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A investor's guide to M2 Group Ltd

August 23, 2015 | Team Kalkine
A investor's guide to M2 Group Ltd

  • The company recently announced that it has moved to majority ownership in Aggregato Global Limited (“Aggregato”). Aggregato is a specialist provider of prepaid international telecommunications services, with a large retail distribution network across Australia, New Zealand and the United States of America. As previously disclosed to the market, M2 has had an investment in Aggregato since its incorporation M2 increased its interest through participation in a pro-rata rights issue, in which it invested $4.9 million. Not all shareholders participated in the rights issue, resulting in M2's shareholding in Aggregato increasing to 61.2%. The proceeds of the raising will be used by Aggregato to fund working capital and retire some external debt. Prior to the acquisition of Aggregato, company announced the acuisition of the CallPlus group of companies and related entity, 2Talk Limited (collectively referred to as “CallPlus”). The acquisition of CallPlus will deliver a number of benefits for M2, including expansion of M2’s existing NZ business to become the third largest ISP and leading challenger in the NZ telecom market, a large, profitable and organically growing business that serves the same markets in NZ that M2 currently targets in Australia , a proven management team that is experienced in operating the leading challenger business in the NZ telecom market, a nationally recognised portfolio of consumer and business brands which are well positioned to grow share in the transition to Ultra-Fast Broadband in the NZ telecom market and further significant enhancement of scale to M2’s business. 
       
       M2 Daily Chart (Source - Thomson Reuters)
  • These acquisitions follow a series of acquisitions done in last year. Over the course of fiscal year 2013/14, M2 progressed the integration of Dodo and Eftel and completed two restructures of the business, to result in a cohesive and focused team. Through its acquisitions in 2012 and 2013, M2 gained a number of benefits, including network assets, widely recognised brands, improved sales and marketing capability and a more sizeable consuer customer base. The Company also gained some complexity, with multiple billing and customer support systems, disparate customer support operations, additional premises and a number of duplicated functions. These projects have significant implications for the medium to long-term earnings efficiency of the business. This is perhaps best demonstrated by the cost to serve, which was reduced by 6% in the consumer segment and 13% in the business segment over the course of the year. These initiatives not only reduce costs but also improve effectiveness of the customer operations, which is evidenced by the 24% reduction in the number of telecommunications industry ombudsman complaints from the beginning of the period.
       
  • Other investments into the business have included an increased marketing spend to take advantage of the strength of company’s brands and push sales. The company launched new products such as Commander Phone, to meet the evolving needs of businesses and prepare them for the rollout of the National Broadband Network ('NBN').  In FY14, M2 delivered organic growth of 121,000 services in operation across fixed voice, mobile, energy and broadband products. This growth is the result of a comprehensive body of work that included new targeted marketing campaigns, the creation of new sales teams and the expansion of existing teams, the reinvigoration of Commander Channel program, the launch of Dodo Connect Kiosks and the release of several new products and offers.
      
       M2 Results Guidance (Source - company Reports)
  • During FY14, Cash flow from operating activities increased by 37.6% to $85.6 million. Free cash flows increased by 51.7% to $63.7 million, from tightly controlled capital expenditure in the year, which was just above 2% of revenue. Balance sheet remains strong, with net assets increasing by $35.5 million for the year. Total net debt reduced by $22.7 million, with the committed debt facility reduction of $30 million across the period. Investments have been made within this period in Aggregato Global Ltd, as well as the listing on the Australian Securities Exchange of Inabox Group Limited, taking the current investments to $8.4 million. Board and Management of M2 are committed to reduce debt in accordance with the funding arrangements entered into in May 2013, of $30 million per annum. With 2 years remaining on this loan, refinancing options are being considered for the coming financial year, well in advance of the expiry of the current funding facilities. With the strong operating performance of the Company, all banking covenants have been met and exceeded.
       
  • The company is currently trading at a stock price of $9.94. The company is currently trading at a Price to earnings ratio of 25.0800 and a dividend yield of 2.85%. The company has earnings per share of 0.413 AUD. The 52-week high stock price of the company is 11.790 and 52 week low of 6.310. Although the growth prospects of the company are impressive, given the very high Price to Earnings ratio of the company and the low dividend yield; we believe that the stock is expensive at the current price of $9.94 and recommend to sell. 

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