Company Overview: MNF Group Limited (ASX: MNF) is an integrated telecommunications software and network provider. It provides wide range of services which includes voice communications, broadband Internet, and cloud-based communications services to residential, business, government and wholesale customers. It operates primarily in two business segments – Wholesale (provides voice and communication products including cloud services to telcos, etc.); and Direct (provides mobile, conferencing and collaboration services directly to residential, Government customers, etc.). The Wholesale segment is further bifurcated into two business units- Domestic Wholesale and Global Wholesale, reflecting the different product suites catering to a diverse customer base.  The company generates recurring revenue from its suite of wholesale offerings and variable revenue from service usage, sale of hardware and equipment, etc.

MNF Details

Resilient Performance in FY20 Owing to Increased Consumer Demand: MNF Group Limited (ASX: MNF) is engaged in the provision of software and services for voice communication. The market capitalisation of the company as on 25 January 2021, stood at ~$373.06 million. The company delivered a decent financial performance in FY20, despite the disruption in the economy with the onset of COVID-19 pandemic. It reported revenues of $230.91 million in FY20, compared to $215.58 million in FY19, exhibiting a growth of 7% on Y-o-Y basis. Net profit grew by 20.15% to $11.94 million in FY20, from $9.94 million in FY19. There was a significant improvement in the cash position of the company to $46.16 million from $15.48 million during the same period under consideration. During FY20, there was a reduction in the loans and borrowings of the company to $30 million, compared to $55.60 million in the previous corresponding period.  The company has witnessed strong organic growth in its core product area of hosting next-generation voice services in the cloud. The demand has been driven by cease sale of legacy PSTN/ISDN services, the NBN rollout and the UCaaS, CPaaS & CCaaS communications revolution. There was an increase in the phone numbers added in FY20, reflecting a growth of 17% on the previous corresponding period.

FY20 Financial Performance (Source: Company Reports)

Key Capabilities Backed by Robust Business Model: The company helps in bridging the gap between software and telecom by addressing the ~$70 billion global market in cloud communications. Its voice IP network is designed to power cloud communications, with features including APIs, HD Voice and advanced routing controls.

Business Proposition of MNF (Source: Company Reports)

Benefiting from the COVID Induced Volatility: The onset of COVID-19 pandemic has made everyone realise the importance of a robust communication mechanism to stay connected, either professionally or personally. MNF has been one of the beneficiaries due to the global shift in working preferences to remote working. The pandemic has created an increased demand for voice communications and collaboration in technology as work and schools got shifted to work-from-home mode. As a key player in the provision of software and services for telecommunications and communication technologies, MNF has experienced a surge in demand for its core products during the initial phase of the pandemic. The company has witnessed strategic growth in UCaaS, CPaaS and collaboration with customers, driving strong second-half results in FY20. It reported an increase in the variable revenue segment in March and April, owing to a record increase in calling and conferencing traffic volume during the initial shutdown of economies.

Strong Operating Cash Flow and Net Debt Position: The company reported an improvement in cash flow from operations at $28.9 million in FY20, compared to $5.5 million in FY19. MNF reported a significant increase in cash conversion rate (CCR) to 93% from 46% during the same period. There was an improvement in the debt level of the company too, with net debt of negative $16.2 million in FY20, compared to positive $40.1 million in the previous corresponding period.

FY20 Debt Profile and Operating Cash Flow (Source: Company Reports)

Top 10 Shareholders: The top 10 shareholders together form around 47.28% of the total shareholding while the Top 5 constitutes the maximum holding. Fung (Kam Kan Andy) and Sugo (Rene) are holding a maximum stake in the company at 16.11% and 8.40%, respectively, as also highlighted in the chart below:

Data Source: Refinitiv, Thomson Reuters, Chart Created by Kalkine Group

Key Metrics: During FY20, MNF reported a decent improvement in margin performance, reflecting its capabilities and resilient business model. It reported a gross margin of 41.8% in FY20, compared to 38.3% in FY19. Net margin increased to 5.2% from 4.6% during the same period. ROE of the company stood at 10.8% during FY20. There was an improvement in the liquidity of the company too to 2.19x in FY20, compared to 1.60x in the previous corresponding period. There was a significant reduction in the debt to equity ratio of the company from 0.68x in FY19 to 0.37x in FY20. Loans and borrowings stood at $30 million as on 30 June 2020, and there was an increase in lease liability to $17.77 million during the period.

Key Risks: The Group is exposed to foreign exchange risks owing to its business transactions in United States Dollar and the New Zealand Dollar. The company's short-term cash and long-term loans are subject to a floating interest rate. MNF has to verify the accuracy and completeness of the revenue recorded, as a result of reliance on the output of billing systems. The onset of the COVID-19 pandemic had a major impact on its consumers and network and it saw a many-fold increase in the volume of minutes traversing its network, which led to congestion in some key regions. There was also disruption in the Australian Telecommunications industry’s number portability processes during the pandemic, and it has impacted the growth in recurring revenues in the second half of FY20, across all the segments.

Outlook: Each business segment of the company has multiple product lines with a diversified customer base and income contribution. MNF will continue to look to enable new and disruptive voice communications through software development and network deployment. The company is focused on growing Monthly Recurring Revenue (MRR) across all the segments, which tend to provide high gross margins. Recurring revenue grew by a CAGR of ~39% to $101.5 million from $26.9 million in FY16. MNF is optimistic to drive its long-term growth through a sustainable performance in the MRR across all the segments. It has provided a guidance of EBITDA to be around $40-43 million in FY21, an increase when compared to $38.2 million in FY20. It is planning to launch its fixed voice network in Singapore and production is expected by March 2021. It will also look to invest in its strategy for expansion in the APAC region.

Valuation Methodology: EV/EBITDA Multiple Based Relative Valuation (Illustrative)

Stock Recommendation: The company intends to build a sustainable long-term high margin business, with over 80% in recurring revenues. As per ASX, the stock of MNF is trading above its average 52-weeks’ levels of $2.77-$6.20. The stock of MNF gave a positive return of 1.77% in the past three months and a positive return of 0.44% in the past one month. On a technical analysis front, the stock of MNF has a support level of ~$4.33 and a resistance level of ~$4.823. We have valued the stock using an EV/EBITDA multiple-based illustrative relative valuation and have arrived at a target price of low double-digit upside (in % terms). We have applied a slight discount to peer average EV/EBITDA (NTM Trading Multiple) to arrive at our implied target multiple because we expect some earnings streams like International Mobile Roaming and traditional audio-conferencing to remain impacted in the near term, owing to the disruption induced by the COVID-19 pandemic. For the purpose of our valuation, we have taken peers such as Telstra Corporation Limited (ASX: TLS), 5G Networks Limited (ASX: 5GN), Vocus Group Limited (ASX: VOC), to name a few. Considering the current trading levels, increase in demand for the company’s products and services, planned operations in Singapore from March 2021 and resilient financial performance backed by decent cash position, we recommend a ‘Buy’ rating on the stock at the current market price of $4.58, up by 3.854% as on 25 January, 2021.

MNF Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

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