The Fairfax Media is reporting that investment bank Morgan Stanley has put a $7.70 share price target on online voice communications provider MNF Group Ltd (ASX: MNF) based on the analysts' belief that it'll deliver strong earnings per share growth out to 2020.
The MNF Group earned its stripes building Australia's largest online carriage-grade voice network and then developing software products, voice, and cloud services to cross sell to network users as the shift by enterprises to online voice communications accelerated across Australia.
In Australia MNF Group is now a dominant player on VoIP via its MyNetFone and PennyTel brands, with a history of organic growth and successful track record of acquisitions such as the iBoss cloud-based billing software deal.
Much of its latest growth leg is being fuelled by the recent acquisition of the TNZI business that provides online voice services to enterprises globally. This is a competitive space, but it's lucrative for a small player like MNF Group that is now competing for market share with big tech hitters like Verizon, Tata and Deutsche Telecom.
The group has allocated capital expenditure to expand its international voice traffic network by developing points of presence (PoPs) across Asia, Europe and the US. This involves the physical connection of equipment such as routers, servers, switchers and digital communication lines that allow wholesale voice over internet communications.
It has also invested heavily in human talent to help develop its own software products that it can then up or cross sell to customers using any of its online voice communication services.
This kind of offering providing multiple communication services in the cloud such as call holding, routing, cyber-security and number portability falls under the Unified-Communication-as-a-Service (UCaaS) umbrella.
This is space is largely occupied by big U.S. tech and cloud players like Salesforce, Cisco or India's Tata.
MNF Group though is carving out a profitable niche for itself in the UCaaS space in Australia, with Morgan Stanley correctly noting that it faces little competition locally from the likes of Telstra Corporation Ltd (ASX: TLS) or Optus.
Thanks to the firm's success the stock has climbed 500% over the past 5 years and is still run by a stable management team and its entrepreneurial founder and substantial shareholder Rene Sugo.
Outlook
For FY 2018 the group is forecasting organic growth net profit growth of 24% and earnings per share growth of 18% to 20.5 cents per share. These forecasts exclude any upside from major new client wins or acquisitions that could deliver accretive earnings per share growth and MNF Group has a history of providing conservative profit forecasts.
Despite a track record of growth via acquisition the business carries minimal debt and its share count has remained reasonably steady.
I'm with Morgan Stanley in thinking that this founder led business can deliver a compound 15%-20% earnings growth long into the future in which case its $7.70 price target may prove too conservative in time.
In fact I wouldn't be surprised to see the stock above $10 by 2020 given the long-term focus of what appears a high-quality company and management team. As such I'd rate the stock a buy at $6.75 today.
