iiNet: Number 2 in DSL broadband

Although low margins and high debt levels mean no reason to rush in

Mike King

Mike King is a Fool.com.au Investment Analyst and Writer. He caught the investing bug more than a decade ago, at a time when the U.S. had invaded Iraq and fear reigned in the markets. His initial success as the markets took off encouraged his passion and thirst for knowledge. With 13 years behind him at one of Australia's largest domestic banks, Mike's passion for stocks led him to join a boutique funds management firm, where he stayed for four years. A seven-year stint in equity research at one of the largest investment banks in the world followed that, giving Mike a thirst to pursue his passion further. Mike holds a Diploma in Applied Finance and Investment and a Graduate Certificate in Financial Planning. His passion is to help retail investors invest better, and that passion was one of his primary reasons for joining The Motley Fool Australia in late 2011. Mike has written thousands of articles since joining, including for Fairfax Media, Yahoo!7, Ninemsn and has also appeared on ABC's The Business. You can see all of Mikes' holdings here

Published August 16, 2012 2:48 pm AEST

Internet services provider iiNet Limited (ASX: IIN) has today reported an 11% increase in profits to $37.1m on revenues of $831m for the 2012 financial year, on the back of a string of acquisitions. The company bought TransACT Group in November 2011 and then Internode in January 2012, and its total debt has soared from around $100m to more than $225m in the current year.

Those acquisitions have helped push iiNet into the clear number 2 spot in DSL broadband (copper network), behind Telstra Corporation (ASX: TLS) but ahead of Optus – owned by Singapore Telecommunications (ASX: SGT) and TPG Telecom (ASX: TPM). That doesn't include customers using fibre or satellite connections – Optus has around 1.5 million broadband subscribers in total. iiNet has stated that it now has 15% of the broadband market, although chief executive Michael Malone has said that the number of broadband subscribers is no longer growing.

Looking to the year ahead, the company hasn't outlined any further plans for acquisitions, but instead will be looking to complete the integration of TransACT and Internode, and increasing cross selling to existing customers, to offset a lack of growth in new broadband subscribers.

As the number one provider of services on the National Broadband Network (NBN), iiNet will also be looking to grow its NBN services, and its presence in key Business markets. As well as growing its exposure to business, iiNet announced today that it has also launched mobile handsets and mobile phone plans, and will be trying to capitalise on that opportunity.

As network and carrier costs represent the lion's share of the company's expenses, it will also be looking to reduce its costs, as it consolidates agreements on international bandwidth. With Internode and TransACT yet to be fully integrated, iiNet could potentially reduce its staffing costs, once it integrates the back office and IT systems into its own.

The Foolish bottom line

The great thing about investing in the sharemarket, is that investors don't have swing at every pitch. With debts of more than $225m, compared to equity of $287m, and a net profit margin of just 4.5%, this is one company I'll pass on for now.

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Motley Fool writer/analyst Mike King doesn't own shares in any companies mentioned. The Motley Fool's purpose is to help the world invest, better. Take Stock is The Motley Fool's free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. Click here now to request your free subscription, whilst it's still available. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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