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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Thanks for the update Claude, much appreciated.
LinkIt is enlightening to see the DCF method to value the stocks, I have heard of it but not seen how it is applied.
I use a different method of valuation, outlined in "Value.Able" authored by Roger Montgomery, based on using the Return on Average Equity, payout ratio, investor's required rate of return and Equity per Share. Out of interest here are the numbers at the end of FY13 using this method.
Payout Ratio 44% (dividends actually paid, as opposed to declared)
Equity per share $0.17
Return on Average Equity 50% (it is actually higher but I like to be conservative)
11% required rate of return (which I feel is reasonable)
Valuation:
A. Unretained Earnings Proportion: 0.44 x 0.17 x 4.5 = $0.33
plus
B. Retained Earnings Proportion: 0.56 x 0.17 x 15.2 = $1.44
Approx Valuation of $1.77. The reason for such a high valuation is that MNF are retaining over half of their earnings and deriving a return above 50% on those retained earnings ie Implied growth of 25%. The question is .... can they continue to do this?
Interestingly, at the moment, very few quality stocks trade below their valuations using this method, MNF is a one of those very few..
Interested to hear your thoughts on this method of valuation.
Hi Peter,
LinkThanks a lot for this contribution! I have noticed that Skaffold does tend to come up with a few of the same companies I look at. However, I reckon you can often see it coming a bit before the figures come in, giving an edge over people who are purely using a screen.
Hi Claude,
LinkGiven the horse has apparently bolted with MNF would you consider them still worth investing in given they are way about the $1.20 at the end of last year?
I recently sold some of my MNF shares at $2.19, but I still hold some shares. I don't think I'd buy them at current prices if I didn't have any, although they aren't that expensive. I tend to have a buy zone, a hold zone and a sell zone... i'd say MNF is in my hold zone... part of the reason I sold some shares was to rebalance my portfolio and reinvest in some more compelling opportunities.
Link