Dodo… the share price that flies
M2 Group Limited (ASX: MTU) has been a holding in our funds since the second half of the 2014 calendar year. Purchases were first made around August-September at approximately $7.50 with further purchases made in the beginning of 2015. As per the below chart, it seems we have done well for our investors.
Now with the share price hovering around $10 it’s reasonable to ask whether the stock is still undervalued. Our estimates suggest fair value is in the $10-$11 range but could further upside be realised above this number?
M2 Group is an internet service provider with a large suite of products. In assessing the firm’s prospects, it appears likely that most future value will be derived from the broadband subscribers that it’s “value brand” Dodo attracts.
In coming up with our valuation range, an estimation of Dodo’s long term market share in the Australian retail broadband space needs to be made. In our analysis, we assumed 10 per cent long term market share based on comments by the company.
Further upside will naturally arise if the company exceeds the forecast level of market share and this isn’t completely an unrealistic scenario – M2 Group gained 16.05 per cent of all new and churned broadband contracts in the first half of 2015. Churn is an industry term for lost customers. In this case, M2 Group could be worth more than $13 a share. Of course, we are conservative investors; hence we have defaulted to the lower valuation. But this is something we have our eyes on in the event of further supporting evidence.
We must also consider the possibility of further industry consolidation. M2 Group must surely look like a tempting target for the TPG’s (ASX: TPM) of the world not only from a scale and profitability perspective, but also as a hedge. For instance, ensuring that Dodo won’t begin picking off TPG’s value driven customers base.
The Montgomery Fund and The Montgomery Private Fund hold positions in M2 Group Limited.
This article is for general advice and educational purposes only. Before you commit to any investment decision we strongly recommend you seek the counsel of a licensed investment adviser.
Scott Shuttleworth is an analyst at Montgomery Investment Management. To invest with Montgomery, find out more.
This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.
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