Telecommunications powerhouse M2 Group Ltd (ASX: MTU) – formally M2 Telecommunications – has not ruled out the possibility of acquisitions in 2014 and beyond, as it transitions to its organic growth model.
In recent years, M2 has been a fantastic acquisitive growth story making approximately $500 million of calculated takeovers to boost its share price. Purchases included Eftel, Dodo and Primus telecom. Since 2009, its share price has rallied an incredible 1,166%!
In more recent times, management have had less flexibility with the company's balance sheets and last year announced the group would focus its efforts on integration of the new businesses and seek organic growth. In the past six months the share price has dropped 6%, as the market adjusts to the new strategy.
Investors are overlooking M2's potential
A quicker than expected integration of its most recent acquisitions has allowed M2's CEO, Geoff Horth, to suggest the company could be on the prowl for more acquisitions. "There are still a number of listed telco stocks that could potentially be on our radar," Mr Horth told The Australian Financial Review.
In 2013, M2 acquired a 12% stake in Inabox Group Ltd (ASX: IAB) for $2 million and since Inabox has a market capitalisation of only $15 million, a takeover could be on the cards. Other larger telecommunications services providers (which could complement M2's existing businesses) include My Net Fone Limited (ASX: MNF) – whose services connected 500,000 customers in the cloud throughout 2013, or Vita Group Limited (ASX: VTG) – who operate and franchise Telstra Corporation Ltd (ASX: TLS) and Fone Zone stores.
Get ready for a strong future
Despite M2's rapid acquisitive growth, you'd be mistaken in believing debt has ballooned out of control. The company is rumoured to be well ahead of schedule in transitioning its new businesses and will likely have net debt down to between $350 million and $375 million in FY14.
Many analysts are also expecting a very strong annual report in 2014, as the company reaps the rewards of its acquisitive growth model. According to Morningstar's analyst consensus, earnings per share are expected to jump from 27 cents currently to 51.3 cents – giving it a forward price-earnings of 11.7.
I'll concede the company may not achieve the same levels of yearly growth moving forward, but for the past five years earnings have grown by an average of 33.1%, as has cash flow, sales have grown by 25% and dividends by 32.9%. That is better than rival iiNet Limited (ASX: IIN) which also trades on higher earnings multiples. TPG Telecom Ltd (ASX: TPM) has also achieved high levels of sales but, in this Fool's opinion, it is priced to perfection.
M2 also has assets outside of telecommunications which could provide another avenue for growth beyond 2014 as the industry begins to consolidate: "We've also got an energy portfolio as well [and] I think there'll be some consolidation in that sector… Our eye can cast wider than it has traditionally and it's quite a fragmented, early stage of regulation market in the energy space, so there could be some interesting opportunities there," Mr Horth said.
Foolish takeaway
Telecommunications companies have a very bright long-term future ahead of them and although the sector has experienced a period of rapid consolidation, there's still plenty of industry tailwinds pushing up M2's share price. Whether the company pursues an organic or acquisitive growth model from here on, at current prices, the stock remains a quality buy for long-term investors.
