Will M2 Group Ltd keep surging higher?

M2 Group (ASX:MTU) is expanding to NZ but the market is crowded, can it perform?

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 April 17, 2015 8:00 am AEST

What Happened?

M2 Group (ASX: MTU) expanded its New Zealand business earlier this week with the acquisition of NZ's number three internet service provider CallPlus and related business 2Talk.

The acquisition makes sense, adding to M2's scale in New Zealand and maintains the company's strategy of infrastructure-light expansion, but will it ensure that M2's stellar share price run continues?

What does it mean?

Importantly for M2 shareholders, after 12 months of consolidation following an acquisition spree in Australia, management has shown that it will continue to look for sensible acquisitions.

The purchase will give M2 an 18% share in the New Zealand internet service market and M2 may adopt a similar strategy to that in Australia where the group bundles home phone, internet, energy and mobile plans.

These add-ons are the biggest opportunity in the country as Spark and Vodafone hold the number one and two positions in the extremely mature and consolidated NZ market.

What Now?

Analysts are slightly concerned that the acquisition will give M2 a significant presence in New Zealand and will result in a capital allocation battle over time. The NZ dollar is also trading close to an all-time high of parity versus the Australian dollar. The Australian-dollar denominated earnings could rise if the NZ dollar retreats over the medium term.

Is there still time to buy?

M2 has had an extremely successful few years consolidating the Australian, and now NZ, markets. Both are mature and M2 will have to work hard for organic revenue growth over the medium term. I believe we'll only see a moderate rise in the share price from here unless another major acquisition is announced.

M2's problem is that it operates in a competitive industry dominated by companies other than itself and with many similar-sized companies fighting for the scraps. While this has worked so far, I prefer to own companies that are the market leaders, which is why I sold my shares earlier this year.

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