Amaysim investor day

It's been a tough week for telcos. Vocus, of course collapsed earlier this week and TPG fell in sympathy. It seems a similar fate has befallen amaysim whose share price crashed 12% following an investor day.

The update itself didn't contain any bombs. Amaysim confirmed it would add between 58-60,000 new customers in the first half, a run rate of over 100K new additions per year. As we've noted in Unlocking value in amaysim, incremental margins are higher than average margins so adding customers strengthens the economics of the business.

Average revenue per user (ARPU) fell for the second consecutive half but that should not surprise as Amaysim counts lower priced Vaya customers into its aggregate numbers for the first time.

There is one lingering concern: that Vaya customers, who typically have higher churn rates and lower ARPUs are cannibalising Amaysim growth. It's hard to see if that's the case so far but it is something to watch. The direction of ARPU will be key. 

The trigger for today's fall may well be lower gross margins which fell from the mountainous 36% in the second half last year to a more reasonable 32%. That should not be any cause for alarm.

There are seasonal reasons why second half margins are higher (for example, Amaysim counts unused phone card credit as revenue at that time) but that gross margin was unusually high because it coincided with a favourable wholesale agreement with Optus which temporarily elevated margins.

That impact has now subsided and we expect a long term gross margin around current levels.

On a forward multiple of just 12 times and prospective yield of around 5%, Amaysim is cheap. The business should generate double digit revenue growth, slowly expand margins and grow free cash flow. With operating metrics looking sound and an undemanding valuation, it's hard to see what spooked the market. We were within whiskers of downgrading as the price bumped up against our recommendation guide. The fall today puts it squarely back on the radar. BUY. 

Note: The Intelligent Investor Growth Portfolio owns shares in Amaysim. You can find out about investing directly in Intelligent Investor and InvestSMART portfolios by clicking here.

Disclosure: The author owns shares in Amaysim.