What's new? The ever-changing nature of the telecommunications landscape in Australia means no participant can afford to sit still. Technological and regulatory change provide opportunities for proactive and efficient players.
This is certainly true of M2 Telecommunications Group, which has been a serial acquirer in the past 12 years and has consistently reported good revenue and earnings growth.
M2 reported a 24 per cent increase in earnings to $60.1 million in the year to June 30. This was its 10th straight year of earnings growth. The company is now Australia's largest network-independent telecommunications provider for retail and wholesale fixed-line, mobile and data telecommunications services.
M2's recent $192 million acquisition of Primus is its most transformational buy yet. Under the deal, M2 changes its complexion from an out-and-out reseller to an owner and operator of network infrastructure. The deal not only diversifies existing revenue streams but adds next-generation product capability in the form of managed and cloud services. The deal also adds a large residential broadband customer base and opens up cross-selling opportunities.
Management has predicted the deal will deliver about $5 million in cost savings.
Given the benefits of the Primus deal, the price tag of about four times underlying earnings seems something of a snip, in our view.
Outlook Recent noises from its annual meeting and investor-day presentations suggest the company is on track to hit its 2013 financial-year guidance.
Management is forecasting underlying profit after tax to rise 52 per cent for the 2013 fiscal year to $57.5 million, on revenues that are set to rise 60 per cent to $630 million. Free cash flow is also set to rise by 53 per cent. With the company making its biggest acquisition to date, revenue and earnings growth seem likely, too.
Price M2 shares have enjoyed a strong year so far, rising about 30 per cent. It has come onto the radar of more investors since being admitted to the ASX 200 in June. The compelling growth story and modest valuation suggest the share price has further to rise.
Worth buying? We are impressed by the consistent record of earnings growth at M2 and believe the integration of Primus will lead to further profit gains. We expect the company to be increasingly successful in positioning itself as a one-stop shop for telecommunications.
M2 is a rapidly growing contender in an important sector, offering a 5 per cent yield and trading at an undemanding valuation of 11 times next year's earnings.
With scope for plenty of growth through acquisitions, we view it as an attractive mid-cap to stuff into Christmas stockings.
Greg Smith is head of research at Fat Prophets sharemarket research.