Small Caps | Sep 09 2021
MNF Group has transformed, realigning its business to focus on Asian expansion with high-margin communications software
-Recurring revenue growth suggests significant acceleration in FY22
-Wider product offerings may be on the cards
-MNF Group aspires to 100m on-net phone numbers in Asia/Pacific by 2030
By Eva Brocklehurst
MNF Group ((MNF)) is intent on becoming the top enabler of voice communications across Asia and to this end has realigned its business, with a current focus on expanding in Southeast Asia. FY21 has been a transformational year as most retail operations have been offloaded in order to concentrate on high-growth, high-margin software communications services.
So, the time had come for a re-rating, Morgan Stanley observes, as the company delivered on expectations with its FY21 results. Recurring revenue growth of 19% suggests significant acceleration in FY22 is likely.
The business is building a strategic asset and the broker observes the market has been patient, despite a lack of guidance or clarity on the outlook. This is largely because of the realignment to the high-growth parts of the business.
The reorganisation highlights the recurring, software-based and scalable nature of the products, Ord Minnett agrees, which also better aligns the business with its target customer cohorts.
The segments are reorganised under communication (CPaaS), telecoms (TaaS) and unified communication (UCaaS). Moelis expects gross profit growth across all three continuing business segments, offset by the discontinued earnings from the Direct segment and additional operating expenditure in Singapore.
The Direct business has been sold for $20m up front and $11m over FY22 and this, along with cash and undrawn debt facilities, provides ample funds. Moelis believes MNF Group can grow operating earnings (EBITDA) at around 16% between FY22-24.
Morgan Stanley also notes repeated references to messaging, which signals wider product offerings may be on the cards. Still, the broker remains wary of expenditure, which is high, and the change in segment reporting means there are numerous ways estimates could be wrong for FY22.
Nevertheless, MNF Group has the ability to switch on communications and messaging services, providing reliability and scale across Asia which is not only compelling for customers but a rare offering and Morgan Stanley reiterates an Overweight rating with a $7.30 target.
Moelis considers the business a market leader in mission-critical voice services for large global cloud communication operators along with around 500 Australian re-sellers. The service delivery is via easy-to-use new software and there is little competition. The broker has nonetheless downgraded to Hold from Buy, with a target of $6.68.
The business is proving its first offshore market in Singapore where it recently went live, and Morgan Stanley notes investors remain keen to understand the market response and speed of the take-up.
M&A is on the cards with the company selecting five candidate countries which include South Korea, Japan, Malaysia, Vietnam and Taiwan. There is an aspirational target of 100m on-net phone numbers across Asia/Pacific by 2030.
FY21 results were at the top end of guidance with net profit of $19.2m and EBITDA of $43.1m. Ord Minnett considers MNF Group a superior growth story, retaining a Buy rating with a $7.33 target, and while international roaming revenue declined more than expected in FY21 the higher-margin recurring revenue was welcome.
The broker expects continued revenue growth in FY22 although anticipates much of this will be offset by additional expenditure for growth.
See also, MNF Group Transforming Into Higher Growth on June 10, 2021.
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