Small Caps | Feb 24 2021
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MNF Group delivered significant growth in its global wholesale business over the first half with expansion in Singapore an upcoming catalyst
-Impressive growth in core telco business
-Singapore expansion a key catalyst
-Domestic wholesale the soft area
By Eva Brocklehurst
MNF Group ((MNF)) has entrenched its lead as a provider of critical voice services for the telecommunications industry, delivering significant growth in global wholesale business over the first half.
Canaccord Genuity asserts the strength of the wholesale business was clearly evident in the first half and growth in revenue from this source helped propel operating earnings (EBITDA) growth of 17% despite flat revenue.
The broker has long believed in the MNF Group business as a structural growth story. An improving mix within recurring segments means recurring margins have improved by 260 basis points, year-on-year. Global recurring gross profit grew 86%.
Canaccord suspects some of the headwinds facing the business, such as international roaming and challenges to audio conferencing, only serve to highlight the impressive growth at the core.
Recurring revenue reached 50% of group revenue for the first time and the long-term objective is to attain recurring profit of 80%. Cash conversion, which has been an issue, surpassed 100% for the second consecutive quarter.
The latter and a growing cash balance are clear improvements, in Morgan Stanley's view. Operating earnings guidance is $40-43m for FY21 and, with a strong result in the first half, there is likely to be a smaller second half skew required to reach even the top edge of that range.
Structural tailwinds have featured heavily, although Morgan Stanley notes MNF Group revenue has been variable and there have been difficulties with the Direct business. Still, this is starting to fade.
A strategic review is likely to provide upside for the Direct business and Morgan Stanley suspects the market will welcome the Pennytel divestment, which has been sold to MacArthur Telecom a wholesale customer of MNF Group.
Canaccord has long believed in the MNF business as a structural growth story. An improving mix within recurring segments means recurring margins have improved by 260 basis points, year-on-year. A key leading indicator of revenue growth is a number of phone numbers in circulation and the broker estimates the figure reached 5m for the first time.
An expansion into Singapore is nearing its formal launch, expected in the June quarter, with technical testing in progress. Management remains confident regarding this region, given 4500 US companies operate in the jurisdiction and the information and communications technology market is growing at 10.8%.
Morgan Stanley has an Overweight rating and $6.30 target and envisages incremental demand from domestic Singapore customers outside of the returns that are already embedded in investor expectations. this should be a significant catalyst going forward, along with further Asian expansion.
The broker does have some queries about the latter, requiring further details regarding market entry, customer support and the capabilities that might allow the business to expand.
Canaccord Genuity, with a Buy rating and $7.15 target, values the business on a sum-of-the-parts basis as it distinguishes between the fast-growing wholesale revenue and earnings from other areas which offer a different dynamic.
Combined domestic and global wholesale recurring gross profits growth of around 26% compares favourably with international peers that are rated on much higher multiples, the broker points out.
Moelis maintains a Buy rating and $5.93 target and highlights the profit growth and gross margin expansion in the global wholesale division. A challenging environment for re-seller customers domestically exists but the broker believes this division will improve as the outlook for re-sellers improves post the pandemic.
Declining revenue and 5% growth in gross profit for domestic wholesale were the softest areas of the results and Morgan Stanley is maintaining a watch on the trajectory of this part of the business to better understand the potential.
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