In today’s daily we have covered stock research on M2 Telecommunications (Expensive).

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S&P 500 was up3.74points or 0.19%on Friday and closed at 1960.96.  U.S. stocks ended higher on Friday, led by gains in technology shares, but DuPont's downbeat second-quarter and full year forecasts kept a lid on gains. Nike Inc. (NKE) added 1.1 percent after the largest sporting-goods maker posted profit that beat analysts’ estimates. GoPro Inc. (GPRO) rallied for a second day after going public. DuPont fell 3.3 percent after the maker of genetically-modified corn trimmed its profit estimate as farmers switched to soybeans. Dollar General Corp. sank 7.3 percent after the company’s chief executive said he would retire.

London’s FTSE 100 closed 0.3% higher as Franfurt’s Xetra Dax ended the session up 0.1% on the day. Paris also published the final print of its first quarter GDP which as expected showed the economy neither grew nor contracted in the period reading 0.0%. Confidence numbers for the Eurozone as a whole unexpectedly dipped in June after a three year high in MAY.


S&P 500 Daily Chart (Source – Thomson Reuters)
 
S&P ASX 200 was down by 19.2points or 0.35%on Friday and closed at 5445.1 points. Senex energy (SXY) and Origin Energy (ORG) have completed the two farm in agreements announced on 24/02/2014 after all conditions were satisfied. Recall (REC) has announced the implementation of a facility optimization program designed to increase facility utilization and reduce real estate costs in existing markets.

As per the latest trading update by Fleetwood (FWD) there is strong demand being experienced in the education sector in Western Australia, Victoria and Queensland however with lower occupancy at Searipple and poor performance in the resource sector it is expected the second half EBIT to be approximately $3m. Henderson Global Investors (HGG) has entered in to an agreement to acquire the entire issued share capital of Geneva Capital Management which has assets under management of US$6.3bn in mid and small cap US growth companies.



ASX 200 Daily Chart (Source – Thomson Reuters)

The top gainers on ASX 200 were:- 




Stock of the Day – M2 Telecommunications (MTU)
 
We expect the stock to underperform the Australian telecom sector on a 12 month view. Earnings momentum is slowing, MTU’s core business (commander, 38% of group FY13 revenue) is declining. Since MTU has acquired iprimus and Dodo, its returns have declined significantly. MTU’s return on tangible assets was almost 30% in FY10 but we forecast 13% in FY14. 


M2 Key Measures (Source – Company Reports)

There is a structural shift away from phone lines (we estimate 81% of Commander’s FY13 revenue is from fixed phone), there is increasing competition in the space. We also highlight that MTU’s Commander Business is unlikely to benefit from a reduced cost base in the move to the National Broadband Network (NBN), the cost reduction achieved will be offset by a significant reduction in the phone line used by a business.



M2 Shareholder Returns (Source – Company Reports)

MTU’s EPS momentum was broadly positive in the last four years though 2010 – 2013 and the share price rose. In the last 12 months the stock price has risen above investor expectations of EPS growth. MTU’s share price should return to a level more in line with its EPS forecasts. Over the past 12 months MTU has outperformed ASX200 market but underperformed its closest peers iiNET and TPG Telecom.



MTU Daily Chart (Source – Thomson Reuters)

We expect MTU to continue to underperform its Telecom peers. The outperformance by all players versus the ASX 200 has been driven by consolidation of the industry which has meant that significant synergies have been extracted. Declining return on invested capital means MTU should continue to trade at significant discount to its peers IIN and TPM. We believe the stock is expensive at its current price and would review the stock at a later date.

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