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MNF Group Transforming Into Higher Growth

Small Caps | Jun 10 2021

This story features VONEX LIMITED. For more info SHARE ANALYSIS: VN8

A refinement to the MNF Group business has been welcomed, with the opportunities in wholesale voice services now firmly in its sights

-Post Direct sale, MNF Group becomes largely a wholesale services provider
-Potential to be a leader in wholesale voice in Asia-Pacific
-Brokers see a significant value opportunity opening up


By Eva Brocklehurst

Several catalysts have combined for MNF Group ((MNF)) recently, and the company's latest announcement highlighted the opportunities, with brokers welcoming the news and flagging an even more bullish outlook for the stock.

MNF Group has refined FY21 earnings guidance, maintaining the $40-43m range but now anticipating earnings will be in the top half, on top of announcing the divestment of part of its Direct business to Vonex ((VN8)).

The retail and small-medium business segment will be divested while enterprise and government segments, which Morgan Stanley estimates provide around $8m in revenue, will be retained along with the brand MyNetFone.

The sale will make the business a largely wholesale offering with the remainder of the Direct business making up just 5% of group operating earnings (EBITDA). Morgan Stanley notes the market wanted this divestment as the divested business is a lower-growth segment. The broker believes the sale has been executed at a reasonable multiple.

Vonex will enter an exclusive wholesale supply agreement and this is expected to provide $3m per annum in long-term revenue for MNF Group. Moelis agrees the sale is a positive outcome, helping to re-position MNF Group as a higher-growth, higher-quality company.

It can now be more easily compared to overseas peers, the broker adds, such as Bandwidth and Gamma. After re-basing earnings estimates post the sale, Moelis anticipates MNF Group can grow EBITDA at around 14%.

The $31m in proceeds ($20m up front, $11m deferred) from the transaction will be used for the next stage of the Asian expansion and the company has confirmed the "Go Live" date of July 1 for its Singapore expansion. MNF Group has also announced it will launch services in other markets in Asia.

Moelis believes Singapore will provide the foundation for the expansion and the company has an opportunity to be the wholesale leader in voice in Asia-Pacific. The broker reduces FY22 EBITDA by -$4.5m to reflect the proposed sale and maintains a Buy rating with a $6.28 target.

Canaccord Genuity does not change forecasts to allow for the transaction as yet but estimates pro forma revenue growth increases to around 8% in FY22 and, importantly, EBITDA growth rises to 15.6%. The proceeds from the disposal are expected to take FY22 net cash to $69m.

Morgan Stanley, too, does not include the transaction in estimates yet ascertains bullish investors will like the way the numbers appear to be stacking up, as well as the potential from customer-led Asian expansion.

On the other hand, there is some lack of clarity because of the shuffling of divestment and reinvestment, the broker acknowledges, while asserting this does not detract from its bullish view, maintaining an Overweight rating with a $6.30 target.

Canaccord Genuity believes there is significant value within MNF Group and there is an argument for an even higher valuation based on the outlook for the wholesale business. At this stage, the broker retains a target of $7.15 and a Buy rating.

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