M2 Telecommunications (MTU) reported outstanding first half 2010 results today. Though not quite as outstanding as the headline on the release trumpets “M2 delivers record earnings – up 156%“. Still Vaughan Bowen and company have got a lot to be pleased by, with earnings per share up 86% and EPS adjusted for non-cash amortisation up 118%. Excellent stuff Vaughan, keep up the fantastic work.

Growth was driven by last years two major acquisition, People Telecom and Commander. Regular reader may recall I generally have concerns with growth by acquisition. In this case I have nothing but praise for the M2’s brilliance in buying great assets at depressed prices. In 2008 and 2009 most management teams were in a fear induced comas, fortunately Bowen and Co kept their wits about them and pounced on the bargains on offer. These results are a great example of how acquisitions should be done and Bowen appears to understand how to successfully integrate businesses.

The market clearly liked the results with MTU closing up 6.25% at $1.70 on a down day. As I said yesterday the only days worth paying attention to the share price move is when major announcements are made.

The interim dividend is an attractive $0.05 up a whopping 100%. Record date 22 March, payable 14 April. (Total $5,503,199 in cash returned to owners.)

• Gross margins increased to 24% up from 18%.
• Net margins up from 3.7% to 4.4%
• Revenue up 115% yet debtors only up 9%. Validates Bowen’s comments about strength of his customers. This type of validation between what a CEO says and the reality of the data is a great way of checking whether the CEO can be trusted. Bowen is a straight shooting CEO.

Investor Presentation Notes

• Goal: To become pre-eminent provider of telco services to SMB.
• M2 Business: provider of full suite of telco services to SMBs and wholesale business.
• Eight consecutive years growth in eps and dps.
• Guidance eps 13.3 – 14.3c (As they’ve already got 8.7c in the bag, that’s 65 – 61%).
• Good graphs on growth.

BRR Interview Notes

• Business doubled or more so.
• Entered 09/10 with trepidation, but incredibly pleased by small enterprise market, has been strong.
• People and commander businesses were enterprising changing, substantial contribution. Excellent integration. Culturally integration foremost and then process integration.
• Management retention and team engagement has been superb. Quality talent and unity.
• Billing and customer service next phase of integration.
• Small enterprise market is core focus, occupy less than 3% of space and overall less than 1% of telco market. Considerable room for growth.
• 70% of net profit declared as dividend for 11 halves now, light business model enables this. Anticipate this will continue.
• Reinvestment plan at 5% discount of volume weighted average. (5 days)
• Next six months completion of transformation year.  Tighten up and refine. Already implemented new operating systems, accounting, payroll and incidence ticketing systems.

MTU 1H 2010 Resources

Disclosure: Long MTU

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