sensitivity - GP $m 25% % % MNF Group and TC Our Pennytel forecast At this stage, we forecast in line with management guidance for FY18 and a $3.5m loss in relation to the Pennytel business unit. In FY19, we conservatively risk-weight the company s internal guidance to account for potential delays in the customer ramp-up and/or higher than anticipates costs. On this basis we estimate Pennytel will make a nominal EBITDA contribution in FY19. We view this as conservative, particularly in relation to the company s $700k forecast. Rounding out While the size of the investment (~$3.5m) in FY18 and resultant impact on reported EBITDA comes as a surprise, we take comfort in the detailed guidance provided by the company in relation to forecast subscriber numbers and earnings contribution from the Pennytel business unit. Furthermore, given Pennytel will effectively be quarantined as a separate business unit, we do not see this initiative detracting from the continued organic growth in key business segments. Management has indicated it will periodically update the market in relation to Pennytel performance, and in the event early stage numbers are not met, the business unit can be unwound and therefore we see limited downside risk to FY19-FY20 earnings.

5 MNF Group Limited Page 5 of 7 1H18 Headline Numbers MNF s solid interim result was in line with original company guidance and driven by strong organic growth in all of MNF s operating segments, as well as a full period (six month) contribution from the CCI business acquired in early FY17: - Gross margin of $34.1m, +27% on pcp (15% organic growth excluding CCI) - EBITDA of $11.9m, +19% on pcp (underlying EBITDA of $12.4 excluding $0.5m investment in Pennytel) - NPAT of $6.1m, +25% on pcp - EPS of 8.30cps, +16% on pcp Figure 3: Key business indicators MNF Group FY18 Forecast Update Figure 4: MNF Revised reported FY18 earnings guidance MNF Group

6 MNF Group Limited Page 6 of 7 TC revised estimates In conjunction with a solid interim result that was in line with Company guidance, MNF also announced its intention to invest in the relaunch of its Pennytel MVNO Brand. This $3.5m investment will be expensed through the P&L in FY18, which has resulted in Management revising their reported earnings guidance. Underlying FY18 EBITDA and NPAT guidance (excl $3.5m Pennytel investment) has remained unchanged. Importantly, we do not see this initiative detracting from the continued organic growth in MNF s core operating divisions, supported by Management reiterating FY18 GP guidance of $72.3m (+23% on pcp). We remain confident in the Company s ability to deliver >10% GP growth in the medium term. If executed well and in line with Management s target, Pennytel could potentially deliver ~$7.9m EBITDA in FY20, which provides substantial upside to our current projections. Our growth forecasts for MNF s three core operating divisions are underpinned by the following factors: - Domestic Wholesale We estimate 30% growth in FY18 gross margin driven by 40% GP growth in high-margin wholesale managed services more than offsetting flat earnings in voice carriage. - Domestic Retail Overall we forecast ~32% growth in FY18 gross margin, partially driven by a full period contribution from CCI and increased growth in Virtual PBX sales. - Global Wholesale we anticipate margin growth of 13% in FY18 stemming from ~60% GP growth in high-margin wholesale managed services more than offsetting flat earnings in voice carriage. We reiterate our FY18 forecasts of $27.3m underlying EBITDA (excludes interest revenue and Pennytel investment) and underlying NPATA of $16.2m, representing growth of ~21% and ~29% respectively. On a reported basis, we revise our FY18 estimates to $24.6m EBITDA and $12.6m NPAT. Overhead and Capex commentary 1H18 overheads were impacted by various one-off items, including: - Two office relocations; - Full period effect of occupancy costs incurred from Sydney and Melbourne offices (~$750k); and - Full period impact of CCI overheads (contribution an additional one month of costs on pcp). MNF 1H18 capex of $4m was in line with previous guidance provided. MNF expects total FY18 capex of $6m, which includes $2m for the final sum relating to office expansion (borne in 1H18), sustaining engineering costs ($2m replacing old hardware) and global strategy investment ($2m). We note that no customer-driven investment is included in MNF s FY18 estimates. We maintain our FY18 forecast capex of $6m, noting a large portion was incurred in 1H18 in relation to MNF s office expansion.

7 MNF Group Limited Page 7 of 7 Disclaimer The following Warning, Disclaimer and Disclosure relate to all material presented in this document and should be read before making any investment decision. Warning (General Advice Only): Past performance is not a reliable indicator of future performance. This report is a private communication to clients and intending clients and is not intended for public circulation or publication or for the use of any third party, without the approval of Taylor Collison Limited ABN ("Taylor Collison"), an Australian Financial Services Licensee and Participant of the ASX Group. TC Corporate Pty Ltd ABN ( TC Corporate ) is a wholly owned subsidiary of Taylor Collison Limited. While the report is based on information from sources that Taylor Collison considers reliable, its accuracy and completeness cannot be guaranteed. This report does not take into account specific investment needs or other considerations, which may be pertinent to individual investors, and for this reason clients should contact Taylor Collison to discuss their individual needs before acting on this report. Those acting upon such information and recommendations without contacting one of our advisors do so entirely at their own risk. This report may contain forward-looking statements". The words "expect", "should", "could", "may", "predict", "plan" and other similar expressions are intended to identify forward-looking statements. Indications of and guidance on, future earnings and financial position and performance are also forward looking statements. Forward-looking statements, opinions and estimates provided in this report are based on assumptions and contingencies which are subject to change without notice, as are statements about market and industry trends, which are based on interpretations of current market conditions. Any opinions, conclusions, forecasts or recommendations are reasonably held at the time of compilation but are subject to change without notice and Taylor Collison assumes no obligation to update this document after it has been issued. Except for any liability which by law cannot be excluded, Taylor Collison, its directors, employees and agents disclaim all liability (whether in negligence or otherwise) for any error, inaccuracy in, or omission from the information contained in this document or any loss or damage suffered by the recipient or any other person directly or indirectly through relying upon the information. Disclosure: Analyst remuneration is not linked to the rating outcome. Taylor Collison may solicit business from any company mentioned in this report. For the securities discussed in this report, Taylor Collison may make a market and may sell or buy on a principal basis. Taylor Collison, or any individuals preparing this report, may at any time have a position in any securities or options of any of the issuers in this report and holdings may change during the life of this document. Taylor Collison was the Lead Manager for My Net Fone s June 2015 Placement that raised $15.0m, and Lead Manager for My Net Fone s February 2017 Placement that raised $18.5m. Taylor Collison received a fee for their services. Analyst Interests: The Analyst(s) may hold the product(s) referred to in this document, but Taylor Collison Limited considers such holdings not to be sufficiently material to compromise the rating or advice. Analyst(s) holdings may change during the life of this document. Analyst Certification: The Analyst(s) certify that the views expressed in this document accurately reflect their personal, professional opinion about the financial product(s) to which this document refers. Date Prepared: February 2018 Analyst: Chris Reindler Release Authorised by: Campbell Taylor