In this series of articles, I am taking a look at the history of some of the ASX's best-performing stocks. In particular, I will attempt to answer the following questions.
- What did these companies look like at the start of their rise?
- Is it possible to identify tomorrow's 10 baggers?
Today, MNF Group Ltd (ASX: MNF) owns and operates Australia's largest Voice over Internet Protocol (VoIP) network as well as a global network with Points of Presence (POPs) on four continents. It sells IP telephony services to consumers, businesses of all sizes, governments and resellers.
If you had bought $10,000 worth of MNF shares six years ago, they would be worth over $420,000 today plus you would have received more than $20,000 in dividends. Back then, the company was called My Net Fone and had no international operations but other key characteristics have remained unchanged.
Financials
In mid-2010, My Net Fone had recently announced strong half year results which included record profit of $333,460 and revenue growth of 26.8% over the prior period. At 31 December 2009, the company had $1.3 million in cash and no debt and had just completed seven consecutive quarters of positive operating cash flow.
These results built on My Net Fone's strong performance in 2009 when it recorded a maiden profit, a watershed moment for the company. Despite a clean balance sheet and annualised profits of nearly $700,000, My Net Fone had a market capitalisation of just $5.3 million in August 2010 placing it on a price-to-earnings ratio (PER) of under 10.
Macroeconomics
2010 was early on in the global transition from fixed landlines to Voice over Internet Protocol which enables voice and video communication over the internet. VoIP is cheaper than traditional phone systems because it doesn't require a dedicated line and there is minimal capital outlay. Also with VoIP, features such as messaging and call handling can be tailored to individual customer needs and it is possible to answer incoming calls from anywhere with an internet connection.
These benefits suggest that eventually people will use VoIP for almost all voice communication. I think that this was also obvious in 2010 given there were over 500 million registered Skype users at the time.
People
In 2010, My Net Fone had four directors and all of them had been board members since the company listed in 2006. Andy Fung was the managing director and Rene Sugo was the technical director and they owned 25.7% of the company each. Today, both still work for MNF Group with Andy Fung a non-executive director and Rene Sugo the CEO.
Non-executive director, Michael Boorne, purchased $140,000 of stock in the first six months of 2010 taking his shareholding to 8.0% of the company. Directors making regular large stock purchases is usually a good sign, especially when they have been involved with the business for a long time.
Microeconomics
My Net Fone was and still is a defensive and scalable business. Provision of communication is an essential service and so is not impacted by economic swings. Customers pay ongoing monthly fees and have little incentive to switch suppliers. Furthermore, each incremental customer costs little to service and maintain.
In February 2010, My Net Fone had 80,000 customers in Australia, of which 57% were consumers and 43% were businesses. The impact of losing any individual customer is very low with such a diverse customer base.
In 2009, My Net Fone won a Sydney Business Award in the "Information and Communications Technology" category and finished in the top three for the "Business of the Year" award. Such public recognition is independent verification of the quality of the company's service offering at the time.
