this one puzzles me, page-15

Hi Zinc,

I've verified this with the company.

The contract with the NSW Government department does not have an explicit termination date. In the abscence of termination by the client the contract, and therefore this revenue source, will remain intact. It is a contract for ongoing service provision - not a one-off project.

At some stage the service may be in-sourced by the client. If this happens, renewal of the contract will not be an option.

Having said this, to quote the company, "it [the contract] just keeps going on and on".

Other than this, I was told that recent acquisitions have been immediately cash flow generative and that there has been significant diversification in the revenue base. Cashflow is reported to be very strong but we will get to see for ourselves when the quarterly report comes out later this month.

Market capitalisation for Sonnet is now $22.5m (82m shares at 27.5 cents).

The company reported cash of $5.1m at the end of the first quarter this year. Subtracting out $1.2m for the dividend payment due this February leaves, at minimum, $3.9m.

Given the company has no debt, Enterprise Value is $22.5m - $3.9m cash = $18.6m

FY2005 earnings guidance, which assumes total loss of the main Government managed services contract (mentioned above), is for 2005 EBIT of between $3.7m and $4m.

This yields a range for a prospective EV/Ebita multiple of between 5X and 4.65X. This is consistent with a prospective Price to Earnings ratio of betwen 8X and 8.6X.

But, remember, this earnings guidance assumes complete loss of the Government managed services contract. We have already retained possession of this contract for the first half of 2005!

As a result, the prospective P/E will be much lower, probably sub 6X (this is consistent with prospective 2005 earnings of $3.75m - post tax).

In my view SNN is a buy at these prices. The nice thing is that all the technical traders will be wanting to sell from these levels. A good opportunity, perhaps, for the FA investors to get into this story.

I'd be interested to hear alternative views.

Zoot