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Should you buy My Net Fone?

The last 12 months have seen the stock prices of a whole raft of telecommunications companies rise on the tide, partly due to increasing consumer demand for data. My Net Fone (ASX: MNF) is a niche player that has grown from humble beginnings in Tasmania, selling voice over internet protocol (VOIP) connections to retail customers. It has already won its first significant government contract, and intends to pursue others.

What is VOIP? It is the transmission of voice over the internet, rather than over traditional landlines. The drawback is that your VOIP service is only as reliable as your internet connection, but with the roll out of the NBN, this is likely to become less of an issue over time. The main advantage is that call costs are much lower.

My Net Fone is more than a retail business, having acquired Symbio, its VOIP wholesaler from its directors in 2011. Indeed, since then, My Net Fone has grown mostly by acquisition. In the first half of FY2013 it acquired three businesses; Callstream (which sells 1300 and 1800 numbers), Connexus (a Melbourne-based ISP) and GoTalk (a wholesaler; similar to the Symbio business).

Although the company was clearly growing organically at one stage, the acquisition spree has made it very difficult to determine how the company is attracting new customers. It’s quite plausible that most of the growth has come through acquisitions, which, while earnings accretive, are obviously not as attractive as organic growth. To date, the acquisitions have been funded out of free cash flow and with two capital raisings to institutions and sophisticated investors at 72c and 94c per share. The share price closed at $1.22 on Friday, up from a recent low of $1.09.

On 27 February 2013 the company announced that “the business is on track to deliver the previously published forecast guidance.” The previous official guidance was in September 2012, but a fairly informative presentation was given in December 2012. That presentation suggested that the new acquisitions would add $770,000 to net profit after tax (NPAT) for the second half, and that NPAT for the 2013 financial year would be about $4 million.

However, those estimates came with a page full of disclaimers, first among them that “investors should rely on their own calculations.” My calculations had NPAT for FY2013 a bit lower, and I think diluted earnings per share will be from 6.1 to 6.3 cents. I think earnings growth of over 20% for FY2014 is probable, but I’m not willing to buy shares at current prices.

What concerns me is that My Net Fone was scheduled to “issue a consolidated and updated guidance to the market prior to the end of April 2013.” Well we are half way through June and we still haven’t received that update. Another concern is that company director Michael Boorne recently sold about half a million dollars’ worth of shares at about $1.40, having already disposed of shares at about $1.05 earlier in the year. Substantial holders Pie Funds also reduced their holding (at around $1.60), although they still retain over 5% of the issued equity.

Foolish takeaway

My Net Fone is in an industry that has significant tail winds, and at first glance, it appears to be growing rapidly. However, the company is in a fast-changing, highly competitive industry, and I think there are better shares available that will catch the “big-data” tailwind.

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Motley Fool contributor Claude Walker does not directly own shares in My Net Fone, but does have an indirect financial interest through a managed fund.

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