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Three Wise Monkeys Podcast: MNF Group (ASX:MNF), Pro Medicus (ASX:PME), Appen (ASX:APX), Nanosonics (ASX:NAN), A2 Milk (ASX:A2M) and Webjet (ASX:WEB)

2019-03-01T02:37:40+00:00

The latest episode of the Three Wise Monkeys Podcast is out now. The pint-size chimps cover MNF Group (ASX:MNF), Pro Medicus (ASX:PME), Appen (ASX:APX), Nanosonics (ASX:NAN), A2 Milk (ASX:A2M) and Webjet (ASX:WEB) in an action packed earnings season episode.

Listen to episode 15 on Soundcloud here.

Or, if you prefer, subscribe to the feed on iTunes by clicking here.

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Disclosure: The Author, Claude Walker, owns shares in all the above-mentioned companies, at the time of publication. This article contains general investment advice only (under AFSL 501223). Authorised by Claude Walker.

MNF Group Ltd (ASX:MNF) Gives New Guidance

2018-10-09T22:36:39+00:00

MNF Group Ltd (ASX: MNF): Inabox Acquisition and Updated Guidance

On Monday MNF Group (ASX:MNF) announced it would buy the wholesale and enablement business from Inabox Group (ASX: IAB).

After Inabox fell from grace late last year, I became curious about whether there was potential for MNF to buy this business, since it competes (albeit less profitably) with MNF’s own wholesale and enablement business. Although I saw value in Inabox at those lows, my rules dictated I should not hold the stock because I lacked confidence in the management. I am pleased their failure could yet turn into success, for MNF.

However, if there is a point of contention in this acquisition it is the price. The larger company will pay up to $33.5 million for the Inabox business, a multiple of about 8 times EBITDA. For this to be a truly successful acquisition, my prior estimation of management failure at Inabox must prove correct. If that is so, then the team at MNF should be able to increase margins simply by bringing higher levels of competence to the table. The risk here is that there are nasty legacy issues in the acquired business. The is uncertain -- but provides for possible upside, as well as downside. Keep in mind that change might come slowly, since MNF historically takes a ameliorative rather than ruthless approach.

What is near certain is that MNF will be able to generate synergies by combing the enablement business with its business, and in any event it will benefit from improved scale. To quote Harley Grosser on Livewire:

"there is the opportunity that comes with big consumer brands (grocery chains as an example) looking to offer telco services to their customers. As the leading provider of wholesale aggregation IAB Indirect is well placed to grow off the back of this and management seem to be indicating that they expect to announce new customer wins soon."

The CEO, Rene Sugo, is likely to elucidate these synergies during the conference call this afternoon, but I note for now that the presentation says the acquisition is "highly synergistic with MNF". He said on the call that TIAB is a customer of MNF and the technical teams will be merged within six months.

The CEO also said that they have customer contracts on iBoss for existing customers and there are contracts between Octane and their customers. So both platforms have deliverables and obligations. There are also plenty of integrations into each platform, making it difficult to shift customers between platforms. So the two offerings will be run in parallel for now. Looking forward, MNF will use microservices architecture to gradually merge the products into a unified product, over about 3 years. There will also be some additional capex on hardware required to realise the operating synergies available from this merger.

It's worth noting that the TIAB Domestic Wholesale, Enablement and iVox businesses will fit into MNF's "Domestic Wholesale" business. The Neural and Symmetry business will fit into MNF's "Domestic Retail" business. Thus, we can expect uplift in the core Domestic Wholesale business.

Finally, capex is expected to be about $15 million, of which $8 million is on prior planned hardware, $3 million on hardware spend arising from the Inabox acquisition, and $4 million in software development (which they will capitalise).

Importantly, the presentation says that the company is intending to raise capital through a share purchase plan. I note that the last time the company raised capital from retail shareholders, allocations were scaled back.

Guidance update

MNF has also given guidance for FY 2019, and FY 2020. When we covered the recent MNF annual results, I said, “ I think that FY 2019 is likely to be another tough year but we should see improved statutory results in FY 2020 as the Pennytel and Singapore plans become profitable.”

The acquisition of Inabox wholesale and enablement exagerrates this further, because the company will spend and integrate this year, and reap the full rewards next year. Therefore, the company is forecasting 17.5 cents per share in earnings for FY 2019, but at least 20.5 cents per share in FY 2020.

At current prices, then, the company trades on about 27 times earnings, with that figure dropping to around 25 times earnings next year. It’s not clear what impacts the recent spending spree will have on operating cashflow, but it is fair to say that free cashflow will of course be quite negative as a result of the acquisition of Inabox wholesale and enablement.

Overall, this is a good result in keeping with my expectation that MNF grows through acquisition and organically. While I still think many investors won’t like the modest growth in 2019, I currently intend to continue to hold the stock.

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Disclosure: Claude Walker owns shares in MNF at the time of publication. This article contains general investment advice only (under AFSL 501223). Authorised by Claude Walker.

MNF Group (ASX:MNF) FY 2018 Results: No Synchronous Bloom This Year

2018-08-28T23:45:53+00:00

MNF Group (ASX:MNF) yesterday released its results for FY 2018. Unfortunately for shareholders, they were the least pleasing results I have witnessed from this company. Fortunately, the long term investment thesis remains in place.

The headline numbers saw revenue growth of 15% to $220 million and net profit drop 2% to $11.9 million. Earnings per share -- uncharacteristically -- fell short of guidance, coming in 16.25 cents for your full year. You can see the longer term view, below:

I would not want to discourage management from making long term decisions for growth, but I cannot deny it is clearly disappointing to see earnings per share in the second half fall below 8 cents. This is a substantial half-on-half drop of 20%. Incidentally, that is about how much the share price fell, yesterday. The guidance miss is probably the driver of the share price fall.

Of course, as shown by the purple part of the column on the right, the company had already warned the market that earnings would be lower than one might have hoped. The reason for the lower earnings was the investment in Pennytel.

Pennytel And Residential Retail Services

Pennytel is the new consumer facing mobile reseller. It sells the Telstra network to baby boomers in regional Australia. While I think this is a smart strategy; leveraging the better network and targeting the ‘low data usage’ crew, but the plan is off to a slow start.

The most unfortunate aspect of today’s update was that the Pennytel plan isn’t going as well as hoped. However, I think that the project could still pay off very well even while it falls short of expectations. You can see what the company originally hoped, below:

Yesterday on the conference call, the CEO said that the uptake was around half as fast as had been hoped -- and the marketing team is learning. However, I need to clarify whether that ‘half’ was revenue or services. Conservatively, I’ll assume services.

In that case we can assume that there were over 4,000 services. That’s far from ideal, but it is also worth noting that the company is likely achieving a lower ARPU than what it had modelled.

For example, I took this top screenshot in February 2018, and the bottom one yesterday:

The original business case was based on achieving 250k mobile subscribers by June 2020. I would say there is close to zero chance of that happening without a major increase in projected costs. Having said that, the company has clearly already reacted. It has merged Pennytel with its existing domestic business and consolidated costs.

The report said that the “Residential sub-segment is expected to cost the company approximately $0.5m at EBITDA level as the customer acquisition run rate increases.” Given that this sub-segment contributed about $3 million in gross margin in 2018 (albeit shrinking), I estimate that the company is now budgeting about $6 million to get Pennytel to breakeven, rather than under $4 million. I think that will be hard to achieve, but I also think that there’s a good chance the end result is reasonable, even if nowhere near as good as hoped. This may be a case of aiming for the moon -- missing, but still making it through the clouds.

I have focussed here on the problem area of domestic residential, but the domestic small and medium business segment is the largest contributor to the segment and it is growing. So too is the recently purchased conference call business. Meanwhile, MNF Enterprise is moving to a more recurring revenue model -- all this means that the domestic retail segment was flat, despite the ‘residential’ segment being a drag for now.

Domestic Wholesale -- The Jewel In The Crown

Moving on to happier subjects, the core domestic wholesale business managed to increase its customer numbers over the last six months, after consolidation reduced partner numbers in the first half.

This segment performed extremely well overall, with gross profits up 15%, and a sharp increase in iBoss SaaS customers, as you can see below:

This is the more positive story that the market was focussed on when various small cap funds were talking up the stock. Presumably those same funds have sold or are selling, now that the narrative has changed. Many small-cap funds are more momentum players than long term holders, which is fine; but their prognostications should be taken with a massive pile of salt -- if they are talking about a company, they are probably selling it.

This business grows organically each year and the plan is to replicate it in Singapore. I’m in favour of the plan.

Global Wholesale -- Below Expectations

Global wholesale was largely responsible for the gross profit miss. The company had predicted it would make $72.3 million but in the end made $69 million, some $3.3 million short. The fact that this translated to a net profit miss of just $400,000 actually suggests that the company scrambled to find savings -- and fair enough.

The culprit in this uncomfortable spot was the global wholesale business which saw margin compression in the second half. As a result, the second half was actually weaker than the first half, by around $25,000. The year on year growth was 16%; so you could probably forgive them for thinking it would keep growing. The reality is that they made less transaction-based revenue than they thought they would.

Over time, the company is selling more of the software-as-a-service style products, into this segment, so it should become less volatile.

Where To From Here?

This was a tough year for MNF Group. In part, that’s because it reinvested in growth, and in part because the global wholesale segment disappointed. Its cashflow looked bad due to the unwinding of a massive payable sum, received in 2016. Look to the huge cashflow in 2016, if you are concerned by the outflow this year.

Capital expenditure remained within reasonable levels, once again suggesting that the company owns good assets that allow high ROIC growth when combined with the expertise of management and employees.

Touching on employees for a moment, I was pleased to hear that the company had managed the consolidation of its residential operations without forcing redundancy on anyone. The fact that this was a priority for the company shows good sense. Companies that are ambivalent about letting people go in tough times will lose more employees to competitors in buoyant times.

The company has moved to address its one segment that is in structural decline. It is always easier on the financials to just let declining business spin off cash, without investing. I am glad that MNF has decided to stay active in the retail space, since it enhances its ability to serve wholesale customers, and leverages tools it builds for its wholesale customers.

This bad year for MNF saw gross profit growth of 17%. The average half-on-half earnings per share growth rate, in the last 4 years, is over 10%. If you narrow that to 3 years, it is still 8.9%.

Either you think it’s game over for MNF Group or you think they will show grit and resilience and continue to build this business.

If the former, sell. If the latter, then I think that we may see some good buying opportunities arise.

Personally, I think that this remains a quality company and -- although it is a large position for me -- I retain an appetite to buy more shares. I think that FY 2019 is likely to be another tough year but we should see improved statutory results in FY 2020 as the Pennytel and Singapore plans become profitable. This could be further delayed if the company makes a big push into NBN. Therefore, short term focussed investors are unlikely to stick with the stock, and sentiment could turn pessimistic.

As a result, I will be looking to buy more shares in MNF Group around $4.15 - $4.65 , all else being equal, at least 2 business days after publishing this post. Keep in mind I already have shares, so I'm going to be patient about the price I have to pay to buy more. I would not rule out paying a higher price if I feel like it, later on, but I am not in any rush.

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Disclosure: Claude Walker owns shares in MNF at the time of publication. This article contains general investment advice only (under AFSL 501223). Authorised by Claude Walker.

My Net Fone (ASX: MNF) Half Year Results 2014

2014-02-12T22:26:15+00:00

My Net Fone Limited (ASX:MNF) this morning released its first half results for 2014. In the half to 31 December 2013, the company generated Net Profit After Tax of $2.37 million, and Operating Cashflow of $2.9 million. Cash sat at $3.6 million there was approximately $1.6 million more payables than receivables on the balance sheet. The company has no debt, and has paid off all its deferred consideration for past acquisitions.

All in all the results fall slightly short of what I had hoped for. I wanted free cashflow of about $6.6 million for the year. This half saw free cashflow of about $2.6 million, meaning that the company would need to generate $4 million free cashflow to justify its price, in my view. This seems unlikely to happen.

One thing shareholders must bear in mind is that the company usually achieves superior margins in the second half. The company has forecast NPAT of $5.5 million for FY 2014. If operating cashflow for the second half of the year is less than $3.1 million, I will probably sell my shares (unless there is a clear and acceptable explanation). If the forecast is correct, My Net Fone is trading on a P/E of 20.3 for 2014, leaving little room for P/E ratio expansion, in my opinion. This company is priced for growth, if it fails to deliver, the share price is likely to tumble.

At this stage I believe cashflow of at least $6 million for the full year is very likely. According to my worst case scenario analysis that result is likely to mean that My Net Fone is worth at least $1.10. That's a 38% downside risk from current prices - in the worst case scenario.

Basically, these results are at the bottom of the acceptable range. It would be hasty to sell my shares, especially as the company is growing strongly, and is usually more profitable in the second half. However, I would not buy shares in My Net Fone at current prices, and all else being equal, I would consider sellling some of my shares in My Net Fone at around $2.10.

As a reminder to myself, the key reasons I'm invested in My Net Fone are:

1. The company facilitates the migration of phone numbers away from copper lines and on to the internet. This is a more sensible way of doing things in this day and age, and will presumably continue for a long time to come.

2. The company has an Australia-wide VOIP network so is well placed to serve customers' needs. The company's focus on VOIP gives it a niche area of expertise; MNF fills the gaps left by larger ISPs.

3. My Net Fone saves money for its customers.

4. The company has a history of sensible acquisitions, no debt and regularly increases its dividend. Today's growth story is tomorrow's dividend play.

The interim dividend is 2c per share (up from 1.5c per share in 2013). I'd expect the company to increase the final dividend to 2.5c per share in 2014, giving a total dividend of 4.5 cents per share, putting the company on a 2.5% yield for 2014, at current prices. I'm happy to hold My Net Fone in my personal portfolio and as part of the Hypothetical Ethical Share Portfolio.

This is not advice. The author owns shares in My Net Fone directly and in a managed fund.

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Checkup on My Net Fone (ASX: MNF)

2013-12-09T04:26:32+00:00

Just as a follow up to this article, here's a quick note on my recent thoughts about My Net Fone.

The guidance recently announced was for $8.6 million EBITDA for FY 2014. Now, last year My Net Fone paid tax of 23%, however, I'm just going to use 30% for this analysis (because I'm that way inclined.) I'm also going to assume depreciation of $800,000 (a bit more than last year), which could be described as a bit of a stab in the dark.

That would give us a profit of (8.6 - 0.8) x 0.7 = $5.9 million. Using my harsh method of calculating diluted earnings per share, that amounts to 9.3 cents per share. It also implies cash-flow of at least $6 million.

Edit: I made a mistake in the above paragraph that was corrected by a reader. Unfortunately, I didn't notice the email so it took me ages to correct. Thanks Mark. Sorry everyone.

It does appear that my previous underestimation of the company occurred, at least in part, because some of the synergies I was expecting in FY 2014, arrived in FY 2013.

We still have the impending contribution of the (delayed) Tasmanian government contract which should now contribute in FY 2015. Plus the happy news that My Net Fone has been able to take business off M2 Telecommunications (ASX: MTU), when they took over Callstream. I'm hoping that My Net Fone can continue to take business from M2. We also have the fact that GoTalk has a contract with Telstra until December 2014, that is currently a drag on My Net Fone, because it is excess capacity. The company will either use all the capacity, or finally be free from that drag in FY 2015. In conclusion, it is fair to say that further growth in FY 2015 is extremely likely.

Here's what a worst-case scenario DCF might look like:

Discount Rate is 10% pa unless otherwise stated
Year	Growth Rate	Cashflow	DCF Value
2014		$6,000,000	$6,000,000
2015	10.00%	$6,600,000	$5,940,000
2016	0.00%	$6,600,000	$5,346,000
2017	0.00%	$6,600,000	$4,811,400
2018	0.00%	$6,600,000	$4,330,260
2019	0.00%	$6,600,000	$3,897,234
2020	0.00%	$6,600,000	$3,507,511
2021	0.00%	$6,600,000	$3,156,760
	Total DCF Value	Discount Residual Value (10x cf)	Total DCF Value
	$68,556,760	$31,567,595	$36,989,164
	Indicative SP	Shares on Issue (Diluted)
	$1.10	62500215

It's has been pointed out that my method for accounting for dilution is unnecessarily harsh, but having crunched the numbers, it doesn't make a huge different to the analysis. The consensus seems to be that I'm biased towards undervaluation, especially when it comes to dilution. However, this model is just designed to assess the worst case scenario downside.

I believe strongly that My Net Fone is worth over $1.10 based on a worst case scenario analysis. While the company has probably moved out of my buy range, I believe it is definitely still worth holding. I think it is likely that they will continue to make wise acquisitions. When you read the first half results for FY 2014, don't forget that the company usually achieves superior margins in the second half of the financial year. Given the growing and glowing track record of management, I'm holding on for the ride. And just as a reminder, I used a tax rate of 30% for this analysis.

The Author owns Shares in My Net Fone. Nothing on this website is advice, ever.

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Why I Bought My Net Fone (ASX: MNF) Again

2013-09-18T23:12:36+00:00

About 2 months ago I wrote about My Net Fone. By way of history, I had sold my shares at about $1.50 earlier in the year, but the fall in the share price to below $1.20 prompted me to write a short article, in which I concluded (conservatively) that the company would earn about 6c per share. Having thus justified my decision not to buy shares at $1.20, I carefully avoided considering whether affirmation bias might have swayed me (after all, I had decided the shares were over valued at just $1.50). Further evidence that I have a way to go developing my investing temperament.

My Net Fone subsequently reported, exceeding my expectations by about 10%. I should make an academic point here: I use actual earnings per shares (diluted) whereas My Net Fone uses completely accepted and legal (but in my view misleading) accounting to suggest that their earnings per share is closer to 7 cents. They use the average weighted number of shares: I use the sum of the actual number of shares and the 65c options that will inevitably be converted into shares. Options are a great way of making per share statistics look a lot better than they really are, but that’s a rant for another day. Either way, my earnings per share figure is just above 6.6 cents. At the current price of $1.35, My Net Fone trades on a trailing yield of just over 2.5% fully franked.

Based on the profit for 2013, and the full year contribution from the acquisitions, I think that earnings per share of about 9c is more likely than not, per the table below. One possible flaw in this theory is if they did so much better in 2013 than I expected because they managed to squeeze efficiencies out of the acquisitions more quickly than expected; and as a result there will be few gains next year.

Cashflow in FY 2013 was $6 million. It's worth noting that, this year, cashflow was a fair bit higher than profit, and this is only partially accounted for by depreciation of about $600,000. However, it can be reasonably assumed that if profit were to be within striking distance of the estimate above, cashflow would be at least $6 million again in 2014 year. My worst case scenario valuation of My Net Fone is a no-growth-beyond 2014 scenario. In that case, I get a value of about $1.

However, I think that My Net Fone will continue to grow. When I made my prior assessment of MNF, I assumed no organic growth. Now, either the acquisitions have integrated seamlessly, or that was my error. The indication is that the company is still growing organically, and with their Tasmanian government contract making a full contribution in FY2014, I think growing cashflow is more than likely. Here's how I value My Net Fone, in the "most likely" scenario.

As you can see, My Net Fone is currently selling below my indicative buy price of $1.38, looking at an 8 year span. Given how fast changing the telco industry is, the 8 year model is a bit ridiculous: MNF will almost certainly continue to acquire or be acquired before 2020! However, I think this gives a reasonable indication of the company today.

The final reason why I like My Net Fone is that it is achieving impressive returns on investment. In the table below, column A is the amount generated per $1 of capital investment, and column B is the ongoing increase in cashflow as a percentage of capital expenditure. I've compared MNF with relative giant M2 Telecommunications (ASX: MTU) because both companies operate in the same industry, and MNF is following a similar growth strategy to the one M2 pursued in the past. Take note though; they are different businesses with different product offerings.

As you will see My Net Fone has achieved lower, but comparable return on investment to what MTU did during its early growth phase. This is important because it reflects the ability for My Net Fone to grow and to continue to pay dividends (because it earns a good return on cash invested). However, please note that the table above is comparing apples with oranges: and share issues essentially distort those figures. I have, however, used the same methodology for each company. If you show a man a healthy apple, it will help him identify a healthy orange: healthy fruit have common characteristics.

This is not advice. The author owns shares in My Net Fone directly and in a managed fund.

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Notes on the acquisitive My Net Fone (ASX:MNF)

2013-06-28T02:02:52+00:00

I recently wrote this article for the Motley Fool about up-and-coming VOIP reseller My Net Fone (ASX:MNF). In that article, I alluded to the fact that it is quite difficult to track the growth of My Net Fone, because of all their acquisitions. What is clear, is that the impressive earnings per share growth has been buoyed by acquisitions, in particular the acquisition of Symbio. If this is the case, we can expect further earnings per share growth resulting from the company’s most recent acquisition spree. However, in recent halves there is no solid evidence of organic growth. That in itself is not necessarily a bad thing, but I think it needs to be taken into consideration when analysing the stock.

As I wrote earlier this month, the main thing that concerns me is that that My Net Fone was scheduled to “issue a consolidated and updated guidance to the market prior to the end of April 2013.” To his credit, Rene Sugo responded very quickly to an email I sent him, querying why there had been no announcement. He said, “no news is good news” regarding guidance, and that, “we are now very close to the end of year that we feel it is difficult to put out an announcement at this time. This is being considered by the board.” The most important fact for me was that Mr Sugo replied quickly, and addressed the question. To me it is always a red flag when managers ignore questions.

I’m not a buyer of MNF at current prices, but I have had a look at the recent acquisitions.The graph demonstrates the impact of dilution. I expect diluted EPS of about 6c for FY2013.

Recent Acquisitions

Call Stream

- Paid $600,000, announced October 2012
- Annualised EBITDA contribution is $600,000
- It provides 1800 and 1300 numbers… Will be moved to Symbio infrastructure from a competitor (hence the synergy).

Connexus

- Paid $4.75 million, announced November 2012
- Annualized NPBT of $1.6 million.
- Is an ISM that also sells services such as email and web hosting.
- Good potential to sell VOIP products to Connexus customers. EBITA expected to go to $2.1 for FY2014
- $3 million paid for by issuing 4167000 shares at 72c and $1.75million of free cash flow (1H2013).

GoTalk Wholesale

- Paid $1.4 million December 2012

- Long term competitor to Symbio, and will take about 24 Months to Migrate all customers completely to Symbio Network.
- Hopes to add EBITDA of $1.3-$1.6 million in FY14 and $2 million beyond FY2015.
- Restructure expected to cost $0.5 million over 12 months.
- Paid for by way of a $2 million share placement at 94c each (That is, 2,127,660 shares added for 2H2013).

The Author has no direct holding in MNF, but does have an indirect interest through a managed fund.

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