Here’s why Melbourne IT Limited shares are going nuts today

During this earnings season one of the standout areas of the market in my opinion has been the information technology solutions providers. The likes of RXP Services Ltd (ASX: RXP), Data#3 Limited (ASX: DTL), and ASG Group Limited (ASX: ASZ) all reported strong results and subsequently their shareholders have seen the value of their respective holdings increase significantly.

Today it was the turn of Melbourne IT Limited (ASX: MLB) to report its half year earnings and pleasingly for its shareholders it has followed the lead of its peers and reported a 115% increase in statutory earnings before interest, tax, depreciation, and amortisation (EBITDA) to $11.2 million. Net profit after tax came in 83% higher at $2.2 million on revenue of $85 million, which itself was up 23% year on year.

The market has clearly been impressed by the result. Its shares have gone gangbusters and were up by almost 10% earlier today.

Both its Enterprise Services and Small to Medium Business segments produced solid growth during the half. The latter being a welcome relief to shareholders following a decline in the segment’s top line growth in recent times.

This enabled the company to double its interim dividend to 2 cents per share. Should it at least maintain its 4 cents per share final dividend, investors could be looking at a full year fully franked 3.2% dividend.

Melbourne IT reiterated its full year guidance and expects to report statutory EBITDA for FY 2016 in the range of $26 million to $28 million. This will be a huge leap from the $16.5 million statutory EBITDA it posted in FY 2015.

Based on these results I estimate its shares to trade at 26x trailing earnings. Whilst this is expensive, with an even stronger performance expected in the second half they should start to trade on more reasonable multiples in the future.

Although the result is a strong one and the guidance offered is good, I still have a preference for RXP Services Ltd or ASG Group Limited. Personally I think they offer investors better value for money and in light of this I would suggest investors choose these two ahead of Melbourne IT today.

But before making an investment in either of these shares I would highly recommend taking a look to see if you own one of these three wealth-destroying ASX shares. Each could be harming your portfolio and may be best swapped out if you ask me.

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Motley Fool contributor James Mickleboro has no position in any stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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