Conservative Holding M2 Telecommunications Group Ltd (ASX: MTU, OTC: MTCZF), which we added to the AE Portfolio in December 2011, has posted a remarkable record of growth over the past decade, its expansion driven primarily by acquisitions of smaller competitors on the Australian telecommunications space.

Recent reports suggest management is considering an acquisition outside its “wheelhouse,” as it seeks to extend a remarkable history of double-digit sales, earnings and dividend growth.

M2 is Australia’s fifth-largest provider of fixed-line broadband ­services, with brands such as Dodo and iPrimus. It’s spent more than AUD500 million to buy more than 20 rivals over the past six years.

Management has developed a reputation for effective cost-cutting that gets strong savings out of newly acquired businesses before integrating them with the rest of the company.

In fact in April 2014 management began “a process of consultation” regarding a potential restructure of its business due to role-duplication created by acquisitions completed over the preceding two years. The effort to integrate revealed approximately 150 roles across administration, customer service, technology, provisioning and sales that may become redundant.

But the market is now largely consolidated, and “second tier” telecoms–the first tier is headed by fellow AE Portfolio Conservative Holding Telstra Corp Ltd (ASX: TLS, OTC: TTRAF, ADR: TLSYY)–are on the hunt for new sources of revenue and profit growth.

Lumo Energy, Australia’s fourth-largest natural gas and electricity retailer, could be M2’s answer.

M2 does have experience with adding energy retailing operations. In May 2013 it completed the acquisitions of smaller telecoms Dodo and Eftel for a combined AUD248 million. 

Dodo, a hybrid telecom-energy retailing business, brought with it a customer base of 53,000, which grew to 69,000 by the end of the first half of fiscal 2014.

M2 rolled out Dodo Electricity in South Australia and now also launched Commander Energy, which will bundle telecom and energy for small-business customers in South Australia, Victoria and New South Wales, on a “soft” basis earlier in 2014.

Infratil Ltd (New Zealand: IFT, ASX: IFZ), Lumo’s parent, put the business up for sale in an auction that will likely attract several energy players, including ERM Power Ltd (ASX: EPW), privately held Alinta Energy, AE Portfolio Aggressive Holding Origin Energy Ltd (ASX: ORG, OTC: OGFGF, ADR: OGFGY) and EnergyAustralia, a unit of CLP Holdings Ltd (Hong Kong: 002, OTC: CLPHF, ADR: CLPHY).

The primary attraction is Lumo’s 500,000 customers, all of whom could be sold extra phone and Internet services to keep them locked in and loyal to M2. Such a purchase could cost up to AUD300 million and would require an equity issue or a significant increase in debt.

Even as it looks to expand its energy offering, M2’s core function is to provide broadband service to businesses and consumers. M2 expanded into retail broadband with the April 2012 acquisition of Primus Telecommunications and its 165,000 customers for AUD192 million.

Dodo had over 400,000 customers and some 660,000 active Internet services, in addition to its energy customers. Eftel had over 130,000 active Internet services.

The acquisitions made M2 one of the largest Internet service providers in Australia, behind Telstra, Singapore Telecommunications Ltd’s (Singapore: ST, ASX: SGT, OTC: SNGNF, ADR: SGAPY) Optus unit and iiNet Ltd (ASX: IIN) and approaching somewhere near TPG Telecom Ltd (ASX: TPM).

On July 3, 2014, M2, in an official Australian Securities Exchange release, announced it had increased its broadband subscriber base by 31,000 during the six months ended June 30, 2014, to 482,000, a 17 percent increase compared to June 30, 2013.

In a follow-up interview with The Australian Financial Review M2 CEO Geoff Horth noted that average revenue per user for the half-year had remained relatively stable, suggesting new customers weren’t attracted by unprofitably cheap offers.

Overall M2 posted net organic growth of 71,000 postpaid services in operation across all segments, including fixed voice, broadband and energy services.

Following net organic growth of 50,000 services in the first half of the fiscal year 2014, M2 added 121,000 services during fiscal 2014, with fixed voice up 20,000 and energy services up 24,000 in addition to the 31,000 uptick for broadband.

Total fixed-voice services was up 5.9 percent year over year, while energy was up 66.1 percent.

M2’s postpaid mobile portfolio declined by 4,000 during the second half of the fiscal year, a significant improvement on the first half performance following the release of new 4G mobile plans in February 2014.

M2’s total active postpaid services in operation was 1,573,000 as of June 30, up 8.3 percent from 1,452,000 a year ago.

Customer growth was once again driven by the Dodo/Eftel and Primus businesses.

In its July 3 ASX release M2 management confirmed that it expects to post earnings results at approximately the midpoint of fiscal 2014 guidance, AUD150 to 170 million for earnings before interest, taxation, depreciation and amortization (EBITDA) and AUD60 to AUD70 million for net profit after tax (NPAT).

Recent product launches, including the Commander phone and 4G mobile service, have exceed expectations.

Orders for the Commander, launched in March 2014, continue to beat internal forecasts, with an average of four handsets per sale. And 45 percent of orders include dedicated broadband service as opposed to “over the top” sales. Ninety-eight percent of sales have been to new customers, with 86 percent generated by M2’s dealer channel. Most customers are locking into 36-month contracts.

M2’s refreshed 4G mobile broadband plans were launched in February 2014 following the August 2013 rollout of updated 4G mobile plans. Management recently noted consistently improving month-over-month sales trends, with 39 percent growth in mobile sales over the three months ended April 30 compared to the three months ended Jan. 31, 2014.

The rollout of Commander Electricity, launched in March 2014, transitioned to direct sales from lead generation in May, with the marketing campaign extended in June to include the “Above the Line” pitch. M2 is offering a 20 percent discount on both services to subscribers who sign up for Commander Electricity as well as business broadband.

On top of its acquisition-led expansion M2 has posted consistently strong organic growth numbers, with that trajectory continuing through the third quarter and into the fourth quarter of fiscal 2014.

Management’s focus remains on integration plans for acquired business and realizing cost savings, which will help support double-digit earnings growth–margin growth and cost reductions are the keys here.

Mergers and acquisitions remain a central part of M2’s broader long-term strategy, though its horizons have to get broader than the telecommunications sector.

It should be noted too that M2, with attractive current valuations relative to peers such as Amcom Telecommunications Ltd (ASX: AMM, OTC: ATMUF), could itself become a target for cash-up telecom hunters such as Telstra, which despite announcing a AUD1 billion share buyback program and a stepped-up final dividend of AUD0.15 per share and reiterating its intention to invest AUD1 billion in its network during fiscal 2015 still has ample cash on hand to fund an aggressive, acquisition-led growth program of its own.

M2 posted a 66 percent surge in fiscal 2014 first-half revenue to AUD506 million on new acquisitions. EBITDA were up 38 percent to AUD75.8 million, while NPAT grew 26 percent to AUD30.9 million.

Underlying earnings per share (EPS) were AUD0.245,

Management declared an interim of AUD0.115, a 15 percent increase compared to the prior corresponding period.

Mr. Horth noted at the time of M2’s half-year earnings release that “the double-digit growth story is a long way from over.”

Management’s policy is to pay a full-year dividend equal to 70 percent of NPAT. The fiscal 2014 interim dividend of AUD0.115 per share represented approximately 66 percent of first-half EPS of AUD0.173. Based on management’s recently updated full-year guidance for earnings at the midpoint of forecast, EPS will likely come in at approximately AUD0.365.

Fiscal 2014 second-half EPS would therefore be approximately AUD0.192. Projecting based on management’s recent practice and policy we can expect a final dividend of AUD0.125 to AUD0.135 per share.

We’re boosting our buy-under target based on this reasonable forecast of a final dividend increase.

M2 Telecommunications, which is currently yielding 3.3 percent, is now a buy under USD7 on the Australian Securities Exchange (ASX) using the symbol MTU or on the US over-the-counter (OTC) market using the symbol MTCZF.

M2’s fiscal year runs from Jul. 1 to Jun. 30. The company reports full financial and operating results twice a year; it typically posts first-half results in late February, with full fiscal year numbers out in late August.

Interim dividends are usually declared in late February, along with interim results, with payment made in mid-April. Final dividends are usually declared in late August, along with full-year results, with payment made in late October.

M2 declared an interim in respect of fiscal 2014 first-half results of AUD0.115 on Feb. 24, 2014, 2014.

This dividend was paid April 16, 2014, to shareholders of record on March 19, 2014. Shares traded ex-dividend on this dividend as of March 13.

M2 will declare a final dividend for fiscal 2014 on Aug. 25, 2014, when it reports full-year results. It will likely be paid on Oct. 24, 2014, to shareholders of record as of Oct. 3. Shares will likely go ex-dividend on or about Sept. 29.

Dividends paid by M2 are “qualified” for US tax purposes. Based on the “fiscal cliff” compromise reached in Washington, DC, in early January 2013 dividends will be taxed at Bush-era rates of 5 percent to 15 percent for investors’ first USD450,000 a year of income for couples and USD400,000 for single filers. Above that the maximum tax rate is 20 percent.

The Australian government withholds 5 percent to 15 percent, based on the US-Australia tax treaty on double taxation. The two countries have not taken the step of eliminating withholding from dividends paid in respect of shares held in a US IRA, as have the US and Canada.

Among the 16 analysts who cover the stock eight rate it a “buy” according to Bloomberg’s standardization of brokerage house recommendation terminology, while five rate it a “hold.” Three brokerages that cover M2 rate the stock a “sell.”

The “best consensus” 12-month target price among the 11 analysts that provide such a number is AUD6.83, with a high of AUD7.88 and a low of AUD5.42.