Tuesday, June 9, 2009

IIN - iiNet's FY09 forecasts

iiNet has a been a favourite stock for some time - being the light of promise to the Telstra anti-christ.  A quick review of their 09 forecasts that were released yesterday to see how they are tracking (if you want to short answer - very well - you can hang up now).

Underlying 2007 2008 2009
Revenue 229.6 251.2 415.0
EBITDA 39.1 47.4 65.0
NPAT 11.9 17.7 25.0
Shares on issue 126.60 127.34 151.10
EPS 9.4 13.9 16.5
DPS 6.0 7.0 8.0
Dividend yield 4.7%
Market cap'n 256.9
Share price 1.70
P/E 10.3

They have delivered to the letter on their promises when they acquired Westnet.  At the time IIN was tracking along with EBITDA of $46m and NPAT of $15.2m, Westnet added EBITDA of $12.0 and NPAT of $7.0, and they forecast synergies $6.8m - and voila - combined EBITDA of $64.8m.  You can't ask for more than that - transparency and ability to deliver rolled into one, which for my book adds greatly to the all-too-important the management credibility quotient.

So where should their share price be trading.  Let's take a quick look at some EBITDA multiples:

Valuation based on FY09 forecasts
EBITDA multiple   4x 5x 6x 7x
Enterprise value   260 325 390 455
Debt   24 24 24 24
Implied value   236 301 366 431
Shares on issue  151.1 151.1 151.1 151.1
Share price  1.56 1.99 2.42 2.85
Equivalent P/E  9.4 12.0 14.6 17.2

Remembering that IIN acquired Westnet at a EBITDA multiple of 4.3x including synergies (and 6.8x excluding synergies), then the very low end of a valuation range would imply a share price around $1.69 (using this same 4.3x).  

Now I know we are battling through a global meltdown of epic proportions, but to me these numbers look pretty compelling.  In summary,
  • IIN is growing it's business in what was a mature and stable market, because technology has unleashed opportunities that the incumbents are loath to embrace.  Why else is Telstra trading on a dividend yield of 9% and P/E under 10?  I'd back IIN to continue to grow market share (even without further acquisitions).
  • The core business is more of a 'must have' than a discretionary spend for its client.  In fact as the disruptor, IIN's core service offering undercuts the incumbents with a cost saving proposition in a time when consumers are more focussed on saving money.
  • IIN is well managed by a team aligned with shareholders
  • IIN has a debt to equity ratio under 20% and free cashflow that more than covers its capex requirements  
On this basis I'm a happy holder - cause the risk/reward is skewed to the upside.  To my mind an EBITDA multiple of 6 to 7 times seems like fair value in today's climate that puts IIN's share price through $2.00...

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