Tag Archives: Telecom/Technology

article 3 months old

Micro Cap Rising Stars – Hansen Technologies

By Greg Peel

Microequities is an Australian financial adviser specialising in in-depth research of listed "micro caps" - those companies of low capitalisation too small to register on ASX indices or to attract research coverage from leading stockbrokers. In June Microequities hosted its Rising Stars conference, at which selected companies presented their wares. FNArena was invited to attend, and over a period of time will provide conference highlights. This is the second.

Hansen Technologies' ((HSN)) CFO Grant Lister proved to be surprisingly dry-witted and entertaining for an accountant. In a sense he was a metaphor for his company - admitting that as his presentation followed that of a company doing innovative things realm of new generation mobile phones, the audience should now be prepared for something a bit more dour. However, it soon became apparent that Hansen's business is not the least bit humdrum.

In order to appreciate what Hansen does, and why it has plenty of upside potential, consider a few points.

Australia has actually led the world - believe it or not - in the process of utility deregulation. Yes - despite all the hullabaloo presently surrounding the NSW government's plans to privatise electricity production in the state, and the fact those plans may be scuppered by yet another inane scandal amongst the ranks, Australia is even ahead of the US on deregulation and privatisation in this industry. Victoria has been the pioneer, and every other Australian state has fallen into line, except NSW to date.

You may have noticed in Australia that your electricity provider is also now offering gas, and your gas provider is offering electricity. If you live in the UK, you perhaps use the services of Britain's biggest telco service provider - Tesco supermarkets.

You can also choose to pay extra for a proportion of renewable energy to be accredited to your quarterly bill. You can also choose to receive a bill monthly. You may also be aware that off-peak electricity costs, for example, are different to peak.

In the case of the latter, you may also be aware that electronic home utility monitoring systems are becoming popular, which are devices whereby a family can keep a tighter rein on where its members are soaking up power unnecessarily. You may not be aware that such devices are gaining in intelligence, such that newer whizz-bang devices can turn a light off after a wasteful teenager, or perhaps turn off the fridge for a while in off-peak periods when it is cold enough.

You may also not be aware that new homes built in Australia no longer allow for old-style whirling-wheel meters of limited flexibility that require a serviceman to come and take a reading. They must now be digital units, which can be measured from a central point. New units are taking measurements up to 4,400 times a quarter, instead of once.

When you consider such innovations, you can begin to understand why the process of utility billing has become highly complex, and will only become more so. Across the globe utility industries are deregulating, then rationalising, then attracting new players, then adopting new technology. Producers have become separate entities from distributors. Tax considerations are changing. It has reached the point where flexible and up-to-the-minute billing process technology is a must-have. Every time a utility comes up with a new marketing ploy, a new billing system is required. And shortly environmental regulations and/or cap and trade schemes will only add to the complexity.

That's where Hansen comes in.

As an example, Scottish Power spent four years contemplating a new comprehensive billing system and then spent another four years installing its new Hansen product, and in so doing progressively switched off the eight separate billing systems the company had been forced to have running. Australia's AGL, as another example, currently has 26 different billing systems in order to produce one household bill.

Beginning with a HUB (Hansen utility billing) system, Hansen purpose-builds requisite software for its customers utilising primarily Unix platforms and Oracle database management systems. Products are not "shrink-wrapped", but specific to each customer. Notes Lister, "There are currently more changes happening in the world than companies or people who can handle the billing".

Hansen's big-boy competition includes IBM, SAP and Oracle. However, the smaller Hansen has the capacity to be more nimble and flexible than the big operators. The company has policy of customers being able to make only one phone call to their billing services provider to sort out any queries, and a human will answer. It will be the CEO, if requested. Hansen's smaller independent competitors are beginning to drop off.

Hansen was founded in 1971 and listed on the ASX in 2000. However, shortly after listing the company realised it had made one significant error. Focussing initially on telcos, Hansen allowed itself to become 30% exposed to one single - albeit large - customer. So when WorldCom went under, Hansen's life hung in the balance as well. Indeed, in 2000 only three customers made up 60% of Hansen's business.

The company learnt quickly from this experience, and today no one customer represents more than 8%. Hansen also expanded from telcos into energy, which was both a move with the times and a nod to industry diversification. Energy now dominates, but the telcos are fighting back once more as well. Hansen also expanded its geographical footprint into the UK and Japan.

An important factor in the Hansen business model is that the company looks to create annuity streams from its customers, rather than accept one-off payments. Thus rather than expecting a customer to purchase a software licence, Hansen will provide a software licence in exchange for an agreed percentage of billing. Customers are then locked in and Hansen's cash flow is smoothed, but Hansen also becomes a de facto investor in that company's success.

Across the globe is also a developing pattern of wholesalers being separated from retailers, and retailers not wishing to access only the one wholesaler. There are also, for example, many different companies making different types of metering systems. Hansen's software can be adapted to all eventualities, and the more the market trends in this direction the more billing points are established and thus the more Hansen's capabilities are required.

Last year Hansen sold an outsourcing business which was not core to its business model (and a tough game to boot). It retains a hosting service, although that is now a lesser part of its operations. In FY08 Hansen expects to book $41m in turnover, which is down $10m from FY07 given the sale of the non-core business but up $7m otherwise. EBITDA should be $20m (including $8.8m for that sale). Operating EBITDA of $11m is up 30% on FY07 and rates as 28% of revenue. Industry standard expectation is for 20%.

Hansen paid a 4c unfranked dividend at the interim, but future dividends should be fully franked. There will also be a 2c capital return after June. The company has $20m (13cps) in cash and had no debt - not even a lease. Customers to date include EnergyAustralia, Telstra, AAPT, Alinta, Energex, Scottish Power and Tesco, to name a few.

The shares traded recently at 37c for a market cap of $56m.

Just as a last teaser, consider this planned innovation from Hansen in telco billing: Currently you pay your family's phone bill on a contract/plan basis. You give your children each a mobile phone and a pay-ahead phone card which you will refill on a predetermined basis. You have no idea who they call. On Hansen' new system you will be able to pay your arrears contract and your children's pay-ahead which will be automatically added to your own bill on a scheme you decide - all on the same bill. You will get a list of all calls on all phones.

As technology itself moves exponentially on, billing also becomes an issue in need of innovation.

article 3 months old

Wotif Small Caps Weren’t So Unpopular Right Now?

By Greg Peel

When the balloon starts losing altitude precariously it's time to start throwing all those unnecessary accoutrements and trimmings overboard quickly in order to stall the drop. You wouldn't throw the engine overboard of course, as you'll need that to take you back up again.

So it is with equity portfolios in weak markets, particularly weak markets that happen rather fast. And particularly in weak markets which feature a lot of margin lending. I need cash now, so what can I ditch? BHP? No, better hang on to that. Westpac? No, might be able to use that again. A high-risk, high-PE, small cap? Over she goes.

And it's probably an easier decision if that small cap's an internet-based company, which derives income from concepts a lot of people still don't understand. They remember 2001 though. So it's no great surprise that internet travel success story Wotif ((WTF)) has seen its share price slashed from $6.25 at its peak mid last year to about $4.00 now, following the fortunes of the broader market. There are a lot of small caps out there who must be thinking: what have I done to deserve this? In many cases, probably nothing at all.

Wotif burst on to the scene a couple of years ago as a listed company that turned its co-creators into instant multimillionaires. It's premise was one of those annoyingly simple concepts that has you shaking your head in disbelief. Through the power of the internet, Wotif matched discount or last-minute travellers with oddly vacant or late cancellation rooms in hotels, at a knock-down rate that suited both parties. Wotif came on in mid-2006 at a substantial premium and preceded to double to mid-2007, before the you know what began.

Excuse me while I go and do some more work on my new YouTube.

The comforting thing about Wotif as an investment is the company has established a robust internet platform, supplier deals, and economies of scale that provide barriers to entry into what might otherwise be an open slather game. On that basis, notes Merrill Lynch, Wotif has been able to grow market share. It didn't help the company's share price when management decided to issue new capital to fund acquisitions at a time when stock markets were wobbly. But under normal circumstances investors would be keen on future accretion.

Wotif has acquired online booking agent travel.com.au and, more recently, Asia Web Direct. The former has now been incorporated and due diligence on the latter is close to completion. The company reported a first half result that was seen as "solid" and "quality" and ahead of broker forecasts. Profit grew by 43%, and a 6c dividend was declared - not bad for an internet company. Group volumes were up 22%, average room rates up 5%, revenues up 32% and margins continued to rise, which UBS suggests demonstrates those ongoing economies of scale.

Yet the current B/H/S ratio in the FNArena database is only 1/4/0. It would be easy to immediately assume the share price had run up well ahead of valuation on general internet exuberance, but that's not really the case. The share price has tanked. Indeed, the average target today fell from $5.24 to $4.70 (last trade $4.08) but still four brokers are stuck on Neutral.

The main reason is that Wotif is a small cap on a PE of about 18x - just what you don't want in this current market environment. Weak markets are a time to stick to tried and true large caps with plenty of balance sheet scale and strong cashflows. For the most part, brokers are wary of ongoing volatility, and what it can do to small companies. Hence the Holds.

There is a consideration that if the world economy recedes then less travel plans will be made, but then that ignores two factors. Firstly, anything offering discount opportunities is more immune to a drop in consumer spending and secondly, Wotif is a beneficiary of a general trend of migration to the internet for all sorts of things.

But in general, brokers have increased earnings forecasts and believe, as ABN Amro suggests, Wotif deserves to trade at some PE premium reflecting business quality, market leadership, and technical superiority. That's the reason the average target is still at a healthy level. For the less risk averse, Wotif represents one to watch for the quick market turnaround.

article 3 months old

The Overnight Report: A Hollow Victory

By Greg Peel

Legend suggests that when a team from the old National Football League, (now the NFC), beats a team from the old American Football League (now the AFC) in the Super Bowl, it will be a bullish year for stocks. Don't laugh - this indicator has worked 85% of the time. As it was, victory for the New York Giants over the New England Patriots thus signalled a positive 2008.

Not that you'd know that from the Dow's reaction last night. Following the 4% gains of last week - the best week in many years - Wall Street gave back some ground last night. The Dow lost 108 points or 0.9%, while the S&P lost 1% and the Nasdaq 1.3%.

The falls came despite some good news on the economic front, with December factory orders having grown 2.3% against 2% consensus expectation and 1.7% in November.

It's no great surprise, however, that Wall Street should have taken a breather. On the Nasdaq, the euphoria settled back a bit from the extraordinary Microsoft-Yahoo announcement. Microsoft had initially indicated Yahoo was not its only option for takeover, sending all possible contenders higher. It has since been decided Yahoo is really the only one, and so while Yahoo shares have pushed towards the bid price everything else fell back.

In the financials sector, two pieces of news were detrimental. UBS downgraded American Express from Buy to Sell, and warned about all credit card companies. UBS is expecting US unemployment to grow from 5% to 6% and for credit card defaults to rise commensurately.

The other loser was bond insurer Ambac. The New York regulator in charge of rescuing Ambac, along with the assistance of a handful of banks, announced that the ultimate bail-out package would only involve certain debt sectors, such that while municipal bonds would be saved, CDOs wouldn't. Moody's has already downgraded yet more CDOs, possibly leading to more bank write-downs. The Ambac package, while a relief on the muni front, is no longer quite as exciting.

President Bush announced his last budget - a record in excess of US$3 trillion. The short term effect will be to take the US deeper into deficit, as tax cuts, the tax relief package, and another big increase in military spending will fail to be offset by spending cuts in unimportant areas such as healthcare.

Traders are concerned the recent rally on Wall Street lacks conviction. It still has an air of more short covering than fresh buying. Breadth is poor, with only a handful of sectors such as financials, retail and builders, and techs over at the Nasdaq, being the ones in play - whether up or down on the day. Everything else seems to be off on the sidelines at present.

The factory orders number at least gave the oil market something to be happy about, as it supposedly is a non-recessionary result. So oil bounced back US$1.06 to US$90.02/bbl, having fallen over US$2 on Friday's jobs data. This is the current status of oil - banging around the US$90/bbl mark looking for direction. One day up, next day down on that day's data.

The US dollar slipped against all currencies except the yen, after Europe posted a strong PPI growth number for December. Traders have been beginning to anticipate the ECB may simply be forced to cut its rate, and thus put a floor under the dollar. But more bad inflation news only reinforces Trichet's fears, and suggests the ECB will still stay fast. The Aussie crept higher to US$0.9092, while gold bucked the trend and continued its consolidation, losing US$5.00 to US$902.90/oz.

Base metals in London mostly range traded last night on mixed news, but very late in the session copper jumped when it was learnt Chile had experienced an earthquake, centred 100 miles from one of its big copper mines. No damage was reported at the mine, however.

Australia had a scare yesterday, when a 3% rally evaporated over the afternoon. The SPI futures had indicated a big opening, and Asia posted some big gains on the day, led by Shanghai up 8%. But an announcement from Commonwealth Bank ((CBA)) spooked the market, and all the banks took a hit. (See "CBA Tanks On Accounting Changes"; late yesterday).

Under the new RBA scheduling, the board will meet this morning to make its interest rate decision and then announce it at 2.30pm AEST. (Before we had to wait until 9.30am Wednesday). The world and his dog believes the RBA will raise by 25bps. It's hard to see this having a direct effect on markets of any magnitude, given it has been expected for some time.

The SPI Overnight lost 69 points.

article 3 months old

Commander Fails To Attract Interest

By Greg Peel

Shares in voice, data and internet systems specialist Commander Communications ((CDR)) jumped 36% on Friday, from 25c to 33c. The stock started the calendar year above $2.00. The jump followed the company's AGM, at which a strategic update confirmed Commander had been in the market for suitors.

The problem is - it didn't get any. At least none that the board were willing to consider. Management is not yet interested in breaking up the company and would prefer either a full takeover or a "cornerstone" investor for the company as it is.

Guidance was, nevertheless, reasonable, given the disaster of last financial year. Commander was unable to deliver on systems upgrades at a crucial point in the calendar. The resultant loss of reputation has hit the company hard. But for the first four months of the new financial year, Commander earned 30% of FY07 revenues which is fairly encouraging.

What's not encouraging is Commander's 88% gearing level and required finance rollover in October next year. If banks are unwilling to lend to Commander then it's unlikely the corporate securitisation market is going to be an option. Commander may well have to raise further equity - something that might prove difficult given the company's spectacular fall from grace.

Commander has been able to rectify some of its problems, has identified cost cutting measures, and has completed the integration of Volante. Unfortunately the company has had to give up some of its margins if for no other reason but to restore confidence.

Commander is currently carrying a 1/3/2 B/H/S ratio in the FNArena database. The "Buy" is actually the lesser rating of "Accumulate" from Aspect Huntley, and the research house has not updated yet since August. Following ABN Amro's target price reduction from 95c to 55c this morning, the average target is 58c. That's a big 43% above the current trading price, but still brokers remain cautious. JP Morgan describes Commander's cash flow position as "precarious", while ABN is concerned about share price volatility and the need for recapitalisation.

This one is a bit of a knife edge, offering value only for those investors who like to play with a good bit of risk.

article 3 months old

Tech Wreck

By Greg Peel

If you want to make money as a Wall Street day-trader it's probably best to turn up at 3.30pm and then just go with the trend in the last half hour. The Dow was down 249 points around 11am on Friday before rallying back to be down about 70 points before 3.30pm and then collapsing once more. The index closed down 223 points or 1.7%. The S&P fell 1.4%.

The greatest pain in the Dow was felt in the tech stocks, which is evident from the fall in the Nasdaq of 2.5%. This followed Thursday's Nasdaq fall of 1.9%. Had it not been for a late short covering rally on Thursday, ignited by a turnaround in financial sector stocks, the Nasdaq would have been down over 3% in that session for its biggest single fall since 2002. Friday simply put things back in order.

The tech sector bubble burst on Thursday, sparked by a warning from Cisco that corporate America was winding back on its IT spend. Never mind how many iPhones Apple might sell, the tech sector has undergone a spectacular run in 2007 and a major acceleration since the depths of the credit crunch. With every other sector hit by US recession fears and credit problems, tech offers significant offshore earnings. But the R-word is gaining substantial currency in the US and the tech sector was so far out on a limb by itself that something had to give.

In terms of specific news however, Friday was another black day for the financial sector. One by one US and global investment banks and brokers are lining up to pre-announce expected subprime write-downs. The previously silent names of Bank of America and JP Morgan Chase prepared the market for losses on Friday without mentioning numbers. Wachovia suggested a write-down of US$1.1bn for October alone. Rumours from the UK suggested Barclays were looking at US$10bn. Barclays denied these rumours, but is yet to reveal a loss of any magnitude.

Apart from wanting to get the bad news out of the way, US houses are disclosing ahead of accounting rule changes effective as of next week. See "The Perils of FASB 157" (FYI; Friday).

But if the news was black, financial sector shares were nevertheless mixed on Friday. There is a growing belief the worst of the news is now being revealed, suggesting the sector could be finding a bottom. Citigroup, having already wiped off over 40% of its value, fell no more in the session.

If the financial sector is slowing its demise, we may not yet have seen the worst for retail despite that sector having also taken some big losses to date. All eyes will be on the US October retail sales figure on Wednesday night. The November consumer confidence measure from the University of Michigan was announced on Friday, showing a drop to 75.0 from 80.9 in October. This is its lowest level in 13 months, and consensus expectation was for 79.5. It is not a good sign for retailers if confidence is collapsing going into Christmas.

There was some good news in that the US current account deficit was reduced in September, again confounding expectations. However, the fact that US exports grew substantially is no surprise given the state of the US dollar. The bad news is that import prices have equivalently soared. Ben Bernanke has suggested the average American is unaffected by the falling US dollar if buying domestically. The problem is, America doesn't actually make much outside of tech products and cars. If the R-word is one problem, the I-word is another.

The US dollar was steady last night against most major currencies - except the yen. The yen leapt on Friday to 110.66 to the dollar as unwinding of the carry trade picked up pace. This is the global risk appetite measure, and as financial storm clouds gather once more risk appetite is beginning to fall back to August levels. The Aussie dollar responded accordingly, falling over US1.5c to US$0.9121.

Gold was steady as oil pushed up once more, rising US96c to US$96.32/bbl. Base metals trading in London featured another 3% fall in copper as inventory levels increase, while nickel enjoyed the opposite.

The SPI Overnight was down 78 points, eroding the 79 points up on Thursday night supported by Rio Tinto ((RIO)).

G7 finance ministers gather in Brussels this week. There is little doubt the one topic of conversation will be the US dollar. If currency intervention is on the cards, watch for a bounce in the greenback and subsequent falls in commodities. If nothing can be resolved, then the US dollar will still be history.

Following an after the bell warning, shares in E*trade fell 13%. E*trade announced the value of its US$3bn mortgage security portfolio has continued to decline, as if that was a scoop. The SEC has begun an investigation into E*trade's reporting. Who's next?

article 3 months old

Good News Is Just Plain Good News

By Greg Peel

The week on Wall Street has brought us US$90 oil, alarming housing numbers, a shocking result from Merrill Lynch, mixed results elsewhere, and increased tensions between the US and Iran. No wonder the Dow is up for the week.

The markets came home with a wet sail last night. For four consecutive days the bears have pounded the market as bad news story after bad news story was revealed, only to see the bulls buy it all back on expectations of a 50 point rate cut. Given NYSE data shows a significant number of short positions in the market, the upside is always going to be vulnerable. And last night brought nothing but good news, so the only way to go was up.

The Dow closed up 135 points, or 1%, while the S&P added 1.4% and the Nasdaq 1.9%. It was always going to be a positive opening, given the surprisingly good Microsoft result announced in Thursday's after-market. Not only did Microsoft surge 9% on the day, but its success sparked rallies in fellow Dow components such as Hewlett Packard, and other PC manufacturers and the tech sector in general all enjoyed a boost.

The secret to Microsoft's 23% increase in profit for the quarter lay in two particular areas (although all areas performed well). Businesses have embraced the new operating system Vista, and have begun the change over to the new software. Vista requires twice the average memory space that corporations currently possess, so its installation flows through to a general upgrade of hardware and other IT elements. What's good for Vista is good for everyone in tech. The other surprise was the turnaround in Xbox sales. Xbox has been a chronic underperformer to date for Microsoft, as Nintendo and PlayStation have dominated the computer game space, but the introduction of the new Halo game has captivated all those people across the world who are either children or have no life, and so Xbox sales have skyrocketed.

But that's not where the good news ended. Over in the troubled financial sector, it was a good day for Merrill Lynch shares. Merrills announced a US$8bn loss on Wednesday - far and away the biggest amongst the investment banks - and suggestions are that there may be another US$4bn yet to come in the fourth quarter. But Merrills rallied 7% last night on two bits of speculation. One is that the CEO will be taken out and shot as early as next week, and the other is now that Merrills is in such a mess, some other entity must surely come in and take it over.

And the good news continued. Poster child for all things wrong with the mortgage market - Countrywide - released a third quarter loss of US$1.2bn. It was the company's first quarterly loss in 25 years, and if you're going to break a 25 year run why muck around. But the good news was that Countrywide explained to analysts in a conference call that it expected to actually make a small profit in the fourth quarter, and to be profitable in 2008. Good news? Countrywide shares rose 32%.

So it was really a Microsoft and Countrywide day, and there was little to undermine the exuberance. Oil actually hit US$92 during the session, before falling back to close up US$1.40 at US$91.86/bbl. This doesn't seem to bother anyone.

And it was a significant day for gold. Oil was up again, and the US dollar once again slid to a new low against the euro as rate cut expectations grow, so there wasn't much to send gold down. But after having a day to digest the latest phase of US-Iran tensions, the gold market decided that another US$14.60 was needed. Gold closed at yet another post-1980 high, at US$783.50/oz.

(Note: Gold closed at $750 on January 17, 1980, $830 on January 18, $850 on (Monday) January 21 and $737.50 on January 22. So there have only been two days in history when gold has been higher than where it is now. For the record, gold closed on March 18, 1980, at $481.50.)

The crux of the new US sanctions against Iran (and these are in response to a perceived impotence of UN sanctions) is that any company or individual in the world who has business dealings with Iran, including buying its oil, will be barred from the US financial system. Wise heads believe the extent of the sanctions will force Ahmadinejad back to the negotiating table, but gold traders are bracing themselves for an ultimate military attack.

Silver also jumped sharply last night, wearing its precious metal hat for a change. It was up US30c to US$14.17/oz, marking the first time silver has had a big figure 14 since April. Base metals were again positive in London, but unspectacularly so, with lead and nickel both up 2%.

The yen was relatively unmoved last night, allowing the Aussie to continue its relentless surge to US$0.9184.

The SPI Overnight was up 58 points.

article 3 months old

Disaster And Commander

By Greg Peel

Around about May last year, analysts were still relatively positive about the prospects of Commander Communications ((CDR)), a specialist in voice, data and internet business systems. But then the earnings downgrades started to roll in.

Those old enough will remember when Commander telephone systems were the must-have office accessory of the roaring 80s, and boy were they high-tech! Multiple lines, intercom...a clock for goodness sake. George Jetson had nothing on this one-time division of Telecom (now known as Telstra). To springboard off such success, Commander moved with the times into even newer technology, eventually listing as a separate entity in late 2001. Unfortunately, the times also moved with Commander.

After a rocky start post tech-wreck, Commander shares eventually rose from their $1.00 listing price to reach $2.50 in 2005. Voice data and internet business systems were the stuff of the mew millennium, and brokers had high hopes. But Commander soon found itself being elbowed aside from the very likes of its one-time parent. It could not compete. Then the company hit a big IT glitch and the wheels began to fall off.

Not that anyone really knew, for if there was one big problem analysts had with the company it was its lack of disclosure. That's why frustrated analysts had to keep chasing the share price down with lowered targets as surprise downgrade after surprise downgrade was forthcoming. At the time of writing, Commander's shares are trading at 41c - down over 30% on the day. The stock has been in a forced trading halt for two weeks having failed to get its accounts in on time. That can never be good news.

Around August analysts began slashing their $2.00 targets down to $1.00 targets. Apart from anything else, Commander was deeply in debt in the middle of a credit crisis. This morning, before coming out of the trading halt, analysts had halved those targets again. Most brokers had kept Hold ratings given the stock looked like it might represent value, even at $1.00. Today Citi gave up, and downgraded to Sell. Macquarie had already downgraded, and today suggested that even at its new target of 55c, the company was not much of a bargain. Commander had once been the stuff of takeover speculation.

JP Morgan is hanging on to Neutral (53c) in the belief an equity injection from one of the larger telco players is not beyond the bounds. Only GSJB Were sounded relatively positive, considering the upcoming strategic review the company has announced may just be what the doctor ordered. Weres' target remains at $1.04 - 154% above where we are now.

Macquarie notes that even if the business is recapitalised or sold, its extreme leverage still represents a risk for shareholders.

article 3 months old

A Telco Offering Reliable Revenue, Profit And Dividend Growth?

By Chris Shaw

While earnings issues at Commander Communications (CDR) and regulatory issues at Telecom New Zealand (TEL) highlight the volatility of the telecommunications sector Intersuisse believes it has found a company offering a reliable growth in revenues, profits and dividends in M2 Telecommunications Group (MTU).

The company’s track record backs up this view as the FY07 profit was its fifth consecutive record profit and further growth is expected as the acquisition of Orion Telecommunications, which should be completed by October, is forecast to boost revenues to near $100 million annually, more than double what was achieved in FY07.

The FY07 revenue figure of $43.8m was itself an increase of 31% from the previous year, reflecting the acquisitions made during the period and the increased customer base this created for the company.

Growth is not only coming from acquisitions as the company continues to win new contracts, as evidenced by recently being appointed the preferred telecoms provider to Capricorn Society, Australia’s largest automotive industry buying group. The broker expects the increased product offering and capabilities from recent acquisitions such as Wholesale Communications Group will continue to enhance the company’s organic growth prospects by adding new growth platforms to its operations.

An example of the new products being offered is the company’s wholesale high speed residential broadband and telephony offering, while the company’s solid relationship with Optus continues to provide opportunities for increasing earnings through new contracts.

The strong revenue growth in FY07 translated into a profit increase of 10% to $2.41 million and the broker expects continued growth in coming years, forecasting profits will increase to $5.1 million in FY08 and $6.6 million in FY09.

Dividends should keep pace with this profit growth, the broker expecting an increase to 4.8c in FY08 and 6c in FY09, which would be double the 3c paid out in FY07. This implies a yield of 6.1% this year and more than 7.5% in FY09 based on yesterday’s closing price of 78.5c.

Given a market capitalisation of a little under $50 million it is not surprising the company is not widely covered by the broking fraternity, the FNArena database showing none of the major Australian brokers research the stock.

Shares in M2 are untraded so far today and the last price of 78.5c compares to a trading range over the past 12 months of 30.5c to $1.00.

article 3 months old

Buy Data#3 For Solid Earnings Growth

By Chris Shaw

Intersuisse had expected a record profit result from IT and communications solutions group Data#3 (DTL) and was not disappointed as the company delivered a 26% increase in net profit to $7.2m on revenue up 19% to $285.1m.

This continues a run of strong performances from the company, the broker noting Data#3 has averaged a 35.6% return on capital over the last five years, with FY07 coming in at a 37% increase.

While acknowledging the company has benefited from a strong market in recent years the broker also points out management has been attempting to create a competitive advantage through a focus on productivity applications and by supplying a more specific solution for each customer’s needs.

This is helping the company develop cross-selling opportunities among its client base, the broker highlighting the success of this strategy by noting the group’s top 100 customers delivered a 45% increase in revenues over the year.

It is also helping with the winning of new contracts, with a deal signed just last week with Queensland Health and another a few weeks ago with the Queensland Government. These new contracts support the broker’s forecast for continued strong growth, its estimates for earnings per share (EPS) showing an increase to 53.8c in FY08 and 62c in FY09 against 46.1c in the FY07 year.

Net cash flow of $8.1m last year was more than the amount required for dividend payments, so the company has cash on hand and its dividend is well supported. As a result the company offers an attractive yield, the broker forecasting dividends to increase from 36c in FY07 to 42c in FY08 and 48c in FY09, equivalent to yields of 6% and 6.8% fully franked as at Friday’s closing price of $7.00.

Others in the IT sector such as SMS Management & Technology (SMX) and Oakton (OKN) have attracted broader analyst coverage thanks to larger market capitalisations than that of Data#3 at just over $100 million but the FNArena database shows ABN Amro analysts also research the stock and equally rate it as a Buy. The broker has a price target of $7.07 on the shares.

Data#3 shares today are trading 15c lower at $6.85 compared to a year’s trading range of $4.00-$7.10, though it should be noted the stock is trading ex-dividend today.

article 3 months old

Arasor Buys More Growth

By Rudi Filapek-Vandyck

Expect even more growth for Arasor International (ARR) in the years ahead. At least, that’s the view of one of the closest followers of the company in the country.

Patersons analyst Russell Wright has been quick on his feet to respond to the company’s latest announcements involving two acquisitions. One involves US-based Alfalight Inc (in an all stock deal) and the second one involves buying AOFR from US-based parent Verrillon (also in an all stock deal).

Though details remain scant at this stage, Wright believes it is fair to assume the end result will be something close to EPS neutral for the short term, but offer significant growth in the longer term. In addition, he believes those pesky rumours about a pending significant equity raising may now finally be put to rest.

Alfalight is a designer and manufacturer of high-power diode lasers for the telecommunications market and AOFR is a manufacturer of optical couplers for fibre lasers for the telecommunications, defense and systems markets. Wright believes there seems to be a significant strategic value in the deals for Arasor as pulling the two companies into the group effectively gives Arasor full control over three critical technologies which are common to all of its key products, including Laser TVs.

The financial benefit will come from the fact that each of the three manufacturers may have been able to charge $100 revenue and $50 gross profit each for their part of a chip set whereas Arasor could now be able to charge $300 and keep $200 gross profit per chip set sold, the analyst says.

In theory these acquisitions could result in a quadrupling of gross profit per chipset for Arasor, he adds.

Wright has updated his model and forecasts, including for the impact of a stronger Aussie currency, and this has left his price target/valuation of $8.80 for the stock unchanged. His recommendation remains Buy.

Amidst an overall mildly positive share market, the shares were trading 4c, 1.31%, higher at $3.09 at around midday.