"The trouble with the world is that the stupid are cocksure, but the intelligent are full of self doubt." – Bertrand Russell.
Telecommunications wholesaler and VOIP retailer, My Net Fone Limited (ASX: MNF), reported whopping profit growth of 39.5% this morning, sending the shares soaring over 8% on market open.
However, they were starting at an unusually low (share price) base given the sell off following CEO (and founder) Rene Sugo's recent decision to sell some of his personal holding. In my view, the sell-off down to below $2.25 was overdone in any event, and I wasn't surprised to see the share price bounce this morning.
The main question on my mind is this: what is likely free cash flow in FY 2016, and on what free cash flow settings should this company be valued? Here are my preliminary notes on the main figures (I think) that can help us estimate future free cashflow.
Profit (usually a useful number, but includes non-cash items): $5.78 million.
Operating cashflow (this is my starting point): $8.6 million.
Approximate requisite capital expenditure (investment required to keep the business growing): $1.7 million. However, this is pure guesswork, based on past years and trying to intuitively adjust for the necessity that acquisitions continue to contribute to growth.
Change in the amount of tax not paid (but nonetheless apparently owed): $1,492,000 – $501,000 = $991,000.
Change in receivables: $5,294,000 – $6,612,000 = $1,318,000 Less receivables.
Change in payables: $8,783,000 – $9,544,000 = $761,000 Less payables.
Inventory = basically the same.
Change in deferred revenue = $1,725,000 – $1,145,000 = $580,000 more (this has some nice advantages, but I tend to put it aside).
I think that when they say: "Cash benefited from a marked improvement in working capital," the company is letting investors know that a reduction in working capital boosted cashflow, though I may have misunderstood that.
My best guess at this point is that the company can earn free cashflow of over $6 million in FY 2015 even after adjusting for movements in tax owed, payables and receivables. While growth is expected to continue, I'm guessing that the rate of profit growth will decline as the company gets bigger. Let's hope the crystal ball starts to clear up as I digest the results.
It would be good to know how much capacity remains across the wholesale network – which has "over 146" service provider customers. Does that mean 147?
Although Mr Sugo has sold some shares, it is nice to see that both he and Mr Fung attended all the directors meetings – and are both major shareholders. There are certainly more than a few My Net Fone shareholders who are still enjoying the rewarding ride provided by these enterprising gentlemen. They seem to have created a really great company, and I'm very happy to be a shareholder although I didn't rush to buy more shares today.
My call is to hold My Net Fone, for the time being. If it dropped down to $2, I don't think I could resist stocking up. Having said that, for people who like dividends, I think this stock could be a real winner even at current prices of around $2.45. I also note that buyers tend to emerge after the CEO presents the results, as he will tomorrow.
In 2014 the company raised the dividend and ended up paying 4.5c per share. That's a grossed up yield of 2.5%, even at the reasonably fair price of $2.45. The company looks to me like it manages cashflow very well, so I wouldn't be surprised if they continue to inch up the dividend for many years to come. I also think they'll make useful acquisitions, even if it's only smaller companies like PennyTel. As the cash hoard grows, larger acquisitions will be possible with less dilution of existing shareholders. To my mind, the risk/reward equation still favours holding or potentially even buying at $2.45.
I'm wary of being too skeptical of My Net Fone, as it has maintained a pleasing pace of improvement over quite a few years. This is demonstrated by the chart below which compares My Net Fone and Commonwealth Bank of Australia (ASX: CBA) since the bottom of the market after the GFC. I find this chart amusing given the popularity of Commonwealth Bank.
