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.
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.