Australia | Feb 27 2013
-Question mark over earnings growth
-Volume growth drives revenue
-Brokers cautious about company's plans
By Eva Brocklehurst
M2 Telecommunications ((MTU)) needs to deliver better organic growth to satisfy expectations, or pursue more acquisitions. This is the key finding as brokers rake through the half year results. Most of the growth in earnings was driven by the Primus acquisition and a question mark hangs over what will drive earnings growth in the future.
For Citi the calculation of the organic growth rate is made more difficult by the fact that M2 has made both acquisitions and a divestment over the past 12-18 months. Volume growth seems to be the main revenue driver, offsetting pricing pressure and churn. Citi expects revenue will be at the lower end of M2's forecast range of $610m to $650m for FY13, because of further divestments of low or no-margin business, but profit will be at the top end of guidance ($43-48m), derived from an 18% earnings margin.
Macquarie is cautious about synergies continuing beyond FY13, given the size of the Primus acquisition and the issues around operating a telco infrastructure, a new area for M2. CIMB also suspects synergy gains from here will be an uphill battle. The core Small-Medium Enterprise (SME) segment, including Primus, Commander and People Telecom, looks to be growing at less than 1%, according to Macquarie. Yet management expects it to grow 5% by June and 7-8% by the end of 2013. CIMB finds the performance wanting in this area. Macquarie believes the Primus acquisition has changed the company's business and the search for synergies has distracted from SME-focused direct sales.
The consumer business, including iPrimus and Time Telecom is expected to break even. Macquarie notes the focus here has changed from a defensive strategy to a more expansionary strategy – reducing churn, improving bundling and increasing access to market.
M2 plans to aggressively grow market share in SMEs via a scaleable distribution network as well as expand consumer market share. Citi and Macquarie are giving the company the benefit of the doubt. For CIMB this is not enough. The broker does not see enough catalysts for stronger organic growth.
Macquarie has reduced its rating to Hold, given the strong share price appreciation recently. On the FNArena database there are three brokers covering M2. Macquarie has the Hold position. CIMB has the Sell and the Buy is occupied by Citi. Citi is happy to retain a Buy rating based on the company's reiterated guidance. CIMB thinks the good news is all factored in to the share price and has downgraded to Sell. The consensus price target on the database is $4.57, showing just 1.3% upside to yesterday's closing share price.
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