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Telstra (TLS) vs M2 Telecommunications (MTU)

Telstra (TLS) vs M2 Telecommunications (MTU)

Interviewed by Peter Switzer last Thursday, I was asked why Montgomery doesn’t own any Telstra (ASX: TLS) shares.

Montgomery is a value investor that uses a highly disciplined and fact-based investment process.

We focus on investing in “extraordinary businesses” trading at a discount to their estimated intrinsic value.

I explained to Peter that our assessment of Telstra’s intrinsic value has approximated $3.00 per share for the past decade, and its share price has accordingly risen from $4.00 to $4.50 over that period.

When a company’s intrinsic value effectively goes sideways for a decade, it is not an “extraordinary business” – and not one for Montgomery.

Montgomery has much preferred a minnow on the telecommunications scene, M2 Telecommunications (ASX: MTU).

Floated in late 2004, MTU has risen from $0.25 to $5.00 in eight and a half years and shareholders have also received $0.72 of total dividends.

Founding CEO, Vaughan Bowen, has done a superb job transforming the company through organic and acquired growth.

The May 2012 acquisition of Primus for $192m and the recently announced proposed acquisition of Dodo and Eftel for $248m will take M2’s forecast revenue to $1,050m in the year to June 2014.

M2’s net indebtedness, like Telstra’s, will now be approaching 100 per cent of equity, which does not thrill us.

However, this should come down over the medium term, as M2 retains at least 30% of its forecast net earnings of $80m (or 45 cps on 178m shares) for the year to June 2014.


Chief Executive Officer of Montgomery Investment Management, David Buckland has over 30 years of industry experience. David is a deeply knowledgeable and highly experienced financial services executive. Prior to joining Montgomery in 2012, David was CEO and Executive Director of Hunter Hall for 11 years, as well as a Director at JP Morgan in Sydney and London for eight years.

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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  1. Carlos Ohanian

    Hi there. I am new to this, and have found your site very interesting.
    I just bought your ebook, and hope to start reading it today.
    But I would like to do some exercise to see if what I had learnt so far is in line with your methodology.
    If I have to define myself, I am an investor, not a trader, interested in buying valuable business, which also pay some dividend and have some growth perspective.
    Yes! This is exactly what every one wants!

    Anyway, this is my exercise-question. Note that you can feel assured I will consider your opinions just a part of this “exercise” and not as investment advice. I only want to test my findings.
    Say that I have some positions with BHP and Woodside.
    And now I wan to decide if to offload some from BHP to buy M2 Telecom.
    On the one hand, M2 looks promising, selling at a discount and with plenty of growth ahead, in a tough market, where it is not a big player. It has already showed great growth in the past.

    BHP is a big company, and looks also selling at some discount in a more bumpy-prone industry.
    Both pay similar dividend yields, but M2 seems to increase it year after year.

    To this point, I would be tempted to sell some of my positions at BHP to buy M2.
    But, I am concerned by the high debt M2 has.
    Something that has also been stressed in a report by D. Morel (not sure if I can post the link here): M2 Telecommunications – high risk low return investing

    THEREFORE: with my current knowledge (before finishing reading Value.Able) I would pass on M2 and keep my positions with BHP. What would you say will my decision AFTER I read your book?


  2. Having bought into MyNetFone (MNF) many years ago at 18c I have tried to keep a watch of other ‘smaller’ telco players, hoping to get in on a smaller success like this again. M2 has always been interesting but I remember one component on Benjamin Grahams “intelligent investor” suggested avoiding companies who were constantly acquiring others!

    Going back to the drawing board and looking at all the ASX listed ‘Telco Services’ companies I am confounded by QUE. Whilst its obviously not a telco company anymore, does anyone have any idea why these types of listed ‘holding'(?) companies continue to trade on the market?

    Am I right in observing that QUE hasn’t actively engaged in any business for years, yet they continue to post monthly cash flow statements (mainly from their controlled entities?) and property developments?

  3. M2 has worked out well thus far, but it’s generated negative free cash flows every single year since 2007 – of course both gearing and equity capital is going up if they’ve paid out $50m in dividends since listing but have generated cumulative negative free cash flows of $169m over the same period (they’re effectively borrowing to fund their dividend). They’ve managed to maintain their ROICs in the mid 20 percent range thus far so all the extra capital pumped into the business has been profitably employed, but the question is whether they can maintain this going forward.

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