iiNet half year result "bad" says analyst

Stuart Corner
Wednesday, 22 February 2012 19:14

IT Industry - Listed Tech

iiNet bragged this week about "record half year earnings with growth across key financial and operating metrics." However one market analyst sees the results in a very different light.

In a report on the company, Michael Henshaw of Petra Capital writes: "It is infrequent that a company reports results as bad as those from iiNet yesterday and still enjoys a share price rally."

According to Henshaw: "iiNet produced a disappointing 1H12 performance, below our expectations and, below the EBITDA line, lower than consensus expectations. As a subscription/annuity business with no seasonality, we believe investors should be particularly concerned that the results saw a marked decline on prior period (EBIT: $30.0m vs $34.5m in 2H11).

"At the NPAT level, the decline was even more acute, with the group reporting $16.0m [normalised & ex legal costs] versus $22.0m in 2H11, despite a maiden $0.5m contribution from TransACT, without which the sequential decline would have been 30 percent."

Henshaw said that Organic subscriber growth had been below expectations and "is now declining in both AAPT and the core iiNet business...The integration of AAPT is behind schedule; guidance for Internode synergies was softened; and TransACT cost rationalisation won't now start for 12-months."

He added: "We have argued for some time that iiNet is too exposed to off-net customers (ie wholesaling Telstra) and that in its efforts to scale up, management have overlooked the lesson learnt historically - that relying on Telstra is hazardous."

Henshaw concluded: "We move our recommendation back to sell with a price target of $2.71. Fundamental investors should take profits - the only reason to hold iiNet now is the hope of corporate activity."

In contrast iiNet was extremely bullish, with CEO Michael Malone saying: "iiNet's excellent financial performance over the past six months and attractive growth outlook clearly shows we are successfully executing the right strategy in light of the changing industry dynamics."

It reported: revenue up 11 percent to $365m; EBITDA up 36 percent to $56.4m and NPAT up 17 percent to $14.4m, along with "Market leading low levels of churn."