Have analysts underestimated M2 Group Ltd again?

Junio telco looks set to positively surprise the market when it reports early next year

Mike King

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Published November 17, 2014 3:52 pm AEDT

Telco M2 Group Ltd (ASX: MTU) has seen its share price rise 25% since the company reported its 2014 financial year results in August.

Over the same period, the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO) has dropped 4%.

Much of the gains in M2's share price since August must be attributed to the excellent results the company produced in 2014, but it seems analysts underestimated the company then, and appear to be doing the same over the next financial year.

Analyst consensus forecasts suggest M2 Group is heading for 11.2% growth in earnings per share in the 2015 financial year. But in an article in The Age today, CEO Geoff Horth noted that the company was guiding for revenue growth of around 8% to 9%, which he says should translate into 15% to 20% growth in net profit.

If the company doesn't issue any new shares between now and June 2015, that should equate to similar growth in earnings per share.

M2 is likely still bedding down its 2013 acquisition of internet service providers Dodo and Eftel, which cost the company $248 million. Dodo doesn't just provide broadband services, but had also expanded into bundling energy products into the telco offerings. M2 plans to expand its energy offering, with Dodo running kiosks in shopping centres around Australia that offer internet, mobile and energy products. According to The Age, Dodo aims to have 40 kiosks up and running by early next year, with some by Christmas.

So maybe analysts are expecting rivals iiNet Limited (ASX: IIN) and TPG Telecom Ltd (ASX: TPM) to cut in on M2's margins. TPG in particular has the ability to do so, given it owns much of its own fibre optic network, while M2 is forced to lease space on the network.

That has its advantages and disadvantages, but either way, it seems M2 could positively surprise the market when it reports its six-monthly results in February. Now may be an ideal time to take a closer look at the junior telco.

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