Rally In IiNet Shares May Have Further To Go FN Arena News -...

Rally In IiNet Shares May Have Further To Go
FN Arena News - October 10 2006
By Chris Shaw

Telstra (TLS) and Telecom New Zealand (TEL) stole the headlines in the telecommunications sector yesterday but announcements by iiNET (IIN) had the greatest impact in terms of share price performance.
The company made two announcements, one that it has sold its New Zealand "iHug" business to Vodafone and the other advising of a favourable draft ruling by the ACCC with respect to Line Sharing Service (LSS) charges the company must pay to Telstra (TLS).
The market responded favourably to the news, pushing the share price up by about 18% to more than $0.80 but Microequities, which has had the stock in its recommended portfolio for some time, suggests there remains further upside potential.
It notes the iHug sale for about $36m represents a profit on book value of around $6m, the proceeds to be used primarily to reduce debt. Assuming the full amount is applied to debt reduction, Microequities estimates the company's debt level would halve, allowing it to save $2.5m annually in interest costs.
While this is a positive the ACCC ruling may prove to be a greater boost to earnings going forward, as the company currently has about 115,000 customers with accounts that require payment of the LSS. The current terms of the payment are iiNet pays Telstra $9.00 per month per account, but the draft ruling suggests an amount of around $3.20 is fairer, so the potential savings for iiNet appear significant given group revenues in FY06 were about $249m and earnings before interest, tax, depreciation and amortisation (EBITDA) was $24.6m.
Shares in iiNet have been volatile in the past year, trading in a range of 56.5c to $2.82. Complicating matters for investors is the stock receives little coverage, with the three brokers and equity researchers in the FN Arena database yet to have updated their views following the last profit result, rating it as Hold twice and Underperform once. Following yesterday's rally the shares are now trading above the average price target, which stands at $0.72. The company's shares closed yesterday at $0.83.