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AUS Initiating Coverage| 1

12 June 2013

Canaccord Genuity (Australia) Limited is the Australian affiliate of global capital markets group Canaccord Financial Inc. (CF : TSX | CF : LSE)

The recommendations and opinions expressed in this research report accurately reflect the Analyst’s personal, independent and objective views about any and all the designated investments and relevant issuers discussed herein. For important information, please see the Disclosures at the end of this document.

MyNetFone Limited Warren Jeffries +61 3 8688 9108 [email protected] MNF: ASX

BUY Target: $1.35

COMPANY STATISTICS: Share Price $1.13

12 Month Range $0.45 - $1.65

Market Cap $70.3m

Enterprise Value $67.8m

Issued Shares 62.3m

Cash Balance - forecast $2.5m

Debt – forecast $0.0m

Major Shareholders

Rene Sugo – Managing Director

Andy Fund – Non-Exec. Director

Pie Funds Management

23.3%

23.3%

6.8%

EARNINGS SUMMARY: June Yr End FY12A FY13F FY14F FY15F

Revenue ($m) 38.3 52.4 70.8 76.6

EBIT ($m) 4.3 6.0 9.5 10.6

NPAT($m) 3.1 3.8 6.2 6.9

EPS Normalised (c) 5.5 6.5 9.9 11.0

EPS Growth (%) 205.3% 18.4% 51.8% 11.7%

PER (x) 20.6 17.4 11.5 10.3

EV/EBIT (x) 12.6 11.3 7.1 6.0

DPS (c) 2.3 3.3 5.0 5.3

Yield (%) 2.1% 2.9% 4.4% 4.7%

SHARE PRICE PERFORMANCE:

Source: IRESS

COMPANY DESCRIPTION: MyNetFone (MNF) is a leading provider of hosted voice and data communications services for residential, business and enterprise users. MNF’s wholly owned subsidiary, Symbio Networks, owns and operates Australia’s largest VoIP network providing wholesale carrier services to the domestic and overseas telecommunications markets.

VALUATION & PRICING DATA

DCF valuation $1.75

EBITDA valuation $1.35

PER valuation $1.26

Telecommunication Services

Working the network Investment Perspective

MNF is a leading provider of hosted voice and data communication services for residential, business and enterprise users. MNF also owns and operates Australia’s largest VoIP (Voice over Internet Protocol) communications network providing wholesale carrier services to domestic and overseas customers. As a fully integrated communications provider, MNF is well positioned to leverage its network through organic and acquisitive growth. We believe that on successful integration and synergy realisation from acquisition activity in the 1H13 will only serve to endorse MNF business model and growth potential. We initiate coverage with a BUY recommendation and price target of $1.35.

Key Points:

Symbio acquisition a company changer - acquired in July 2011,

MNF’s wholly owned subsidiary Symbio Networks owns and operates

Australia’s largest VoIP network and fifth largest non-mobile voice

network. A key wholesale provider of voice and data services to MNF

prior to being acquired, Symbio allows MNF to benefit from increasing

demand for VoIP products and services through owning and operating

its own fully interconnected network, while also mitigating the risk from

a likely increase in retail competition as we progress to an NBN

environment.

VoIP growing - in simple terms VoIP (Voice over internet Protocol)

refers to voice, data and other communication services that can use

the internet for communication delivery as an alternative to the

standard landline. The use of VoIP delivery for these services can

provide significant cost benefits and flexibility for users, while growth in

VoIP communication solutions continues to grow ahead of traditional

phone services.

Core offering a value proposition - MNF’s retail offering centers on a

value proposition, and providing customers with innovative products

and services. A key feature of MNF’s offering is an ongoing investment

in new product development, which is supported by an established in-

house engineering capability, and this is a hallmark of the executive’s

core skill set and background. MNF’s voice and data offering looks to

provide customers with savings of anywhere between 40 – 80% for

their communications requirements.

Recommendation & Valuation - We initiate coverage on MNF with a

BUY recommendation and price target of $1.35 based on an FY14

EBITDA multiple of 8x. On an EV/EBITDA basis MNF is currently

trading at a discount of ~35% to peers.

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12 June 2013

FINANCIAL SUMMARY

Price 1.13$

MyNetFone Market Cap 70.3$ Year end 30 June

Profit & Loss ($m) 2012A 2013F 2014F 2015F Valuation ratios 2012A 2013F 2014F 2015F

Revenue 38.3 52.4 70.8 76.6 EPS (cps) 5.5 6.5 9.9 11.0

EBITDA 4.3 6.0 9.5 10.6 PER (x) 20.6 17.4 11.5 10.3

Dep & Amort. -0.4 -0.6 -0.8 -1.0 PER Rel - All Ind. 30% 19% -12% -16%

EBITA 3.9 5.4 8.6 9.6 PER Rel - Small Ind. 36% 28% -9% -8%

Amortisation of Intagiables 0.0 0.0 0.0 0.0 Enterprise Value ($m) 54.5 67.8 66.8 63.1

EBIT 3.9 5.4 8.6 9.6 EV / EBITDA (x) 12.6 11.3 7.1 6.0

Net Interest Expense 0.1 0.0 0.0 0.0 EV / EBIT (x) 13.9 12.6 7.7 6.6

NPBT 4.0 5.4 8.6 9.7 DPS (cps) 2.3 3.3 5.0 5.3

Tax expense -1.0 -1.6 -2.5 -2.8 Dividend Yield (%) 2.0% 2.9% 4.4% 4.7%

NPAT 3.1 3.8 6.2 6.9 Franking (%) 100% 100% 100% 100%

CFPS (cps) 7.4 2.4 6.9 12.4

P / CFPS (x) 15.4 48.0 16.4 9.1

Cash Flow ($m) 2012A 2013F 2014F 2015F Profitability ratios 2012A 2013F 2014F 2015F

Operating EBITDA 4.3 6.0 9.5 10.6 EBITDA Margin (%) 11.2 11.5 13.4 13.8

- Interest & Tax Paid 0.9 1.5 2.5 2.7 EBIT Margin (%) 10.2 10.3 12.2 12.6

+/- change in Work. Cap. 0.7 -3.0 -0.3 -0.1 ROE (%) 120.1 38.8 45.7 40.1

- other 0.3 0.0 2.4 0.0 ROA (%) 36.7 28.2 40.3 43.7

Operating Cashflow 3.9 1.5 4.3 7.7 ROIC (%) -125.5 52.0 61.6 68.9

- Capex -0.3 -0.8 -0.8 -0.8

- other -0.2 -6.5 0.0 0.0 Balance Sheet ratios 2012A 2013F 2014F 2015F

- equity 0.6 0.0 0.0 0.0 Net Debt (cash) -4.9 -2.6 -3.5 -7.3

Free Cashflow 3.9 -5.8 3.5 6.9 Net Gearing (%) -192.8 -26.1 -26.1 -42.4

- Ord Dividends -0.9 -1.5 -2.6 -3.2 Interest Cover (x) -35.7 -345.3 -3169.7 -279.3

- Equity /other 0.4 5.0 0.0 0.0 NTA per share ($) -2.1 -1.3 2.4 6.1

Net Cashflow 3.4 -2.4 0.9 3.8 Price / NTA (x) -54.5 -89.7 48.1 18.7

Cash at beginning of period 2.5 6.0 2.5 3.5 EFPOWA (m) - fully diluted 52.6 62.3 62.3 62.3

+/- borrowings / other 0.0 -1.1 0.0 0.0

Cash at end of period 5.8 2.5 3.5 7.2 Growth ratios 2012A 2013F 2014F 2015F

Sales revenue ($m) 181.5% 36.8% 35.1% 8.2%

Balance Sheet 2012A 2013F 2014F 2015F EBITDA ($m) -51.6% 39.9% 57.3% 11.7%

Cash 6.0 2.5 3.5 7.2 EBIT ($m) 307.7% 37.1% 60.6% 11.3%

Inventories 0.2 0.4 0.6 0.6 NPAT ($m) 205.3% 24.9% 60.8% 11.7%

PP&E 0.8 1.0 0.9 0.8 EPS (cps) - cash 205.3% 18.4% 51.8% 11.7%

Debtors 4.8 6.3 8.5 9.2 DPS (cps) 76.9% 41.3% 52.6% 7.1%

Intangibles 4.6 11.1 11.1 11.1

Other assets 0.3 0.3 0.3 0.3 Interim Analysis 1H12A 2H12A 1H13A 2H13F

Total Assets 16.7 21.6 24.9 29.2 Revenues 18.9 19.4 18.4 34.0

Borrowings 1.1 0.0 0.0 0.0 EBITDA 1.1 3.3 1.9 4.1

Trade Creditors 7.0 5.7 7.7 8.3 EBIT 0.9 3.1 1.7 3.7

Other Liabilities 6.1 6.1 3.8 3.8 NPAT 0.9 2.1 1.5 2.3

Total Liabilities 14.1 11.8 11.4 12.1 EPS (cps) 1.8 3.7 2.6 3.9

NET ASSETS 2.6 9.9 13.5 17.2 DPS 0.8 1.5 1.5 1.8

Board of Directors / Substantial Shareholders Valuation 2014F

Name % Normalised EBITDA multiple (x)

Terry Cuthbertson - Chairman 1.6 2.6% EBITDA ($m) 9.5

Rene Sugo - Managing Director 14.5 23.3% Target EBITDA multiple (x) 8.0

Michael Boorne - Non-Executive Director 1.2 2.0% Add cash ($m) -3.5

Andy Fung - Non-Executive Director 14.5 23.3% Implied Valuation 79.7

Per Share 1.35

Substantial Shareholders % Target PE Multiple

Rene Sugo - Managing Director 14.5 23.3% EPS (c) - cash 9.9

Andy Fung - Non-Executive Director 14.5 23.3% PER Target (x) 12.6

Pie Funds Management 3.6 6.8% Per Share 1.26

Discounted Cash Flow

Cost of equity 13.5% WACC 12.2%

Cost of debt 6.3% Terminal Growth Rate 3.0%

Source: Company reports & Canaccord Genuity es timates Net Debt/ Net debt + equity 14.3% Per Share 1.75

Shareholding

Shareholding


12 June 2013

MNF is a leading provider of hosted voice and data communications services for

residential, business and enterprise users. MNF’s wholly owned subsidiary, Symbio

Networks, owns and operates Australia’s largest VoIP network providing wholesale

carrier services to the domestic and overseas telecommunications markets. The

Symbio network carries 3.2bn+ minutes voice traffic annually with capacity for up to

4bn minutes.

Background

MNF was founded in 2004 by co-founders Mr Rene Sugo (CEO) and Andy Fung (Non-

Exec. Director & former CEO) and listed on the ASX in 2006 with a market

capitalisation of $9m. The IPO raised $2.5m with an issue price of $0.20/share.

MNF listed as a retail provider of voice and data services to the residential and small

business market. In February 2011, the acquisition of wholesale voice carrier Symbio

Networks (Symbio) was completed which allowed MNF to establish a fully integrated

communications network.

MNF founders and shareholders Rene Sugo and Andy Fung were joint owners of

Symbio at the time of acquisition with independent directors and experts both finding

the acquisition to be fair and reasonable. Consideration for Symbio was capped at

$6m with a final payment of $2.35m due to be paid in September 2013.

The Symbio acquisition represented a highly strategic and transformational

transaction for MNF with Symbio owning and operating Australia’s fifth largest fixed

voice interconnected network that will allow MNF to generate significant scale and

synergy benefits from acquisition growth and organic initiatives. Importantly for MNF,

demand for VoIP services is outstripping traditional voice carriage infrastructure.

Key operations and capabilities:

Subsequent to the acquisition of Symbio, MNF has quickly moved to leverage their

network infrastructure by acquiring the business of CallStream, GoTalk Wholesale and

Connexus, which has expanded both their retail and wholesale capabilities.

Retail operations will focus on residential, business, enterprise and government, with

Symbio wholesaling a suite of managed services and carriage solutions.

Figure 1: Divisional operations

Source: Company reports

Residential Business Enterprise VoIP Managed Services Wholesale

95,000+ active services

including 7,000+ DSL

MyNetFone Virtual PBX

service with 2,000+

deployments

MyNetFone Vendor

agnostic SIP Trunking

250,000+ SIP end-points

hosted on network

Owns carrier grade

communications network in

Aust, NZ & Singapore

MyNetFone domestic call

centre & account

management

Connexus multi-site data

services

Enterprise level SLA's Number porting with

300,000 hosted numbers

Interconnect with Tier 1

network providers

Well positioned for NBN Emphasis on Government

Carriage Services

Cloud based hosting of

DIDs & 1300/1800 inbound

numbers

Capcity for 4 billion voice

minutes annully

Multiple vendor

certifications (Micrsoft,

Avaya, Panasonic, Cisco

& others

630,000+ Aust. & New

Zealand DID numbers

hosted on network

Services 130+ wholesale

cusomers & carriers

Retail Wholesale

CallStream OTT cloud

based inbound call

services


12 June 2013

Through a combination of organic growth and acquisitions, MNF has expanded its

customer reach significantly over the past year as tabled below:

Subscriber numbers:

Figure 2: Subscriber growth

Business Market Offering Current FY12

MNF Residential Voice / Data / other 95,000 92,500

MNF Business Voice / Data / VPBX 8,000+ 5,000+

Symbio Business Hosted SIP end-points 252,000 192,000

Symbio Business Hosted numbers (ported) 300,000 139,000

Symbio Business DID Numbers (Total) 631,000 441,000

Symbio Wholesale Wholesale customers 138 105

Source: Company reports & Canaccord Genuity estimates

VoIP a growing market

Demand for VoIP communication solutions continues to grow ahead of traditional TDM

(time division multiplexing) phone services, while demand for VoIP minutes should

continue to benefit from improved broadband infrastructure and capacity, and to that

extent, demand for VoIP communication solutions should increase significantly with

the National Broadband Network.

Figure 3: Voice Traffic – TDM and VoIP (Billions of minutes)

Source: Telegeography

What is VoIP

VoIP or Voice over Internet Protocol is a methodology and a range of technologies for

the delivery of voice communications and multimedia (voice, video, instant messaging,

etc) sessions over Internet Protocol (IP) networks, or more simply VoIP refers to voice,

data and other communication services that can use the internet for communication

delivery as an alternative to the standard landline.

The key benefits of VoIP is that communications can be delivered without requiring a

traditional terrestrial phone line and charges, while ongoing communications costs are

significantly lower, in addition to there being a broad range of services that can be

delivered cost effectively over a VoIP network.

Key VoIP products and services provided by MNF include voice, hosted PBX

solutions, number porting, SIP trunking and a range of managed services solutions.

Through its wholly owned subsidiary Symbio, MNF is able to provide a holistic VoIP

solution to retail, business and enterprise end users.


12 June 2013

VoIP quality is dependent on the standard of the broadband network and capacity,

therefore as broadband speeds increase and capacity lifts, so can be expected the

quality of VoIP products and services. The NBN can therefore be expected to derive

increased demand for VoIP products & services for which MNF is significantly well

positioned to benefit.

Financials

MNF recorded a maiden NPAT result of $0.2m in FY09 on revenues of $9.8m. In

FY12, revenues and NPAT increased to $38m and $3.1m respectively, for which

Symbio contributed ~$2.2 to NPAT for the 12-month period.

We are currently forecasting FY13 NPAT of $3.8m (↑25%) and FY14 NPAT of $6.2m

(↑61%) which includes the annualised benefit of recent acquisitions.

Key Risks and Opportunities

The acquisition of Symbio has provided MNF with a significant opportunity to leverage

an established network infrastructure that operates in a growing market segment.

However with MNF still at a relatively early stage in its consolidation phase, an

element of integration risk currently exists, while competition at a retail level is likely to

intensify with the onset of the NBN.

We also deem a level of key man risk with CEO, Rene Sugo, and Non-Executive

Director, Andy Fung, both integral to the establishment of MNF and Symbio and the

combining of the businesses.

We rate MNF a BUY with a price target of $1.35 which represents a premium of 20%.

MNF is currently trading on a FY14 and FY15 forecast PER of 11.4x and 10.2x

respectively. We note our near-term forecasts reflect organic growth within the group’s

established MNF and Symbio operations, in addition to synergy benefits being

realised in FY14 and FY15 from recent acquisitions.

Symbio Networks

Wholly owned by MNF, Symbio owns and operates Australia’s largest VoIP network

and is the 5th largest non-mobile voice interconnected network carrying over 3.2bn

minutes of wholesale VoIP traffic annually and covering 100% of the population in

Australia, New Zealand and Singapore.

Market position

Symbio operates in the wholesale internet segment of the telecommunications market

which provides the supporting network infrastructure for resellers of data based

communications products & services.

The telecommunications industry includes communication services utilising fixed line

technology, mobile phone technology and internet based technology. The wholesale

internet segment in which Symbio operates provides telecommunication services

utilising internet based technologies. This network infrastructure supports domestic

voice and data communications in Australia and communications between Australia

and overseas markets. Consumers of wholesale voice and data include solely internet

based carriers such as MNF as well as major full service carriers such as Telstra,

Optus and AAPT/Powertel. Symbio’s competitors include large ASX listed companies

such as TPG Telecom, Amcom and Primus, which was recently acquired by M2

Telecommunications (ASX: MTU).


12 June 2013

Technology

The Symbio network benefits from over 11-years of R&D investment and product

development, which will be ongoing and help support anticipated increases in voice

and data volumes. In addition, a substantial amount of IP has been internally

developed by Symbio, which helps maintain its network capabilities and capacity

without incurring ongoing product development and software licensing fees.

Figure 4: Symbio VoIP Network

Key features of the Symbio network:

Regional interconnect Nodes – Symbio has established the 66 points of

interconnect that are required for a full national network interconnect with Telstra, and

other interconnected carriers. The 66 points are inside specially designated Telstra

exchanges around the country.

Major Network Nodes – allows MNF to interconnect with regional nodes for which

third party data centres will typically hold MNF equipment (voice gateways & routers).

This then allows MNF to impart their proprietary technology and IP onto their network

which is integral in establishing a market leading VoIP network.

Main Network Nodes – major interconnects for MNF with locations (typically data

centres) again holding servers, routers and primary software, including call control and

billing capabilities, which again are integral to MNF’s network and operational

capabilities.

MNF’s ability to be fully interconnected with all Tier-1 carriers has firstly established a

national carrier grade VoIP network, and then secondly, and with modest

infrastructure, has been able to enhance its network capabilities through ongoing in-

house research & development and technological innovation which represent both a

significant competitive advantage and barrier to entry.

The Symbio network, unlike many competing VoIP offerings, also has built-in

redundancy and back-up capabilities.

Source: Company reports


12 June 2013

Symbio’s core capabilities:

Managed services - the division provides the network infrastructure that enables

retail providers of voice & data communications to operate their business. Customers

are typically retail service providers for which MNF’s retail operations are a significant

customer. Symbio currently carries 3.2bn+ minutes of wholesale voice carriage p.a.

Wholesale carriage - the division carries incoming and outgoing voice and data from

domestic and international service providers both within Australia and into overseas

markets. As a wholesale carriage platform provider Symbio is required to enter the

open market to buy network capacity or minutes of capacity, in competition to larger

Tier 1 carriers which includes Telstra, Optus, AAPT and Primus (MTU). Entering the

open market does expose the business to some currency and trading risk in buying

forward capacity.

Carrier Interconnect & terminating access - Symbio also holds a ‘Carrier Access

Code’ (CAC) that allows Symbio to interconnect with Tier 1 carriers, and allows

Symbio to charge Tier 1 carriers at the mandated wholesale rate for traffic that passes

across its network. This represents a relatively new source of revenue for Symbio, but

is expected to grow strongly as demand increases for this service.

We note that a ‘CAC’ is only held by only six Tier 1 carriers and requires a significant

level of negotiation with Telstra and other Tier-1 carriers to be obtained (never made

easy), in addition to having a carrier grade network capability, hence there is a

significant level of network investment and time to obtain a CAC.

MNF estimate that in excess of $20m has been invested in the Symbio VoIP network

since being was founded in 2002, and we estimate OpEx is currently running at ~$4m

p.a.

Leveraging the network through acquisition

Subsequent to the acquisition of Symbio, MNF have added the businesses of

CallStream, Connexus and Go-Talk Wholesale which have served to provide scale

and product expansion at both a retail and wholesale level, while also delivering

significant synergy benefits that will be realised through the migration of the acquired

customer bases onto the Symbio network.

We note for a small telco reseller or ISP, the cost to source wholesale carriage supply

from a third party provider can range anywhere from 30-60% of revenues.

Recent acquisitions and earnings impact as follows:

CallStream – specialist inbound call provider of 1300 & 1800 numbers to the SMB’s.

MNF paid $0.6m for Call Stream, which after identified network synergies, is forecast

to deliver to MNF annualised revenues and EBIT of $1m and $0.6m respectively,

which represents an acquisition multiple of 1x EBIT. The acquisition was effective from

November 2012

Connexus – an ISP to the SMB market. MNF agreed to pay $4.75m for Connexus

based on annualised revenues and EBIT of $5.2m and $2.1m, which included

immediately identifiable network synergies of ~$0.5m pa. MNF acquired Connexus for

an after synergy multiple of 2.3x. The acquisition was effective from December 2012.

GoTalk Wholesale – a wholesale voice carrier with 40 customers. MNF paid $1.4m to

acquire the GoTalk network and wholesale business, with the business generating

annualised revenues and EBITDA of $19m and $0.6m respectively at the time of

acquisition. The appeal of GoTalk is the opportunity to migrate the customer base

from disparate and antiquated legacy systems to the Symbio network, which over a 2-

year period can be expected to provide network synergies of up to $2m.


12 June 2013

Based on company guidance for FY14, GoTalk is forecast to deliver FY14 EBIT of

$1.3 - $1.6m after initial synergy benefits, therefore GoTalk has also been acquired on

an effective FY14 EBIT multiple of ~1x.

Key contracts also drive scale and endorsements

Tasmanian Government contract – in July 2012 MNF announced that it had been

selected by the Tasmanian Government to supply VoIP telephony services for an

initial term of 3-years with up to extensions of a further 10-year period. The deal

represents a total contract value of ~$20m.

While the contract is not expected to make a positive contribution in FY13 due largely

to mobilisation costs, revenues will materially emerge in FY14 and the contract is

expected hit a run-rate of $2m p.a. by FY15.

Queensland Government endorsed provider – places MNF on a panel for the QLD

Government and therefore represents upside to existing expectations given we have

made no allowance for a contribution at this stage.

Branding / Key products and services

MNF has moved to leverage their network infrastructure by acquiring the business of

CallStream, GoTalk Wholesale and Connexus which has expanded both their retail

and wholesale capabilities.

Brand rationalisation will see GoTalk folded into Symbio, while Connexus and

CallStream will remain customer facing brands at this stage.

Retail operations will focus on residential, business and enterprise and government,

with Symbio offering a suite of wholesale managed services and carriage solutions to

resellers and industry.

Key products & Services

Figure 5: Key Products & Services:

Source: Company reports and Canaccord Genuity estimates


12 June 2013

MNF VoIP solutions – practical examples

Example 1: Virtual PBX 4

Lines included: 4

Monthly fee: $100.0

Free calls: 500

Additional call rate: $0.10 (per call – untimed)

Mobile rate: $0.15 (per minute)

Expense item Existing Provider

MyNetFone Savings Savings %

Line Charges $328.9 $100.0 $228.9 70%

Internet Charges - - - -

Calls to Local & National $181.0 - $181.0 100%

Calls to Mobiles $101.3 $11.1 $90.2 89%

Calls to 13 numbers $2.1 $1.5 $0.6 29%

Totals $613.3 $112.6 $500.7 82%


Lines included: 8

Monthly fee: $180.0

Free calls: 1000





Line Charges $189.4 $180.0 $9.4 5%

Internet Charges - - - -


Calls to Mobiles $62.3 $34.1 $28.2 45%

Calls to 13 numbers $10.4 $9.1 $0.9 8%

Totals $379.1 $223.6 $155.5 41%


Lines included: 8

Monthly fee: $180.0

Free calls: 1000



Data Plan: ADSL2+ Standard

Quota Included 50,000 MB per Month

Monthly Fee $99.95



Line Charges $586.1 $180.0 $406.1 69%

Internet Charges $180.0 $99.9 $80.1 44%


Calls to Mobiles $96.4 $16.4 $80.1 83%

Calls to 13 numbers $16.1 $11.5 $4.6 29%

Totals $931.3 $307.8 $623.5 67%


12 June 2013

SWOT Analysis

STRENGTHS WEAKNESSES

• National VoIP network that is well

positioned to leverage future demand

for next generation voice and data

communications.

• Customer base remains small versus

larger established “challenger’ telcos

• High level of in-house research &

development and engineering

capabilities

• High degree of customer inertia with

existing telecommunications

providers

• In-house developed and owned

intellectual property.

• Lack of awareness of VoIP network

capabilities and benefits

OPPORTUNITIES THREATS

• VoIP market continues to grow

ahead of broader

telecommunications market, and

NBN should be positive

• Ongoing growth in demand for VoIP

products and services will attract

larger incumbents to the space.

• High level of operating leverage as

an owner and operator of a fully

interconnected carrier grade network

• Competition in the reseller market is

likely to increase with the NBN

• Acquisition of established customer

bases and migration to MNF network

• Regulation and legislation of

telecommunications industry


12 June 2013

Financials

MNF delivered 1H13 EBITDA and NPAT of $2.0m (↑80%) and $1.5m (↑61%)

respectively. The strong organic result reflecting growth from the business sector and

margin benefits realised from Symbio’s wholesale network. The result also includes

two months of CallStream which made a negligible impact.

For FY13 and FY14 we are forecasting NPAT of $3.8m (↑25%) and FY14 NPAT of

$6.2m (↑61%) respectively. Our FY13 forecasts are largely aligned with company

guidance given the significant level of recent acquisitions and limited earnings history

of the broader group.

For FY14 earnings growth is underpinned by the annualised impact of recent

acquisitions, organic growth within the established MNF and Symbio operations and

network synergies being realised.

Figure 6: CGAu Detailed estimates

($m) – unless stated FY12A FY13F % ∆ FY14F % ∆

Revenues

- MNF 15.1 16.2 7 17.8 10

- Symbio 23.2 25.3 9 27.8 10

- CallStream 0.5 - 1.0 nmn

- Connexus 2.5 - 5.2 nmn

- GoTalk 8.0 - 19.0 nmn

Total Revenues 38.3 52.4 37 70.8 35

EBITDA

- MNF 1.1 1.2 12 1.3 14

- Symbio 3.2 3.5 10 3.9 12

- CallStream 0.3 - 0.6 nmn

- Connexus 0.8 - 2.2 nmn

- GoTalk 0.2 - 1.5 nmn

Total EBITDA 4.3 6.0 40 9.5 57

EBITDA % 11.2 11.5 ↑30bps 13.4 ↑190bps

EBIT 3.9 5.4 (11) 8.6 17

EPS 5.5 6.5 18 9.9 52

DPS 2.3 3.3 43 5.0 51

Source: Company reports & Canaccord Genuity estimates

FY14 – key assumptions:

Revenues – organic growth of 10% for the established MNF and Symbio operations,

which are underpinned by the Tasmanian Government contract (announced in July

2012) which is expected to generate ~$1m of new revenues in FY14, with the

potential to lift to $2m p.a. in the medium-term.

Revenues will also benefit from an annualised contribution from the recent

acquisitions of CallStream, Connuexus and GoTalk, for which we are assuming flat

like-for-like revenue growth as business and network capabilities are now being

transitioned across to MNF.


12 June 2013

EBITDA - earnings and margin growth for FY14 will reflect organic revenue growth, in

addition to the annualised benefits of recent acquisitions and the realisation of

targeted synergy benefits from recent acquisitions.

We note GoTalk represents the most significant synergy opportunity with up to $2m in

network synergies identified. However existing third party network arrangements mean

that these benefits will take up to 2-years to be fully realised. Our current forecasts

currently assume GoTalk’s EBITDA contribution lifting to $1.5m in FY14 which will

reflect ~$0.9m in network synergies being realised. For FY15 we expect an additional

$0.5m to be realised in relation to GoTalk with upside for a further $0.5m.

We note our FY14 EBITDA forecasts for both CallStream and Connexus reflect the full

realisation of network synergies identified at the time of acquisition.

Other financial considerations

Balance Sheet:

MNF was in a modest net cash position of $2.4m as at 31 December 2012, with recent

acquisition activities supported by the issue of new equity during 1H12 which raised

$5m. With regards to Connexus $3m was raised by issuing 4.2m shares @ 72c in

November 2012, while the GoTalk transaction resulted in an additional $2m being

raised by issuing 2.1m shares @ 94c in December.

We estimate the balance sheet remains in a net cash position currently, with the final

deferred payment of $2.35m, in relation to the Symbio acquisition, due to be paid in

September 2013.

Operating cashflow and dividends:

1H13 operating cashflow of $1.4m (pcp: $1.1m), with cashflow conversion

(OCFBIT/EBITDA) declining to 0.7x from 1.0x in the pcp. The 1H13 cashflow result

was impacted by acquisition activity at the end of the period, and we expect cashflow

conversion (OCFBIT/EBITDA) to again move to 0.8 - 1.0x EBITDA with the full benefit

of acquisitions and be in-line with industry peers.

MNF has consistently paid dividends since FY10, increasing annual distribution each

year. Dividend payout ratio expected to remain at circa 50% of earnings in the

medium-term as the company continues to expand.


12 June 2013

Valuation & Price target - $1.35

We derive a $1.35 price target for MNF based on a target EBITDA multiple of 8x

FY14F EBITDA of $9.5m

We estimate our target EBITDA multiple represents an average discount of >20% to

our listed peer group (refer page 13).

We note on a DCF valuation basis we derive a valuation of $1.75, however given

cashflow generation remains at an early stage of being realised we refrain from a DCF

driven price target at this stage.

Figure 7: Valuation summary

Valuation Summary Valuation Premium

to CMP (%)

Discounted Cashflow $ 1.75 55

EBITDA Multiple $ 1.35 (20)

PE Multiple $ 1.26 12

Weighted Average Valuation $ 1.45 32

DCF Valuation

Beta 1.6

Ke (%) 13.5

Kd (%) 6.3

WACC (%) 12.2

Terminal Growth Rate (%) 3.0

Business Value ($M) 106.4

Less Net Debt/(Cash) ($M) (2.6)

Equity Value ($M) 109.0

Number of shares (M) 62.3

Value per share ($) 1.75

EBITDA Multiple FY14 EBITDA

($M) Multiple

(x) Valuation

EBITDA 9.5 8.0 76.3

Net Debt / (Cash)($M)

(3.5)

Equity Valuation ($M)

79.7

Value per Share ($)

1.35

PE Multiple FY14

Forecast Normalised EPS (c)

9.9

PE Multiple (x) 12.6

Value per Share ($) 1.26

Source: Canaccord Genuity estimates

Comparative Analysis


12 June 2013

In the table below we present a comparative analysis of MNF to its listed peers, for

which a number operate traditional telecommunications networks.

MNF is trading at a 35% discount to peers based on a peer average FY14 EV/EBITDA

multiple of 10.8x, however we deem it appropriate for MNF to be trading discount of

~20% to listed peers given relative market capitalisation, liquidity and mindful that

MNF remains in a relatively early stage of its consolidation strategy. However we do

recognise MNF has a significant network asset, and highly experienced and relevant

management team.

Figure 8: Comparative Analysis

Enterprise

Value

PER EV/EBITDA Company FY13F

(x) FY14F

(x) FY13F

(x) FY14F

(x)

Amcom 397 18.9 16.3 12.9 11.2

Big Air 93.8 17.1 12.8 12.6 9.3

iiNet 1,197 15.6 13.7 11.9 11.2

M2 Telecommunications 1,177 16.2 12.9 14.2 10.1

TPG 2,672 18.0 16.2 12.5 11.6

Vocus 209 18.4 13.7 16.2 11.6

Average

17.4 14.3 13.4 10.8

MNF 70 17.2 11.4 11.1 7.0

Premium / (Discount)

(3%) (22%) (18%) (35%)

Source: Canaccord Genuity estimates and Capital IQ

AUS Initiating Coverage | 15 12 June 2013

Key investment Risks

MNF is exposed to a number of risks including:

• Technology: new communication mediums and ongoing convergence of the IT and telecommunications sectors will drive down pricing longer-term and therefore potential revenues.

• Substitution: a function of technological change which increasingly allows users a number of avenues for which to undertake their telecommunication needs.

• National Broadband Network (NBN): likely to establish a commoditised network capability that will open up the market to increased competition, particularly within the consumer/ residential market and could impact revenues.


Appendix 1: Glossary

DID Numbers: Traditional phone companies handed out DID (direct inward dial) numbers like candy. In the VoIP world of SIP trunking, there is a real cost for each phone number therefore companies will want to do an inventory and convert only the number of DID numbers you are actually requiring.

Internet - is a global system of interconnected computer networks that serves billions of users worldwide. It consists of millions of private and public, academic, business, and government networks of local to global scope that are linked by copper wires, fibre-optic cables, wireless connections, and other technologies.

Number Porting - a process where your phone number is moved from one service provider to another along with the actual phone service. The ability to quickly port numbers is becoming an increasingly important mechanism for telecommunication providers in acquiring new customers and retaining them as their businesses grow or move into new geographical locations.

Protocols - There are rules adhered to globally that govern how data (voice, images, media, video etc) is transferred over networks, how they are compressed, how they are then presented on the screen or ultimately received. These set of rules are called protocols. There are many protocols, each one governing the way a certain technology works. For example, the IP protocol defines a set of rules governing the way computers use IP (Internet Protocol) packets to send data over the Internet to the end recipient or any other IP-based network.

Internet Protocols - IP - Internet Protocol (IP) is the principal communications protocol used for relaying packets of data across a network using the Internet Protocol Suite. Responsible for routing packets across network boundaries, it is the primary protocol that establishes the Internet.

Session Initiation Protocol (SIP) - is a standard protocol adhered to for making and receiving phone calls over the internet. SIP has become the most popular standard for VoIP globally because it is easy to work with and works well with most networks. All good service providers and equipment vendors support SIP, and customers should check their equipment for SIP compatibility before purchase.

SIP (Session Initiation Protocol) Trunking - A SIP Trunk is a VoIP service that connects a company's PBX telephone system to the public switched telephone network (PSTN) via the Internet. Using a SIP trunk helps to alleviate much of the traditional connectivity (fixed line / PTSN gateways etc) to the PTSN, while also being able to provide a more reliable and flexible communications solution.

PBX (Private Branch eXchange) is a private telephone exchange that serves a particular business or office, and is connected to the public network using phone lines or trunks. A traditional PBX system requires the installation of expensive hardware and ongoing maintenance.

IP (Internet Protocol) PBX (Private branch exchange) is a business telephone system designed to deliver voice or video over a data network and interoperate with the traditional Public Switched Telephone Network (PSTN). MyNetFone SIP Trunking service connects your company's IP PBX via the internet using the latest VoIP standard – Session Initiation Protocol (SIP).

Virtual PBX (or Host PBX, VoIP PBX) - a virtual Private Branch eXchange (PBX) telephone system which delivers PBX-style features, without the need to buy and maintain expensive PBX hardware. A Virtual PBX telephone system is just like having a phone system in your office, except the features and functions run from external services which are owned and operated by telecommunications providers.

VoIP (Voice over Internet Protocol) - is simply the transmission of voice traffic over the internet, instead of over landlines. The benefit of VoIP is the much lower call-costs compared to traditional landline.

Hosted VoIP - A VoIP service run on a core platform by a service provider for both business and residential users. Users are connected via the Internet to the providers platform and all calls are transported over the Internet. Additional features such as voicemail, call routing and call forwarding are available either as standard or for additional monthly fees. All administration is carried via a web interface.

National Broadband Network (NBN) - The Australian Government is currently building the NBN network in Australia. The NBN will support increased volumes of VoIP and data traffic in Australia due to increased use of internet based telephony. Importantly, under the NBN, customers will require only one provider of broadband and telephony services. Symbio stands to benefit from this increase due to its strong position in the VoIP market.


Appendix 3: Directors & Management

NAME POSITION BACKGROUND

Terry Cuthbertson Chairman A Chartered Accountant, previously partner at KPMG with extensive corporate

finance expertise and knowledge. Also Director of S2 Net Ltd, Montec

International Ltd, Austpac Resources N.L., Mint Wireless Ltd, South American

Iron & Steel Ltd, OMI Holding Ltd, Sun Biomedical Ltd and Malachite

Resources Ltd.

MNF Director since March 2006

Rene Sugo Managing

Director

Extensive experience in telecommunications.

Formerly Technical Director of Lucent Technologies. Co-Founder of Symbio

Networks Pty Ltd.


Michael Boorne

Non Executive

Director

A successful entrepreneur with extensive track record in combining technical

expertise with commercial and corporate experience.

Founder of Sprit Modems and Mitron Pty Ltd and previously a Non Executive

Director of Netcomm Ltd. Also Director of Boorne Management Pty Ltd and

Earglow Pty Ltd.

MNF Director since December 2006

Andy Fung Non-Executive

Director

Extensive experience in telecommunications. Formerly Director of Business

Development of Lucent Technologies. Co-Founder of Symbio Networks Pty

Ltd.



Appendix 4: Company History

Date Event

12 March 2013 MNF is accredited by the Queensland Government as an accredited supplier under the Government Information technology Contracting (GITC) Framework.

27 February 2013 MNF reports 1H13 NPAT of $1.5m (↑61%) on revenues of $18.4m (↓2.6%). In interim dividend of 1.5c was declared.

19 December 2012 MNF enters an agreement to acquire the network and wholesale business of GoTalk, a Sydney based voice carrier. Consideration is $1.4m in cash with GoTalk forecast to deliver gross revenues of $19m and EBITDA (post-synergies) of $1.3m to $1.6m, or $0.6m pre-synergies.

14 November 2012 MNF enters an agreement to acquire Connexus, a Melbourne based ISP, which specialises in delivering data communications to the SME market. Consideration is $4.75m with Connexus forecast to deliver gross revenues of $5.2m and EBITDA (post-synergies) of $2.1m, or $1.6m pre-synergies. The transaction is funded by way of existing cash and a $3m placement to institutional and sophisticated investors.

7 November 2012 MNF acquires the customer base and assets of inbound call specialist CallStream for $0.6m. CallStream is forecast to deliver gross revenues of $1m and EBITDA (post-synergies) of $0.6m respectably on an annulaised basis.

28 September 2012 Guidance upgraded by 9% to FY13 EBITDA of $4.6 to $4.8m and NPAT upgraded by 11% to $3.2m to $3.4m.

23 August 2012 MNF reports FY12 NPAT of $3.1m on revenues of $38.3m. NPAT was up 205% for the period. A final dividend of 1.5c is declared.

23 July 2012 Announces that MNF has been awarded a $20m VoIP contract with the Tasmanian Government

9 July 2012 MNF respond to ASX price Query Letter and comes out of trading halt

23 April 2012 Guidance provided for FY12 NPAT of $2.75m to $3.0m, which represents a 30% increase on previous FY12 guidance.

29 February 2012 Mr Rene Sugo assumes the role of CEO with co-founder Me Andy Fung resigning from his role as Managing Director following the completion of the Symbio acquisition. Mr Fung remains as a non-executive director of MNF.

24 February 2012 Acquisition of Symbio group confirmed for total consideration of $6m and an upfront component of $1.3m.

31 August 2011 MNF reports FY11 NPAT of $1.0m on revenues of $13.6m. NPAT was down by 49% for the period. A final dividend of 0.8c is declared.

30 August 2011 MNF enters into Heads of Agreement to purchase Symbio Group of companies. Symbio is a wholesale voice carrier located in Sydney, Australia, supplying domestic and international markets. The related party transaction was subject to shareholder approval.

28 June 2011 Guidance for FY11 NPAT of $1.1m, an increase of 10% on the pcp.

28 February 2011 MNF’s SIP trunking service is certified to interwork with Microsoft Lync Server for unified communications, which delivers integrating voice, video, fax instant messaging and other features.

25 October 2010 Launches mobile VoIP service for three leading Smartphone operating systems in iPhone, Android and Symbian which will benefit from increasing market penetration of 3G mobile and Wi-Fi in Australia.

24 August 2010 MNF reports NPAT of $2.0m on revenues of $12.1m. A maiden dividend of 0.75c is declared.

27 August 2009 MNF reports a maiden NPAT of $0.2m on revenues of $9.8m; active customers reach 74k.

11 March 2009 Launches new SIP (Session Initiation Protocol) Trunking service to broaden MNF’s range of voice and data business-grade solutions.

28 August 2008 MNF reports a FY08 net loss of $1.9m on revenues of $6.8m

15 May 2008 Launches Virtual PBX service which is targeted to the SME market.

18 October 2007 MNF reaches 35k customers


10 September 2007 Launches new unified messaging feature ‘Follow Me’ which allows MNF customers to self manage and re-direct in real time their incoming calls to any destination globally – landline, mobile, mobile-VoIP, VoIP or Voicemail-to-email.

31 August 2007 MNF reports a FY07 net loss of $3.3m on revenues of $3.3m

23 August 2008 Launches mobile VoIP service, MNF On-the-Go, for any supported Nokia mobile devices to receive MNF VoIP calls from their handsets within Wi-Fi of 3G coverage.

5 July 2007 MNF reaches 35k customers

3 July 2007 Raises $1m in private placement to sophisticated investors and Symbio Networks Pty Ltd which is a related party to MNF. The placement coverts existing debt to Symbio Networks into MNF equity. Equity was raised at $0.18c.

23 May 2007 MNF reaches 30k subscribers, representing a 300% increase on listing in May 2006.

6 March 2007 Signs new equipment sourcing arrangement with Linksys, a subsidiary of networking vendor Cisco. The equipment will target the SOHO and SME market to provide a lower cost VoIP solution.

19 December 2006 Appoints Mr Michael Boorne to the role as non-executive director

5 December 2006 MNF and Big Air (ASX: BGL) reach agreement to deliver convergent wireless solutions providing voice and broadband data services to domestic businesses.

28 November 2006 Subscriber numbers pass 20k, representing a 100% increase since its IPO.

26 October 2006 Expands sales team with appointment of three new BDM’s to focus on retail, corporate and channel sectors.

28 September 2006 Signs a new dealer agreement with Panasonic Australia. Panasonic is the exclusive provider of IP-PBX phone systems to MNF.

22 September 2006 Acquires the VoIP business, operations and customer base of Broad IP Pty Ltd. The transaction increases MNF’s customer base to 16k+, representing a 60% increase since its IPO.

13 September 2006 MNF reports a FY06 net loss of $1.4m on revenues of $1.6m

6 September 2006 MNF launches converged VoIP and Internet Broadband solutions for the SME and business enterprise market.

28 November 2006 Subscriber numbers pass 20k, representing a 100% increase since its IPO.

26 October 2006 Expands sales team with appointment of three new BDM’s to focus on retail, corporate and channel sectors.

28 September 2006 Signs a new dealer agreement with Panasonic Australia. Panasonic is the exclusive provider of IP-PBX phone systems to MNF.

22 September 2006 Acquires the VoIP business, operations and customer base of Broad IP Pty Ltd. The transaction increases MNF’s customer base to 16k+, representing a 60% increase since its IPO.

13 September 2006 MNF reports a FY06 net loss of $1.4m on revenues of $1.6m

6 September 2006 MNF launches converged VoIP and Internet Broadband solutions for the SME and business enterprise market.

31 August 2006 Services launched into New Zealand and other countries

17 May 2006 MNF lists on the ASX with a market capitalisation of $9m after raising $2.5m @ $0.20c in an IPO.


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