Australia | Jul 14 2006
By Chris Shaw
A share price decline of 70% over a period of 18 months is usually not a sign of better things to come but iiNet (IIN) is an exception to the rule according to Microequities, a specialist researcher of micro-cap companies, which has added the stock to its recommended portfolio.
Microequities is quick to acknowledge there are risks associated with the company, but also points out there is significant upside if the company can improve its operations and so improve its financial performance. Poor performance has been a major contributor to the share price fall, as in May the company warned its earnings before interest, tax, depreciation and amortisation (EBITDA) would be about $24.6m, lower than the previous guidance of about $40.1m.
The upside potential according to Microequities centres on the company’s ADSL 2 network of more than 210 exchanges around Australia, the largest in the country. The reach of the network has recently been extended thanks to a deal with Powertel (PWT) that will see the companies combining their networks, allowing iiNet to leverage its infrastructure by both opening its network to competitors and increasing its list of potential customers.
As part of the deal Powertel took a 14.9% stake in iiNet at $0.85, the company joining Amcom Telecommunications (AMM) as significant stakeholders, positions that could be a precursor to a bid according to Microequities.
A further positive is the potential for a favourable regulatory outcome in terms of ULL pricing, Microequities taking the view any decision is more likely to go against Telstra (TLS) and in favour of other players in the industry.
Microequities have allocated iiNet a 5% weighting in its recommended portfolio, the stock having traded between $0.565-$3.40 in the past 12 months.
The positive view is at odds with most of the market, the FN Arena database showing iiNet is currently rated as Sell or Reduce by four of the five brokers and equity researchers that cover the stock, the other recommending investors avoid the stock completely.
The average share price target is $0.75, which is well above the median price target according to Thomson One Analytics of $0.50. The stock’s last closing price was $0.705.