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Impressive results from M2 Telecommunications

This week, M2 Telecommunications’ (ASX:MTU) Chairman, Craig Farrow, reported that the company had achieved “… another year of double-digit growth in both earnings before interest, tax, depreciation and amortisation (EBITDA) and net profit after tax (NPAT)”. NPAT increased 20% to $33m and earnings per share rose 15% to $0.259.

While the headline revenue was down by 8%, this was expected due to the company exiting the low margin part of the Edirect mobile phone business acquired in 2011. M2 continues to achieve a very creditable EBITDA margin of around 15% through business improvements and tight cost controls as it integrates a number of acquisitions.

It has grown substantially since listing in 2004 and the acquisition of Primus Australia in April for $192m helped it reach a major milestone in June 2012 when it was included in the S&P/ASX 200 index for the first time.

The company provides telecommunication services, primarily to small and medium businesses, using other people’s network infrastructure, including the NBN as it is rolled out across Australia. This avoids the need for heavy capital expenditure but acquisitions have caused debt to increase to $150m even after an $83m capital raising earlier this year.

M2 continues to maintain a policy of paying 70% of profits as dividends and declared a fully franked final dividend of 9c, the 16th consecutive dividend during 10 years of profit growth. It also operates a dividend re-investment plan (DRP) offering shares at a 5% discount which is a bigger discount than most DRPs.

Perhaps the best news is the forecasts by CEO Geoff Horth. He gave guidance for the current financial year that revenues should grow by 60%, EBITDA to grow by 80% and underlying NPAT to increase by 52%. Wow!

There are other small players in the Australian communications industries such as Amcom (ASX: AMM) and Macquarie Telecom (ASX: MAQ) or Newsat (ASX: NWT) with its satellite communications and of course, the daddy of them all, Telstra (ASX: TLS).

Foolish takeaway

According to Morningstar, M2 has achieved a total shareholder return over the last 5 years of 43.5% per annum.  The current full year franked dividend of $0.253 represents a yield of over 7% on a current share price of about $3.45. While the share price was naturally depressed by the equity raising at $2.66 per share, it seems to have rebounded strongly to current levels. If the company can meet its forecast growth figures, the share price and total return should eventually follow.

The only fly in the ointment might be concerns about the company’s ability to successfully bed down its Primus acquisition. Perhaps ‘wait and see’ is a sensible approach for now.

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Motley Fool contributor Tony Reardon owns shares in Telstra. The Motley Fool‘s purpose is to help the world invest, better. Take Stock is The Motley Fool’s free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. Click here now to request your free subscription, whilst it’s still available. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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