Rising telco shows signs of sustaining growth

Telstra has gained lots of attention in recent times returning 52.5 per cent in the past year as buyers hungry for yield in a falling interest rate environment drive the share price up. The recent rate cut may underpin further gains as it is still paying a 5.5 per cent dividend yield fully franked.

Telstra has gained lots of attention in recent times returning 52.5 per cent in the past year as buyers hungry for yield in a falling interest rate environment drive the share price up. The recent rate cut may underpin further gains as it is still paying a 5.5 per cent dividend yield fully franked.

But canny investors have found other options in the telco market. One is M2 Telecommunications, which has returned shareholders 84.3 per cent in the past year and 59.6 per cent annually for three years. Recent performance been driven by a share price that has risen from $2.93 last July to more than $6.00.

Despite the run-up, yield remains relatively attractive at 3 per cent following a lift in the dividend announced with the results for the December half. That incidentally saw pre-tax profits up 47 per cent to $34.9 million. Current market capitalisation is about $1 billion.

The question investors need to answer after a run-up like that, is can the price growth be sustained? This week's charts, produced by Robert Brain, a director of the Australian Technical Analysts Association, gives us a few different ways to look at that question.

The first chart is the basic share price, the second measures M2's price progression on a logarithmic rather than a linear scale. The effect of this is to show the percentage progression rather than the simple price rise, enabling an easier view of the stock's relative price performance.

"Had we used the linear price chart, the run-up since February 2013 would look way overdone," Brain says. Using the logarithmic scale, he has drawn two green uptrend lines, one from August 2010 to March 2011 and the other from February 2013 to the present. Given the lines are roughly parallel the strength of the current uptrend can be said to be about the same as the previous one. That implies the current rally is not too strong to continue and the price may not be overdone.

The third chart shows the momentum chart indicator and its moving average (the blue line), with the momentum indicator being the change in the share price over a given time interval, in this example 28 days.

Both the indicator and its moving average have trended up since March, another positive sign.However the bottom chart shows weekly traded volumes in the stock and its five-week moving average have fallen since mid-March. That is a bearish signal that implies investor demand could be waning. Given the conflicting evidence from the charts, investors seeking to buy should protect their positions with stop losses.

On the fundamental side, M2 is expanding through acquisition.

It recently completed the takeovers of telco groups Dodo for $158 million in cash and 10.47 million M2 shares and Eftel for about 8.25 million shares and a small cash component.

The acquisitions will build its consumer division and are expected to boost earnings by more than $50 million next year.

The Dodo purchase puts M2 into the energy retailing and insurance businesses and both purchases are expected to boost earnings per share by 20 per cent next year.

They will add to the existing brand portfolio of iPrimus and Commander.

This column is not investment advice. rodmyr@gmail.com

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