Shares in online voice communications business MNF Group Ltd (ASX: MNF) are up 6% to $4.82 in trade today after the group announced a new acquisition and deal to supply voice services to the Victorian government.
MNF Group's new operating part
The first piece of news likely to be pleasing investors is that MNF Group has struck a deal to buy voice conferencing and collaboration business Conference Call International (CCI).
According to the announcement: "CCI provide their customers with high quality and reliable multi-party audio and conference collaboration services. The CCI business is on track to earn $3.5 milllion EBITDA in FY17, a 17% increase on the prior year".
The telco group will pay $18 million to buy CCI on 5x forecast EBITDA, with $0.5 million in cost savings or synergies already identified and expected to be realised in FY2018.
MNF's entrepreneurial and highly-regarded chief executive, Rene Sugo, flagged CCI's high margin recurring revenues and the fact that it brings an additional 5,000 business, government and enterprise customers into the group's cross or up-selling sphere as being attractive parts of the deal.
The group has already raised $18.58 million from institutional investors in a heavily oversubscribed placement to fund the deal at $4.50 per share and will offer retail investors a chance to subscribe for shares via an additional $3 million offering at the same price.
New deal with the Victorian government
In a separate announcement today the group also announced it has been appointed as one of three suppliers of online voice services to the Victorian government. It has been reported that in 2013 the state government spent $30 million on voice services so this looks another potentially profit-spinning operation for the business that already has experience working with the Tasmanian and NSW governments.
Mobile Virtual Network Operator (MVNO) deal
Last October the group also announced a deal with Telstra Corporation Ltd (ASX: TLS) to provide 3G and 4G mobile services piggybacking off the Telstra network to MNF Group's clients and consumers. This is similar to the way in which fast-growing discount telco Amaysim Australia Ltd (ASX: AYS) provides mobile services using the Optus network. MNF Group then looks to have another potentially long-term earnings stream in the shape of this deal.
Outlook
Thanks to its founder-led nature and long-term focus MNF Group continues to tick the boxes as one of the best small-cap stocks to buy on the ASX in my opinion.
In its latest update it confirmed that it's expecting to earn an $11 million profit in FY17 thanks to organic growth in the region of 22%-25%. According to the October AGM this level of organic growth should deliver earnings per share of 16.08 cents, with the potential for upward revision due to marginal accretion from the latest acquisition for example.
If you assume the group earns 17 cents per share in FY 2017 then you can see that it trades on a demanding forward multiple of 28x earnings that probably includes expectations for double-digit growth in FY18 and margin expansion.
Clearly if the business disappoints in the future the share price could come under pressure, although for my money it looks a buy at these valuations given the overall business quality and long-term potential.
