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SP Telemedia: Fat Prophets updates opinion

Fat Prophets initially recommended buying SP Telemedia at 92.5 cents in November 2006 (FAT302). Our last review of this stock was in March (FAT418).

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SP Telemedia (ASX: SOT) effectively became a new company when it acquired internet service provider, TPG in April 2008.

Since then, SP Telemedia has almost doubled its value, in part due to the recovery in the markets but also as the market has specifically awoken to the new dynamic driving the business.

Fat Prophets initially recommended buying SP Telemedia at 92.5 cents in November 2006 (FAT302). Our last review of this stock was in March (FAT418).

Since our last review in March, there has been a dramatic turnaround in the technical outlook for SP Telemedia. From around the 15 cent region, prices have rallied 7 fold, reaching a high of $1.04 this week. This is the highest level for the stock since December 2005.

FY09 Result

The company released its 2009 financial year result today, which showed the momentum that is building in the business. Total subscribers grew to 388,000, up 29.3% on the prior year and now represents 9.2% market share of the DSL broadband market.

Operating profit (EBITDA) increased 27.5% from $83.4 million in FY08 to $106.3 million in FY09, after adjusting for small foreign exchange gains and losses. Operating cash flow lifted substantially as a consequence from $36.8 million to $152.8 million. The company used this to repay $63.4 million of debt, which brought its year end net debt position down to $49.8 million against shareholders equity of $324.8 million.

SP Telemedia has plenty of breathing space on its debt maturity profile with the next repayment not due until February 2011.

The company noted that broadband subscriber growth lifted in the second half of the year with 56,000 subscribers added. The total passed through the 400,000 mark in September.

SP Telemedia’s mobile subscriber base shrank by 10,000 across the year, but within this, there is an on-going migration project underway to shift the original Soul mobile customers onto the TPG mobile services. The company lifted the TPG total from 40,000 to 90,000 in the period.

Broadband leader

Retail broadband in Australia is a highly competitive market. SP Telemedia is Australia’s second largest ISP (internet service provider) ahead of iiNet. Telstra’s BigPond remains by far the largest ISP but this has not stopped a huge number of other ISPs from trying to establish and grow an independent ISP market.

In aggregate, this tail serves approximately 900,000 customers. As with most industries where a long tail of smaller competitors flourish, eventually, economics takes over and a process of consolidation within the market often occurs. That is only gradually occurring so far in the ISP market, but could pick up pace as the bigger ISPs such as SP Telemedia gather sufficient cash flow to enable growth by acquisition. This is part of what we expect the company to embark on over the next few years.

Of course, SP Telemedia won’t be the only consolidator in the market, so the ability to acquire customers at a reasonable price must be balanced with the need to organically grow the customer base and retain existing customers.


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