I use computers and the internet every day and probably wouldn't know what to do if I didn't have it now. Mobile and cloud services cement those ties even more. Can investors make a profit from the service providers? Here are three telecom service companies that enrich and permeate our lives, while making a good living at it.
Telecom Corp of New Zealand (ASX: TEL), the telecommunications service provider has been making some changes, one being the recent sale of AAPT to TPG Telecom for $450 million. By clearing the business, which didn't perform to expectations for many years, the sale proceeds open up new avenues.
It hasn't wasted much time by buying additional spectrum for its 4G networks for NZ$83 million. This will add speed and capacity to its existing 4G mobile network. The company had picked up three lots of spectrum being auctioned off by the government previously for $66 million, and this fourth lot adds to its market position of providing fast service for customers.
If it can revamp its business to the kind of broadband and mobile service provider that its industry is moving towards, it has a chance to stay in the game as a strong player. The obstacles are declining revenues since 2007, and earnings going down or flat, with a net loss before abnormals in 2012.
It has a low ratio of long-term debt to NPAT, thanks to the $288 million profit in 2013, so its borrowings are manageable, but investors will want to see sales of underperforming businesses and acquisitions of companies that will drive its growth to mobile and cloud computing.
Internet service provider, iiNet Limited (ASX: IIN), is looking to the NBN for its next stage of growth. It has 20,000 customers that are currently using it and 60% of them are new to iiNet. So being able to offer the faster internet service has definitely added to its base.
According to its October presentation, it is finding that about 70% of customers are buying higher speeds than the entry level product, and they are downloading 64% more content after moving to its NBN service.
It has seen a steady revenue increase for over 10 years, and EPS have grown a compound average 10.9% annual during that time. In 2013, NPAT was up from $37 million to $60.9 million. Its long-term debt is a little weighty even with the great NPAT increase. If that can be worked down, the bottom line will benefit.
M2 Telecommunications Group Limited (ASX: MTU) provides internet services as well as telecommunications and power and gas products and services. Over the past 12 months, its share price has risen by 40.8% to $6.11, reflecting the average annual 25.5% compound growth it has achieved in EPS for the past three years.
It purchased the Dodo internet service business in May 2013, and through it will be offering NBN high-speed downloads. Before that, it acquired iPrimus in June 2012, so the base of service provision that it has built up to today is wide.
It has taken on a large portion of debt, raising long-term debt from $17 million in 2011 to $294 million in 2013, so the new acquisitions during that time must now start paying off. It has seen a big rise in free cash flow, which should be applied to bringing down its gross gearing, currently at 109%.
Foolish takeaway
If you invest in these kinds of businesses you have to keep up on them frequently. Look for high profit margins, strong growing earnings and a business model that is not too complicated.
