M2 Telecommunications Group (MTU)

Discussion in 'Stocks & Derivatives' started by finicky, Apr 16, 2012.

  1. finicky

    finicky Well-Known Member Silver Stacker

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    Here's one that might interest if you are looking for a high quality sharp end telecom company. I just bought 10,000 shares @ 3.34, funded by selling 1,000 BHP shares.

    Today it announced a renounceable entitlement issue priced @ $2.66, which dampened the on market price. The entitlement goes EX on Wed April18, which implies that buying any tomorrow would still entitle the buyer to participate in the 2.26 offer at the rate of 1 new share per 4 shares held on the record date.

    This is an A1 stock in the Montgomery Skaffold valuation system, and is currently valued at $3.62 FY12, and $4.56 FY13. However those valuations have not yet taken into account this new share issuance, or the added debt that will also be taken on. New shares and debt are for the purpose of a major acquisition (another thing that will change the valuation!) M2 pays a robust fully franked yield of about 5%, and the divvy has been rising along with the earnings over the last 3.5 years.
     
  2. SilverSanchez

    SilverSanchez Active Member

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    1:4

    A 25% increase in issued shares - do they not make money?
    Why are they raising money?

    What is their debt ratio?
     
  3. SilverSanchez

    SilverSanchez Active Member

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  4. finicky

    finicky Well-Known Member Silver Stacker

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    I've no idea yet whether this will be a good acquisition - it's much bigger than anything else they've taken on.

    Here's an enjoyable Motley Fool read on MTU, the stock this newsletter tips as the pick of the ASX for 2012.

    "Our Top Stock for 2012: M2 Telecommunications

    M2 Telecommunications Group (ASX: MTU) started life in 1999 with a vision to create value in the newly deregulated telecommunications sector. Since then, M2 has delivered amazing performance and growth. In 11 years it has become the largest 'network independent' telco in Australia, with 2011 marking M2's tenth consecutive year of growth in earnings and earnings per share."

    Full Article:
    http://www.fool.com.au/sfr/motley-fool-top-stock-for-2011-12/?source=defaultsource

    Or select from this page:
    http://www.fool.com.au/free-stock-report/top-stock-for-2011-12/
     
  5. finicky

    finicky Well-Known Member Silver Stacker

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    Bought too early again on day of renounceable rights issue announcement (3.34), but picked up 5,000 in the after close settlement yesterday (3.25)

    Now today trading in the renounceable rights issue commences. The code is MTUR and top bid looks like 34c. One right should entitle to one share @ 2.66
    http://www.tradingroom.com.au
     
  6. jparrie

    jparrie New Member

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    Big range today in this stock, but it does move quite a bit and quite quickly. Looks oversold now so might be a good time to buy in.
     
  7. finicky

    finicky Well-Known Member Silver Stacker

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    It could get cheaper. It has a big overhang for some time. Anyone holding shares from before yesterday (ex rights date), now has an opportunity to sell some shares on market that they can replace cheaply via the rights issue @ $2.66. Whether the SP will be pushed down as far as $2.66 over the next few weeks is moot but I strongly doubt it - I just think there will be too much buying support. Just last night I was watching the esteemed 'Your Money Your Call' on Sky Business Channel, and the panel that night unanimously endorsed M2. They were: Chris Kimber, Fat Prophets, Mark Moreland, TeamInvest, and George Boubouras, UBS. Mark from Team Invest particularly liked it saying it was "very cheap" for the quality and future return.

    Acquisitions can go wrong though and will they be able to make the new share equity and debt work for the same level of profit as before the Primus acquisition? I wouldn't have a clue - so it's a punt, but a punt on a high quality growth company in a sector I like - telecom and I.T.
    Follows some of the historical fundamentals of MTU - the debt level's going to be well up after this deal:

    Company Historicals

    2004/06 2005/06 2006/06 2007/06 2008/06 2009/06 2010/06 2011/06
    Book Value ($) -- 0.12 0.13 0.15 0.34 0.43 0.61 0.73
    Return on Equity(%)0.0 25.1 26.7 25.9 18.7 15.4 21.0 29.5
    Dividends (cents) 0.0 2.2 2.5 2.9 4.8 5.3 9.6 15.4
    Debt/Equity (%) 3.2 2.4 1.8 2.9 45.9 33.5 21.5 31.7
     
  8. finicky

    finicky Well-Known Member Silver Stacker

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    Down to $3.18 at close today! Low for the day 3.17

    And could get cheaper still. Can be explained by the entitlement selling, i.e. selling in market to fund entitlement take-up @ $2.66; but if you looked at the chart without knowing there's an entitlement issue happening, you might just see it as a failure near the level of the previous top, and forecast more downside to come. I'll get some averaging down compensation for the prices I bought at: 3.41, 3.34, 3.25, from my 1:4 entitlement @ 2.66; but the share price should get pretty enticing soon for new money - albeit without the attached entitlement.

    On a cautionary note I just saw that the Montgomery Skaffold valuation system has dropped the MTU intrinsic value to $3.26 in FY12, down from $3.62, as it was when I first mentioned it, prior to the Primus acquisition news and the capital raising. Intrinsic valuation for FY13 is $4.81, up from $4.56.
     
  9. Prior

    Prior Member Silver Stacker

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    Hmm wonder if my bid at 2.85 will be reached within the next few weeks.
     
  10. finicky

    finicky Well-Known Member Silver Stacker

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    Yes very fair chance down there Prior, and I might join you in a top up if it happens.
    $2.66 will be a magnet for some time, but with the buying for conviction of value opposing it? Nice 'safety margin' opening up for this quality growth stock, if you assume as in past so in future. Montgomery's Skaffold had it on a 2% discount to actual intrinsic value on the price of Friday's close and SP is down 3.8% today as I post. Buyers below here should be winners because of the rights offer overhang, imo. Chunky fully franked dividends + capital growth I am punting.

    If you're not on Comsec here are the Thomson Consensus Estimates provided by Morningstar for eps and divs from FY12 - FY14 inclusive

    EPS 30.4 36.0 39.7

    DPS 19.0 22.2 26.5

    If you like the Rog Montgomery system, Skaffold has the FY12 - FY14 estimates for this A1 stock at:

    EPS 27.0 35.0 38.0

    DPS 18.0 22.0 26.0
     
  11. finicky

    finicky Well-Known Member Silver Stacker

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    Broker's report and valuation of M2 Telecom based on projected discounted cashflow. Note the broker's disclosures on P5, and that the author of the report holds MTU shares, and the broker seeks to do business with MTU. The analyst sees a discounted cashflow valuation and price target of $5.10 in 12 months. Valuations by EBITDA calculation and P/E valuation are lower at $4.57 and $4.10. A bit surprisingly he does not anticipate any near term accretion in eps (FY12, FY13) from the Primus acquisition due to the dilution from new shares out of the rights offer.

    http://m2.com.au/__data/assets/pdf_file/0016/16207/CBGF_MTU_webcopy-170412.pdf
     
  12. finicky

    finicky Well-Known Member Silver Stacker

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    M2 down a fraction today. Rights issue overhang still doing its work. Dusty over on another thread told me he sold his MacMahons (MAH) to buy into MTU at $2.99. Excellent price (I hope). Put it this way - I have bought into MTU at prices of 3.41, 3.34, 3.25; all these packets carry the 1:4 entitlement @ 2.66.

    So at my best price 3.25, if I bought 10,000 shares (for convenience of calculation):
    10,000 x 3.25 = 32,500

    plus entitlement of 2,500 shares @ 2.66
    2,500 x 2.66 = 6,650

    total dollars = 39,150

    average notional price per share
    39,150 / 12,500 = $3.132

    $3.132 is the best price I got with the discount of the entitlement offer. Me a loyal selfless shareholder. Whereas Dusty, a SSTkers blow-in picked his up at $2.99. And who knows? They might get cheaper - rights issues and shareholder purchase plans can be good opportunities for new money. I must do some sums before jumping in and buying extra cum rights shares in future.

    Montgomery's Skaffold is pretty unstable in its valuation of MTU - seems to be factoring in new stuff each week almost. Currently, valuations for MTU in financial years 2012, 2013 and 2014 are $3.72, $3.90, $4.35
     
  13. Dusty

    Dusty Active Member Silver Stacker

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    Thanks Finicky, If you could would you look at QRL and give me your advice on the technicial side of things?
     
  14. finicky

    finicky Well-Known Member Silver Stacker

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    Who knows? If I were great on T/A I wouldn't have bought MTU too early ;)
    Technical thoughts look pretty useless with this one - not much history, not much volume, easy to manipulate. Look at the last rally - nothing at all that I can see to indicate it was going to happen. Maybe just spontaneous as it got down below the IPO price. Doesn't mean it'll happen this time.

    I got a free email from Motley Fool a week back - I think I know the stock, been on my own watch-list for a while. It's good quality, with growth of earnings prospects (unlike QRL) . I'll pm you if I buy a few, maybe you'd like. Its illiquid so I won't say yet, can't get in myself - maybe someone here can deduce it. Motley Fool will spill the beans soon. I don't go for exploration stocks anymore.

     
  15. finicky

    finicky Well-Known Member Silver Stacker

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    Bought some MTU rights on market today for 33c (code MTUR)

    To convert to shares will be $2.66

    $2.66 + .33 = $2.99

    Equals Dusty's buy price of the shares on market!

    Haven't done this before so not sure if awkward for others to buy in this way without already having an entitlement offer form to top up payment on. Cheaper than buying the shares direct though if anyone's up for it. Rights trading in MTUR closes tomorrow, Friday, at 4.00 pm

    Hope I'm right about this whole M2 Telecommunications thing.
    6% ff dividend in FY12 on a 2.99 entry, if all goes to plan, 7.3% in FY13
     
  16. finicky

    finicky Well-Known Member Silver Stacker

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    Well M2 Telecommunications rallied well against the current today. One of the very very few stocks to finish green.

    This stock had the trading in rights that ended on Friday. It dawned on me with hindsight that the trading in rights would have sapped a lot of demand from ordinary shares. Case in point - I bought 5,000 rights myself on market for 33c per right, each of which I will use to subscribe for more shares in the rights offer @ 2.66. So that was 5,000 MTU shares that were not bought on market - lowering demand when you think of all the other punters buying cheaper rights instead of shares.

    Additionally you have been getting extra supply of shares from holders of MTU either 'arbitraging' their old shares by selling them to replace with much cheaper shares in the rights issue, or holders selling old shares simply to finance their exercise of rights to new shares.

    Today the lost demand would be back (as the rights trading lapsed Friday) but who's to say how long the added supply will last? You would think that most of the selling to arbitrage or finance the rights would be done - but can't be sure.

    More demand added to less supply should mean what? - A rally!

    The chart is interesting because today's candle conforms to a 'bullish engulfing pattern' when combined with Friday's candle. This also took place right on the previous ST low. I would expect a bit of a rally here, but whether it will be more substantial and reverse the main downtrend is a harder question.

    http://stockcharts.com/school/doku...alysis:candlestick_bullish_#bullish_engulfing

    [​IMG]
    Source:
     
  17. finicky

    finicky Well-Known Member Silver Stacker

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    So far so good, and with the modest breakout from a pennant so far today I expect more share price appreciation. In the tea leaves as they slow down in their swirl I can see .... $3.45 as a target!

    The volume hasn't been notable so I'm guessing that it is drying up of supply related to the rights issue, and the closure of the option to buy rights rather than shares, that has seen buyers raising their bids in order to get filled. That's my theory anyway. Observers might ask now whether more shares will be offered to the market upon opening of trade for the rights shares on May 22, and so dampen the price up ahead

    [​IMG]
    Source:
     
  18. SilverSanchez

    SilverSanchez Active Member

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    You might struggle to get over 3.30, i dont know anything about this stock though so im probably wrong

    What was the issue date for the SPP?
    In my experience the SPP price acts like a bit of a magnet for short term traders
     
  19. finicky

    finicky Well-Known Member Silver Stacker

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    I'm sort of confident that the share price will break upward before long. The price bars have formed a rough rectangle under the resistance level of 3.25. I think this is going to happen soon in spite of the large number of shares from the rights issue that will become live and available for trading/selling tomorrow, May 22.

    http://www.incrediblecharts.com/technical/rectangles_signals.php

    The founder of the company Vaughan Bowen converted a lot of his rights to shares for a charge of $3.9m, and three other directors are announced on Monday 31 may as having converted rights - at significant dollar costs in the case of two. So that's promising.

    One thing I've learned from this exercise is not to buy shares in a company in the process of a SPP or rights issue just in order to qualify for the rights. The share price will inevitably be depressed by the cap raising and you'll get the shares cheaper on market after they go ex entitlement


    [​IMG]
     
  20. finicky

    finicky Well-Known Member Silver Stacker

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    OK, time to admit possible defeat here. This stock is now not behaving right. If my position were speculative I would be watching very closely and probably exit if the price drops below 3.10. I maybe would even get tight and put a stop just below 3.15

    I'm assuming at this point that the weakness is caused by extra supply of shares being sold from the rights entitlement issue. These shares have been available for selling since Tuesday May 22. But from a T/A angle you wouldn't look for explanations - they might be wrong. Purely looking at price you could now visualize this morphing into a second leg down in an ABC type correction - maybe as part of a general downturn?

    I'll be staying in as I've taken a 'buy a bit of the business' approach to it

    In the years of the GFC (FY08, FY09) M2 Telecommunications raised its earnings per share and raised its dividend. Its an A1 stock trading at a 15% discount to intrinsic value at yesterday's close, and is down almost 2% today so far. Its intrinsic value is currently estimated to rise in FY13 and FY14

    [​IMG]
     

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