The Bull

Friday 20

April, 2018 2:38 PM



TheBull PREMIUM

  • Blue
  • Chips
  • &
  • Stocks
  • To
  • Watch

Bear of the Week - 20th March 2011

Bear of the Week - 20th March 2011

By William Travis 20.03.2011


Stock: Melbourne IT Limited

Stock code: MLB

Share Price: $1.83 (as at Friday 18th March, 2011)

Broker sells: 

RBS Morgans (7/3/2011, share price was $1.99 that day)

MLB

Chart: Share price over the year to 18/03/2011 versus ASX200 (XJO)

Long-term shareholders have to be wondering if they’d be better off waiting for Godot or wait another year to see if Melbourne IT’s new business plan will add value to the bottom line.  In MLB's latest earnings presentation, Melbourne IT CEO and Managing Director, Theo Hnarakis, said: “2010 was the first year of our critical transformation project...Cost and revenue benefits will only be modest in 2011”. The restructuring will have “transformation costs to impact EBIT by $5 million in 2011.”

Not exactly the kind of words that excites investors.

Company Description

Melbourne IT was founded in 1996 by The University of Melbourne to work with the private sector on IT projects.  In 1999, Melbourne IT became the sole Australian domain name registrar for the .au domain and was listed on the Australian Stock Exchange (ASX) with a ticker symbol of MLB.

Melbourne IT's primary business provides domain name registrations and related online business solutions in Australia and internationally and is accredited by ICANN as a registrar for .com, .net and .org domains.  MLB is also an online solutions provider, focussing on professional consulting and corporate domain name management services to business and related value-added services.

The company has expanded rapidly and now employs more than 690 employees with offices in Melbourne, Wellington, Stockholm, London, Paris, Amsterdam, Madrid and San Francisco.  

Customers for Melbourne IT’s products and services range from small businesses to Fortune 500 companies and internationally recognised government organisations.

Earnings

The company announced on February 22, 2011 the 2010 year end results.  Revenues fell 5% year-on-year to $189.9m and earnings before interest and tax (EBIT) was also down 9% year-on-year to $21.2 million.  NPAT came in at a disappointing $16.1 million, a decrease of 4% from 2009’s NPAT of $16.8 million.

“The underlying performance of the business in 2010 – on a constant currency basis using 2009 foreign exchange rates – was slightly better than 2009, with revenues up 3% to $206.3 million and deferred revenues up 2% to $55.7 million,” said Melbourne IT CEO and Managing Director, Theo Hnarakis.

Like many company reporting this quarter Melbourne IT blamed its poor results on adverse foreign exchange rate movements.  Rates negatively impacted 2010 EBIT by an estimated $2.5 million. “Foreign exchange headwinds and a slower sales recovery in the United States and Europe than we predicted have delivered a lower revenue and EBIT result for 2010,” Mr Hnarakis, said.  Year-on-year earnings per share (EPS) decreased 6% to 20.21¢.  

Other relevant data that was announced was that operating cash flow decreased 16% to $18.7 million reflecting lower EBITDA, timing of a significant receipt from a major customer and reduction of creditor balances.  Net debt at the end of 2010 was $22.9 million, with $5.3 million of debt retired this year.  The company also announced a fully-franked final dividend of 8¢ which is unchanged from 2009.  

Strategy

Melbourne IT’s current strategy is to shift to higher-margin IT services with 61% of revenue now derived from IT services rather than domain names.  Mr Hnarakis, said. “2010 was the first year of our critical transformation project. It is on track and on budget, with the first stage due to go live in New Zealand in Q1 this year and our Australian operations to follow by end of Q4 2011. Cost and revenue benefits will only be modest in 2011, however we expect to see a significant return accruing to our company from 2012 once the Australian and New Zealand operations are fully integrated.”

MLB management anticipates that the Strong AUD will continue to impact revenues; however, market conditions in Europe and US should gradually improve, they say. Given the recent catastrophe in Japan and now the tensions in Libya, the recovery in the global economy could be slowed somewhat.

Chart: MLB trading in fairly large triangle pattern, negative diversion in RSI indicator suggests test of the bottom of the triangle. Break below trend line and prior swing low would have quite bearish implications.

Over the last 9 months MLB shares have been slowly grinding back to the 2.35 52 week high.  MLB bulls should take notice that shares failed at the 61.8 Fibonacci level.  MLB’s inability to break above this key technical level may suggest that the current upward correction is over. Negative divergence of the RSI indicator warns that the current upward is running out of steam. Watch for a break below the upward trend line to confirm that this upswing is over.  Next support levels would be previous lows of 1.80 and 1.70.  Overall, anyone considering adding Melbourne IT to their portfolio may pay to wait.

Analysts

Nicholas Brooks of RBS Morgans, who has a sell recommendation on Melbourne IT had this to say about the most recent earnings: ”We were disappointed, but not surprised by this IT service provider’s latest result, with EBIT (earnings before interest and tax) falling 9 per cent to $22.9 million. While there’s talk of a strategic turnaround, better investment opportunities, offering more certainty, exist elsewhere.”

The current average forecasts for 2011 revenues by eight analysts covering MLB, is 209.93 million which have been reduced from previous average forecasts of 219.33 million.  Earnings forecast for 2011 and 2011 were also reduced in the past year.  Average Earnings for 2011 is 20.94 million reduced from 23.30 million.  2012 average earnings 22.86 million from 26.60 million.

Valuation

The market currently values Melbourne IT with market capitalisation of $149.3 million and Price/Earnings: 8.9X 2011 TTM.  Taking a simple glance at the P/E ratio, a novice investor could easily mistake that MLB is cheap.  However, take note that Melbourne IT’s negative earnings and revenue are more likely than not to continue for the next 12 months.  MLB has a dividend Yield of 8.0%.

Conclusion

Over the last 12 months Melbourne IT shareholders are sure to be happy with the 21% increase from its 52 week low. That said, with all indications that 2011 will be another year of transition for MLB, significant price gains might be tougher to source over the coming year.

 

Please note that TheBull.com.au simply publishes broker recommendations on this page. The publication of these recommendations does not in any way constitute a recommendation on the part of TheBull.com.au. You should seek professional advice before making any investment decisions.



FROM THE NEWSLETTER

Precarious employment is rising rapidly

It shows levels rising for both men and women... More

Investor Signposts: Week Beginning April 16 2018

CommSec Senior Economist Ryan Felsman takes a... More

Market wrap: popular stocks

Market wrap and popular stocks on Friday More

New Silver Bull Coming?

Silver has been dead money over the past year... More



WHAT’S ON THIS WEEK

week 20 April 2018
    • 16
    • ABS Lending Finance for February | 10:00 AM
    • 17
    • ANZ Roy Morgan Consumer Confidence weekly survey | 9:30 AM
    • 18
    • RIO Quarterly operations review | 9:30 AM
    • 19
    • ABS Labour force data for March | 9:30 AM
    • 20
    • N/A No items listed | 9:30 AM

TheBull.com.au

TheBull.com.au

TheBull PREMIUM article search



Markets
Index: Points Change Percent

Featured Comment

Treasury Wine Estate - soaring share price shows the rocket that Chinese consumption can put under earnings and market values.

Heady aroma of profits as vintners target Asian middle class

Broker buys

  • ASX Code
  • Company
  • Broker
  • FMGFortescueFairmont Equities
  • TLSTelstraFairmont Equities
  • IBNiBuyNew GroupRed Leaf Securities
  • MYQMyFiziqRed Leaf Securities
  • TCLTransurbanOrd Minnett
  • FMGFortescueOrd Minnett

Broker sells

  • ASX Code
  • Company
  • Broker
  • ORGOrigin EnergyFairmont Equities
  • BHPBHP BillitonFairmont Equities
  • FLTFlight CentreRed Leaf Securities
  • PLSPilbara MineralsRed Leaf Securities
  • QANQantasOrd Minnett
  • TAHTabcorpOrd Minnett

Central Banks Rates

  • RBA1.50%
  • FED0.50%
  • BOE0.25%
  • BOC0.50%
  • RBNZ2.00%
  • ECB0.00%
  • SNB-0.75%
  • BOJ-0.10%

Upcoming dividends

  • ASX Code
  • Company, Div., Franking
  • Ex-Div.

Eight brokers like these stocks

  • ASX Code
  • Company Name
  • Consensus Target

Upcoming Floats

  • ASX Code
  • Company Name
  • Float Date

PLEASE SUPPORT OUR SPONSORS, AUSTRALIA'S LEADING BROKERS:



© Copyright The Compare Group Pty Ltd. All rights reserved.