Thesis to short, page-5

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83 Posts.

16/04/15

13:41

Post #: 15099170
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Originally posted by kray ↑

I am going to acknowledge first of all this company has come a long way from 9c to $9.44, impressive management in DT.

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Originally posted by kray ↑

The main crux of this thesis for shorting is that valuations have run too far ahead on expectations. I have already shorted the company at above $9, looking for a drop to $8 (pre-IIN bid level but factoring in the excellent HY report)

Intangible risks
1. Merger risk with IINET from IIN shareholders, regulators, potential rival competing bids.
2. If the merger is successful, operational risk associated with combining IINET.
3. Potential Australian recession
4. Infrastructure competition from NBN
5. Market competition

Tangible risks
1. Growth from large base - the company has ~10% of the market, significant growth will need to be taken from other competitors.
2. High expectations based on PE
@$9.44 the price/earnings is 23x (IINET prebid was 13x), the net profit margin is 17%, looking at the trend over the last 5 years it is coming off a peak in 2013 of 21% net profit margin. Will this down trend in net profit margin continue?
3. Employee cost is on low base
6% (cost/earnings) employee cost for consumer section over the last 5 years, corporate section employee cost is around 15%+, IIN employee cost on average is 15% as well. So there is plenty of room for consumer section employee cost to rise. Considering consumer section revenue, every 2% (cost/earnings) rise in employee cost results in 1% decrease on net profit margin.
4. Acquision risk of IINET merger.
IIN financial accounts are not that clean. TPM is at large risk of overpaying for IIN.
5. The high margins enjoyed by Telstra/Optus/M2 places the entire Telecom sector at high risk of price war.
6. Failure to grow in mobile market

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Hi kray
Nice analysis.. I totally agree with all you have said.. I can not justify its current share price at all.. It should have dropped since announcing the takeover of Iinet.. Especially since they have payed way to much in the first place.. That all said I am looking for a move back down to around $7.50.. To at least fill the gap. What happens after that not sure.

Last edited by TimeT: 16/04/15

TPM Price at posting: $9.41 Sentiment: Sell Disclosure: Not Held
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0 Great analysis

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Thesis to short, page-5

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