iiNet Continues Outperforming Bigger Rivals

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By Chris Shaw

The Australian broadband market remains competitive but iiNet ((IIN)) continues to record market share gains, the company adding 22,400 subscribers in the December half year on the way to what Macquarie viewed as a high quality interim result.

EBITDA (earnings before interest, tax, depreciation and amortisation) of $37.4m was slightly better than both guidance offered by management in November and Macquarie's expectations, while RBS Australia also viewed the result as a strong one.

RBS notes the company achieved 18.7% of new market adds in the period while heavyweights Telstra ((TLS)) and Optus ((SGT)) experienced declines or a slowing in adds, putting the company's market share at 10.6% at the end of the half-year.

iiNet is now in competition with TPG ((TPM)) for third position in the market, RBS noting iiNet is choosing to offer a differentiated product to gain subscribers rather than trying to compete on prices. The benefit of this is steady ARPU (average revenue per user) growth, as evidenced in the interim result.

In the view of RBS the next phase of growth for the company is via further market share gains and margin uplift from migrating off-net subscribers. Bank of America Merrill Lynch notes much of this is from the company shifting customers acquired in the relatively recent Westnet takeover.

As well, BA-Merrill Lynch suggests some growth could come from expanding DSLAM networks in Melbourne and Brisbane and from a regional backhaul rollout, while Macquarie notes free cash flow is solid and puts the balance sheet in good shape and so frees the company up to make acquisitions to add to its organic growth profile.

The other potential growth market for BA-Merrill Lynch is the Australian small business market where iiNet is beginning to make inroads, while in its core consumer segment thencompany is offering new services such as IPTV that further differentiate its model.

Post the interim result brokers have generally lifted earnings estimates, Macquarie increasing its earnings per share (EPS) forecasts by 4.5% in FY10 and by 4% in FY11 to 21.2c and 22.5c respectively.

This compares to RBS Australia's forecasts of 20.7c and 25.2c respectively for FY10 and FY11, while BA-Merrill Lynch is at 22.1c and 27.9c. Consensus forecasts according to the FNArena database stand at 21.3c and 25.2c respectively.

The changes in forecasts have translated into some changes in price target, BA-Merrill Lynch upping its target to $2.60 from $2.50 and RBS Australia to $2.50 from $2.40. The average price target according to the FNArena database is $2.63, up from $2.55 prior to the results release. The FNArena database shows iiNet is rated as Buy by all three stockbrokers in the FNArena universe that cover the stock.

Shares in iiNet today are stronger in a weaker market. As at 1.20pm the stock was up 5c at $2.18, which compares to a trading range over the past year of $1.10 to $2.38.

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