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MNF Group Ltd (ASX:MNF) share price plunges 18% after reporting FY18 result

MNF Group Ltd (ASX: MNF) has reported its annual result for year ending 30 June 2018 showing a 15% rise in revenue to $220.7 million.

The voice over internet protocol provider (VoIP) reported that its group gross profit grew by 18% to $69 million. All segments delivered pleasing organic growth with Domestic Wholesale’s gross profit up by 15%, Global Wholesale up by 17% and Domestic Retail up by 22%. However, the overall margin was slightly below management’s expectations due to volatility of Global Wholesale usage revenue in the second half of the year.

You may remember that at the half-year result MNF announced the re-launch of the Pennytel brand in February 2018. Pennytel is a telco brand aimed at over-50s. It required a one-off investment of $2.3 million, which MNF has fully expensed in this year.

Earnings before interest, tax, depreciation and amortisation (EBITDA) grew by only 3% to $24.6 million due to the Pennytel investment. Management said that the ongoing cost to maintain Pennytel is $0.5 million in FY19 at the EBITDA level.

Net profit after tax (NPAT) declined by 2% to $11.9 million due to the Pennytel investment plus an increase in the tax rate to 29% in FY18 from 27% in the previous year. Earnings per share (EPS) fell by 6% to 16.25 cents.

Pleasingly, MNF Group increased the dividend by 1% to 8.35 cents per share, leaving the payout ratio at a healthy 51% of earnings.

MNF said that its balance sheet was in the strongest position to date at the end of FY18, with net current assets of $14.9 million and cash on hand of $18.9 million. Debt outstanding reduced to $10.7 million compared to $11.2 million in the previous year.

A couple of months ago MNF announced the acquisition of SuperInternet in Singapore for S$2 million. The business was EBITDA breakeven at the time, but MNF plans to upgrade the existing network infrastructure as well as offering the full suite of MNF wholesale, enterprise and government products domestically and globally. To grow in Singapore MNF needed access to NetLinkTrust, the Singapore version of the NBN.

Whilst the market hasn’t reacted well to today’s result, MNF is confident in its four-pronged growth approach: geographic expansion, enhancing software capabilities, winning new customers and customer expansion.

Foolish takeaway

The market was obviously disappointed with MNF’s result and is thoroughly unconvinced by the Pennytel idea. It didn’t help that at the half-year result management guided for 17.2 cents of EPS and today reported 16.25 cents.

However, MNF is achieving strong organic growth and I think it could be one to watch over the next few years at the current beaten-down price.

Another growth stock that could be a clear market beater is this top ASX stock that’s also growing in Asia.

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Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended MNF Group Limited. 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 Scott Phillips.

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