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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