You know the market is driven more by fear than fundamentals when strong results cannot save a company from taking a big beating.
This is certainly the case for M2 Group Ltd (ASX: MTU) when the stock shed around 8% at the open before clawing back some of the loss to be 3.3% lower at $9.61 despite posting a better-than-expected result.
Ignore the noise. This is a buying opportunity as the telecommunications services and utilities retailer unveiled a record underlying net profit of $100.2 million, which is a 17% increase over the previous year, while revenue climbed 9% to $1.12 billion.
Net profit was around 4% above consensus on Reuters, while revenue was a touch above what the market was expecting.
The group also declared a 17 cents a share fully franked dividend to take its full year payout to 32 cents a share, or a 23% increase over the previous year.
But investors may have initially been put off by the anemic 6% increase in earnings before interest, tax, depreciation and amortisation (EBITDA) to $170.5 million, but that includes costs related to the acquisition of New Zealand-based CallPlus Group.
Maybe investors were also hoping for a bigger dividend surprise, but these are minor negatives given the group's solid performance and upbeat outlook.
Management is expecting organic revenue growth of 24-26% for the current financial year and a net profit increase of between 30% and 35%.
Some of the highlights for 2014-15 include a 6% growth in services in operation with 98,000 new postpaid subscribers, the expansion of its Dodo Connect Kiosks into three news states of Queensland, New South Wales and South Australia and the launch of its small business cloud offering that transforms its wholesale operations to a next generation internet protocol (IP) carrier from just being a value added reseller.
The deal to buy CallPlus also gives M2 a solid footing to build its New Zealand operations, with the newly acquired business expected to generate an EBITDA of $NZ45 million ($41.2 million) in 2015-16.
The stock looks good value as it is trading on a 2015-16 price-earnings multiple of around 13x and a yield of around 6% once franking credits are included.
Given management's strong track record in delivering shareholder returns, I think fair value is around 20% to 25% above its current share price.
