Iinet Limited – Pullback Offers Opportunity
iiNet Ltd. (IIN) is the second largest Internet Service Provider (ISP) in Australia and currently listed in our traders report as a share to buy.
IIN has built its own network (the iiNetwork), boasts the largest Voice over IP network in the country, abolished monthly phone line rental with Naked DSL and has released wireless modem-and-phone-in-one BoB to the world.
The group’s strategy is to increase value both organically and inorganically, with the acquisitions of TransACT in 2011 and Internode in 2012 two examples of the latter.
1H13 was a breakout period for IIN, which more than doubled its net profit from 1H12 to $31.9 million.
This was delivered on the back of a 30% surge in revenue, with IIN experiencing sales growth in its major product categories in addition to a full six month inclusion of TransACT and Internode revenues.
Another major highlight of was a 73% on-year increase in EBITDA. This translated to a 35% improvement in EBITDA margin as network cost savings were achieved and synergies were realised from the Internode acquisition.
The completion of the TransACT and Internode acquisitions are expected to deliver further cost savings in the next few halves, boosting profitability further.
Valuation attractive once more
The telco sector has come under heavy selling pressure in recent weeks. Concerns of an upcoming end to global central bank monetary easing have coincided with rising government bond yields.
This in turn has diminished the attractiveness of traditionally defensive sectors like utilities, banks and telcos.
However, we believe the recent pullback has a fair bit to do with simple profit taking following a year of strong gains. The pullback has also meant many stocks have become more attractively valued. IIN’s one year forward P/E is now just 14.3x.
This represents a discount to its closest peers, Telstra (14.95x), TPG Telecom (16.3x) and Amcom Telecom (17.3x). In our view, IIN’s growth potential hasn’t altered in the past few weeks and as such believe it should be trading on a higher multiple.
IIN is on track for another record profit when it reports its FY13 results.
Its recent pullback has been overdone in our view, and the forward P/E estimate of 14.3x implies good value around current prices. We expect valuation support to lift the share price higher in coming weeks.