pgrading earnings following the FY13 result: We have upgraded our iiNet pre-amortisation NPAT by 1.5% in FY14, 4.2% in FY15 and 5.5% in FY16 following its FY13 result. 2% of the upgrades reflects a lower on-going tax rate for TransACT, the balance is operational upgrades. ■ IiNet getting its groove back. While the FY13 result was broadly in line with our forecast (underlying NPAT $56.1mn), we believe it revealed several important trends that indicate a much stronger earnings and cash flow story for IIN going forward. 1) iiNet is back to achieving positive subscriber growth with increased focus on customer acquisition by management. This is important to offset the on-going decline in consumer PSTN revenues; 2) IIN has demonstrated its ability/willingness to reduce costs with a 4% sequential decline in 2H13 opex and more expected to come in FY14; 3) iiNet is benefiting from early wins in the regional NBN rollout which is actually adding to overall subscriber growth. This trend could potentially add further upside to IIN in FY14 and FY15; and 4) iiNet now has a meaningful base of business revenues ($183mn) which are growing at ~5% p.a. and will assist to offset PSTN decline. All of this leads us to a view that iiNet will be able to grow EBITDA over the next three years while also reducing capex. We think this improving earnings and cash flow profile is attractive and supports the increased dividend pay-out ratio flagged by the board. ■ Catalysts: Federal election outcome Sep-13 for an NBN policy confirmation. ■ Valuation undemanding on 13.5x FY14 PE: Our DCF-based target price increases to $6.74 from $6.15 reflecting earnings upgrades, revised cost of debt assumptions for our WACC and a lower long run capex for the business. IIN is trading on 13.5x FY14E P/E (pre amortisation) which in our view is undemanding vs. the XSI on 14.34, the telco sector on 15.3x and our basket of 'quality and defensive' small cap stocks on 19.5x. We upgrade our rating to NEUTRAL reflecting our more positive investment view. Total return forecast in perspective
Mean^
CS tgt^
Sh Prc
-50%
-30%
-10%
10%
30%
50%
12mth Volatility* 52wk Hi-Lo IBES Consensus target return^
Performance Over 1M 3M 12M Absolute (%) 11.4 3.8 75.3 Relative (%) 9.5 3.0 59.0 Financial and valuation metrics Year 06/13A 06/14E 06/15E 06/16E Revenue (A$mn) 940.0 986.1 1,018.7 1,037.3 EBITDA (A$mn) 180.1 198.2 209.6 212.3 EBIT (A$mn) 98.1 113.7 124.4 130.8 Net income (A$mn) 56.1 66.0 76.6 84.9 EPS (CS adj.) (Ac) 34.63 40.96 47.52 52.64 Change from previous EPS (%) n.a. 2.0 5.4 7.0 Consensus EPS (Ac) n.a. 40.60 43.50 49.50 EPS growth (%) 23.0 18.3 16.0 10.8 P/E (x) 18.3 15.5 13.3 12.0 Dividend (Ac) 19.00 23.35 28.51 31.58 Dividend yield (%) 3.0 3.7 4.5 5.0 P/B (x) 3.1 2.8 2.6 2.4 Net debt/equity (%) 95.0 84.3 55.9 32.7
Relative performance versus S&P ASX 200.See Reference Appendix for a description of the chart. Source: Credit Suisse estimates, * Consensus, mean range from Thomson Reuters Source: Company data, ASX, Credit Suisse estimates, * Adj. for goodwill, notional interest and unusual items. Relative P/E against ASX/S&P200 based on pre GW in AUD. Company PE calculation is based on displayed EPS Currency
Rating (from Underperform) NEUTRAL* Price (21 Aug 13, A$) 6.33 Target price (A$) (from 6.15) 6.74¹ Market cap. (A$mn) 1,020.64 Yr avg. mthly trading (A$mn) 70 Last month's trading (A$mn) 81 Projected return: Capital gain (%) 6.5 Dividend yield (net %) 3.8 Total return (%) 10.3 52-week price range 6.7 - 3.4 * Stock ratings are relative to the relevant country benchmark. ¹Target price is for 12 months.
Research Analysts Bradley Clibborn 61 2 8205 4465 bradley.clibborn@credit-suisse.com
Paul Buys 61 2 8205 4538 paul.buys@credit-suisse.com
Chris Smith 61 2 8205 4210 chris.smith@credit-suisse.com
Sarah Mann 61 2 8205 4610 sarah.mann@credit-suisse.com
Specialist sales: Michael Bassett 61 2 8205 4326 michael.basset@credit-suisse.com
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