It's been a while since I covered two of my favourite little telcos, Amcom Telecommunications Ltd (ASX: AMM) and My Net Fone Limited (ASX: MNF). My change of heart regarding My Net Fone played out very publicly since this misjudgement back in June 2013. Mercifully, I bought shares after I changed my mind, and the company has performed well, growing profits roughly in line with my expectations.
However, I did sell some shares at around current levels some time ago: this had more to do with price than prospects, and I particularly like the fact that the little VOIP telco should continue to benefit from smartphone apps that use the internet to connect users, such as Viber, Tinder, Skype and WhatsApp. We can only hope that the company is winning such contracts, although they definitely counted Skype as a customer at one point (and maybe they still do). I continue to hold some of my shares, and consider the stock a "hold," not a buy. Having said that, I've been wrong when making that call before, and there seems to be sustained interest in the stock from top-notch investors that I listen to. Interestingly, the company's share price didn't suffer much during the recent sell-off, and I'm told by technical traders that the chart looks positive (although this could, of course, change quite quickly).
A recent catch-up with a fellow investor reminded me about the positive signal communicated by director buying. It's therefore worth noting that Amcom director Paul Brandling recently bought almost $50,000 of shares at $2.09 and founding director Anthony Grist bought a small parcel (worth about $4,000) at about $2 in order to round up his holding to an even 8.3 million shares after taking up his entitlement under the dividend reinvestment plan. Not only did Mr Grist found Amcom, but he was also wise enough to acquire a major stake in iiNet Limited (ASX: IIN) when it was a relative baby. In my view, he knows how to invest in telcos. Investors shouldn't buy simply because Grist is reinvesting, but I believe it is a sign that he doesn't think shares are particularly overpriced.
Based on a dividend discount model, Amcom appears to be appropriately priced for investors with a required return of about 5% per annum over the very long term. The company has an impressive history of growing dividends, and I think that dividend growth of slightly above inflation is definitely sustainable. I do think Amcom could provide good exposure to a growing telecommunications company for risk averse or income seeking long-term investors. The current trailing yield is about 2.85% fully franked, which works out at about 4% when grossed up, meaning that Amcom pays about the same as a high interest bank account. My own discounted cashflow analysis, however, tells me that Amcom is probably not yet a buy, mostly because I target higher returns than I think are on offer here.
Foolish takeaway
Last year Amcom traded at a premium to fellow fibre optic telecommunications company Vocus Communications Limited (ASX: VOC), which has since more than doubled in price. Amcom is a slower growing business, and deserves a lower multiple, but it is still a high quality stock, and I believe it is currently the more attractively priced of the two.
The bottom line is that all three of these telcos are still likely to generate a respectable return for shareholders at current prices.
