Will M2 Group Ltd report a profit upgrade?

There's little risk of disappointment for M2 Group Ltd (ASX:MTU) shareholders, but plenty of upside.

Andrew Mudie

Andrew joined the growing team of Motley Fool freelance writers in mid-2013 following years of personal development as a passionate self-taught sharemarket investor. At the time, Andrew was an engineer by trade, writer by hobby, and an investing nerd by passion who spent far too many breaks reading, writing and learning. Andrew’s first investing lesson came with his first stock selection in 2011 when takeover rumours caused a spike and subsequent plunge in the share price of Woodside and then the 21% fall in the market through mid-2011. The next four years of investing saw Andrew dabble in a vast array of strategies until settling on his favourite investment methodology, which is closely aligned with that of the Motley Fool: Fundamentals-based long-term buy-and-hold of great companies at great prices.

Published February 19, 2015 3:15 pm AEDT

M2 Group Ltd (ASX: MTU) has been one of the best performing mid-cap stocks on the ASX over the past 12 months. Since hitting a low of $5.27 in April 2014, the share price has powered almost uninterrupted to today's price of $9.43, a rise of nearly 80%.

Strong Growth

In the past, M2 has been able to grow its business through the acquisition of smaller players, which has seen net profit rise from just $1.8 million in 2005 to $67 million in 2014.

With the internet and telephone industry now thoroughly consolidated, M2 is under pressure to provide adequate organic growth from its stable of brands including Dodo, iPrimus and Commander. The company is forecasting revenue growth of between 8% and 9% and net profit after tax growth of 15% to 20% in the 2015 financial year (ending 30 June 2015).

Capital Light

M2 is unlike larger rivals Telstra Corporation Ltd (ASX: TLS), TPG Telecom Limited (ASX: TPM) and iiNet Limited (ASX: IIN) in that the group operates an extremely capital-light business model by on-selling Telstra and Optus (owned by Singapore Telecom (ASX: SPG)) internet and voice services under M2 brands.

Revenue and profit growth will be achieved through an improved performance from the business-focussed Commander brand and the launch of kiosks in major shopping centres aimed at selling bundled home telephone, internet and energy services. Bundled services improve customer retention and revenue per customer, both great for the company.

Pass/Fail

When M2 reports tomorrow, analysts and investors will be looking for evidence that the company is on track to deliver on its forecast.

Analysts are expecting full-year net profit after tax between $98 million and $109 million, earnings per share between 54 cents and 60 cents, and dividends per share between 30 and 32 cents. Any deviation from a run-rate consistent with these numbers could see the share price fall back to earth, however I personally doubt that M2 will disappoint having given guidance recently. There's even a chance it could surprise to the upside.

Following the strong share price run, M2 is yielding around 3.4% and analysts expect earnings growth in the low-double digits going forward.

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