Australia | Aug 28 2006
By Chris Shaw
Voice Over Internet Protocol or VoIP has long been seen as a major growth area for the internet, as it allows people to talk to one another via their PCs rather than having to use a phone line. Despite the obvious potential it has not translated into significant earnings growth for those companies involved in the sector, though the latest result from Integrated Research (IRI) suggests this is slowly changing.
The company, which services VoIP networks through its well regarded Prognosis product, earlier this month reported a profit of $7m, which was up from $6.2m in the previous year. The key though is earnings in the second half grew strongly, reaching $5.4m compared to $1.6m in the first half and $3.6m for the corresponding period last year.
This stronger outlook has led Microequities (microequities.com.au) to lift its price target on the stock to $0.68, as in its view the company should trade at a premium given its strong business model and high quality client base.
Microequities is forecasting margins to increase going forward, with its pre-tax margin estimated to increase to 35.9% this year from 35.1% in FY06, the company to gain from releasing new platforms for its IP products.
In the view of Microequities the stock is now priced at around 12.5% earnings in FY07 and only 6x based on an enterprise value to pre-tax earnings (EV/EBITDA) basis, making it cheap at current levels.
Aspect Huntley in a recent review was also somewhat positive on the stock, rating it as Accumulate based on the potential for strong growth. It suggests some caution is required though as the company generates much of its revenues and earnings offshore, which makes for less visibility in terms of analysing profits and introduces some currency risk.
The stock today is trading lower, down 2c at $0.52 as at 11.15am. This offers a potential opportunity given the price is well below the price target of Microequities and the median price target according to Thomson One Analytics of $0.60, which is based on median earnings in FY07 of $7.86m, rising to about $9m in FY08.