Mobile Embrace Drops a Bomb

I was in the process of preparing an update on Mobile Embrace when they dropped a bomb that slashed 42% off the market cap in one afternoon.

Some of the update I prepared involved trying to assess what the FY17 results might be. Given my goals for this website are for complete honesty and disclosure I will provide the numbers I had calculated. I was anticipating revenue of around $80m with NPAT of approximately $7m (1.8cps). At the share price on November 16 of 25c I was indicating this was good value (a forward P/E of 14 among other things).

Given my purchase price of 30c for the example portfolio the downgrade (that I will go into below) is obviously disappointing. Had my new analysis been available I would not be a buyer at 30c. The valuation would be too stretched for my liking given the risks.

However, that is history and all we can do is assess the situation in front of us. We are talking about a share price of 14.5c and updated information. The investment proposition as it stands is now completely different to yesterday.

There are two things I would like to reiterate before carrying on.

1.      Trust in management is a very important part of investing. MBE management have performed well to date in my opinion. I have no specific reason to believe this is the first in a string of negative updates, but there are countless examples of this elsewhere in the share market. In this case I give management the benefit of the doubt. However, I will be watching very closely at what plays out over the next few months.

2.      A growth company should never be judged on a single set of financial results. As stated above, it is possible that this is the first in a string of negative updates. We cannot judge this yet. In the future we will be able to look back and see whether this is a blip on the growth radar or the beginning of the end. As stated above, management gets the benefit of the doubt this time.

 

MBE have guided the following:

H1FY17

Revenue  >$28m

EBITDA >$2m

FY17

Revenue >$70m

EBITDA >$8m

Their commentary around the lower than expected first half revenue discussed compliance changes relating to Australian DCB impacting their processes. This had a negative effect on customer acquisition and impacted their marketing spend. To be honest, I was unimpressed with how they explained it. Their release was confusing and didn’t entirely make sense. However, they are on record saying it is a one-off issue. They appear to be well on the way to a return to business as usual.

 These issues have impacted revenue and EBITDA by $3.8m and $1.7m respectively. This really is an inconsequential amount provided it is in fact a one-off issue.

 

We already knew the Australian DCB market was becoming saturated for MBE. My previous analysis had only factored in 20% revenue growth for FY17.

 

Now onto the good news. The international DCB expansion appears to be going well. Q2 revenue is expected to come in at around $2.5m and the Q4 “exit run-rate” is expected to be >$5m. From these numbers I am assuming approximately $12m from international DCB revenue in FY17. That compares to less than $5m in FY16. $12m equates to 35% of FY16 DCB revenue and 20% of total group revenue. That is beginning to show some promise.

 

The increase in international DCB revenue comes at a cost. The announcement indicated customer acquisition costs are expensed on a monthly basis. Therefore, this impacts short term EBITDA numbers with the payoff occurring in the following periods.

 

Marketing

The marketing channel has been experiencing good growth over last year. Marketing accounted for almost 50% of revenue in FY16. It is obviously a very important part of the business in its own right, but the DCB hiccup highlights the importance of diverse revenue streams. I am assuming 30% growth from the marketing operations for FY17.

My financial estimates following managements guidance:

Revenue - $72m (up 20%)

EBITDA – $8.5m (down 10%)

NPBT – $5.2m (down 25%)

NPAT - $3.9m (down 20%)

EPS – 1.0cps (down 20%)

 

The expenses and marketing costs given the expansion are difficult to estimate. I have estimated a modest increase to most expenses, hence a negative impact of the profit figures. The company has guided >$8m EBITDA, so my profit figures may be a little bit on the low side. I am happy with that given the circumstances.

Management would most likely have budgeted for slightly more revenue growth and therefore over allocated  marketing budget. Hence the lower profit for FY17 even though revenue will increase.

 

I would normally look more closely at operating cash-flow. Given the above this is very difficult to estimate. FY16 had OCF of $6.3m. I am assuming something around $5m this year as a ballpark estimate. The key point is that it is likely to remain well in the positives.

At the current share price of 14.5c the forward P/E ratio using my estimates is around 15. For a growth company with positive OCF, money in the bank and negligible debt that is very attractive. International DCB is trending very well and the marketing business is growing. It is only the (significant) Australian DCB business that has suffered a setback. If international DCB is successful then today’s announcement is simply not important going forward.

 

The critical investment decision is whether the issue is a one-off or a sign of things to come. I am currently satisfied that, given the valuation, other revenue streams and management’s track record, the investment proposition offered at 14.5c is a good one. I purchased more today at 14c.

Portfolio Update as at 28/08/2016

It's been quite a volatile last month with a number of companies reporting. Currently up 12.5% after the portfolio pulled back recently.

MBE reported solid growth, but earnings per share was potentially down on what the market was expecting. I was expecting more like 1.5c, but it came in at 1.2c. This was partly due to the treatment of tax and partly due to the need to fund growth. The market still prices it on its current earnings and doesn't give it much credit for the future growth potential. If their international expansion matches the Aussie business then good times are ahead. The UK will be the first hint as to whether they will be successful. This year should provide some good indications.

PRO reported pretty much as expected. They had a hiccup last FY giving guidance that proved a little too bullish. The company is growing well, and the SP has been rerated with limited upside now priced in. Their commentary was encouraging and this year could see the SP resume the upwards trend. Q1 results will be interesting - the company has already hinted they should be strong. Earnings per share were a little bit lower than I expected due to amortisation which I assume is a result of the eMite purchase. Cashflow from operations was very good coming in at 4.9m (7.7cps).

GLH resolved its contract dispute and it was a cracker. $1m per year locked in until 2020 and a lesser amount following that. This resulted in good revenue and 4.2cps in earnings. The company also increased is expenses significantly to position itself going forward. Currently on a trailing PE of 11 with further growth expected this FY.

MOY - I like gold in the current financial environment. MOY is significantly undervalued compared with other miners. It is a turnaround story. Further positive drilling results will increase life of mine which appears to be what is holding back the SP.

MGX - it's a long term game and the good run the SP had has halted for now. I am still considering putting the money to use elsewhere that might have more immediate upside.

ADA - I am glad I sold as the market was expecting a little more than it delivered. The only reason I sold (in the 3.30s) was I thought the SP was getting ahead of itself. I still hold half of my original purchase in my main portfolio. I like the prospects of the company

The Portfolio as at 22/03/2016

Latest portfolio position. I haven't had time to write about my recent purchase of Adacel Technologies (ASX:ADA) yet, but I bought on March 17. Once the cricket season is over I will have a lot more spare time! 

It should be noted my cost basis is only around NZD12,500 currently. The strengthening Aussie dollar has positively impacted my portfolio, but Google finance reports the cost basis at spot rates annoyingly. I'm currently in the green around NZD1,900. I need to put the remaining capital to work!

 

The Portfolio as at 01/03/2016

Latest portfolio summary. A bit of green this time - but that could be taken away just as quickly...

See previous posts for my thoughts on what has caused the price movements.

MBE Delivers Another Cracker

Yesterday Mobile Embrace Limited (ASX:MBE) announced another cracker of a result. The H1 FY16 results beat previous guidance comfortably. 

The headline figures

Revenue - $28m (up 99%)

EBITDA - $4.1m (up 140%)

NPAT - $2.6m (up 73%)

Key things to note:

$4.2m was spent on OPEX for future growth. This did not materially contribute any revenue to the announced results, but will add meaningful revenue next FY onwards. This means underlying EBITDA is actually $8.3m! That is massive growth.

The company will continue to spend money on acquiring customers which implies the $4.2m sent this period will be continued in some respect. This dampens current profits, but it adds value in years to come. I would much rather the company maximise future growth than squeeze out the most profit possible now so the accounts look nice. Having said that, NPAT still grew 73%!

Based on the reported numbers I am anticipating an EPS of around 1.5c (assuming $3.5m NPAT in the second half). What is more important at this stage is the EBITDA growth and EBITDA margin growth (which we are seeing increase even with additional OPEX). This proves the scalability of the business. Scalability is one of the key factors for a business like this. 

An EPS of 1.5c implies a PE of 20, which is pretty good value for a business growing profits by 73%. As I stated above, underlying EBITDA should be a lot higher than that, and at this stage of the game that is far more important than the EPS number. On an underlying basis we could see an EPS of over 2.5c! That is amazing value. That is saying, if the business stopped pushing for growth by acquiring customers, the PE ratio would be closer to 10.

The current market sentiment towards all stocks with an element of risk is very poor. Therefore we may not see immediate recognition of these stellar results. That does, however, give long term investors the opportunity to buy cheap shares and build their position. The market will take notice once the global volatility cools down a bit.

This is a great result, and I am a very happy holder!

MBE Steps up to the Plate

With the sell-off from the past couple of months fresh in the memories of most, we move into more exciting times for holders. As I have previously described I am hoping a number of catalysts help give momentum to the share price over th year. One of these catalysts is the half year results that are just around the corner (this week or next).

When the market was updated about expected results last year the share price found its way to 44c. MBE are known for underpromising and over delivering. Therefore, I'm expecting some upside to the announced revenue of 27m, EBITDA of 3.5m, and underlying EBITDA of 7.5m. However, we all know the market is forward thinking. The market already knows what's coming and has priced it accordingly. So why the huge retrace?

I think the retrace is the result of a number of things including buying by an institution or two. They have cleverly used the recent market turmoil to try and drive the share price lower while they accumulate a position. This has resulted in a lot of weak hands letting go as the SP drops. After closing below support at around 29-30c the SP swiftly recovered to back above 30c. I can now see a possible rally leading into results as buyers try to build their positions prior to the earnings announcement. I see a decent spike following earnings as this is usually the case for MBE.

In summary, I think momentum will start to turn over the next week leading into results and in a month or so we will have seen a rerate possibly back into the 40s. The current market turmoil may take a bit of steam out though, which could offer buying opportunities for a bit longer. I'm confident by the time the year is out we won't be anywhere near 30c. If we are, I'll be accumulating.

TFC Keeps dropping and MBE has significant close

Today was an all round bad day on the markets. It proved no different for my two 20k challenge stocks.

TFC broke below the 129-130 mark which it had been flirting with for a while. There are a few old support points around the low 120s so will be interesting to see where it stops. Sentiment may start changing when results come out which has happened in the past. I will hold off buying my second parcel for now.

MBE closed on the technically important 29c mark. This marks old resistance and recent support. A bounce from here would almost confirm the near term support point. Whereas if we break below then we are searching for new support. Earnings are coming up, the market already has guidance, but expect a beat as usual from management. I expect even though the market knows what's coming we wil get a good bounce.

As all good investors know - short term price fluctuations mean nothing. The quality will rise to the top.

Entry Point Support Holding for MBE and TFC... So far

The timing of my purchases of MBE and TFC was based the recent price action. It goes without saying that my purchase price was attractive to me from a fundamental point of view.

MBE

MBE was oversold on the RSI, had just filled at gap between 29 and 29.5c, held above an old resistance line at 29c and bounced off the 200 day EMA. There was also good buy depth at 29.5 and 30.

A few days have passed and support has been tested and held a few times with good buy depth still at 29.5 and 30c. It looks like we have found a temporary bottom and evidence is building that the bottom has been found, however, tomorrow will be telling after today's 30c close.

TFC

TFC was a similar story to MBE. Hit oversold on the RSI after a big sell-off. Support rushed in at 129-130c and has held for a few days. There was a nice bounce today to close at 134c. There has been growing short interest in TFC over the past two years, and any sizeable rally could mean some short covering.

First Position Complete

I wasn't necessarily expecting to complete my position in Mobile Embrace (as discussed in a previous post) one day on from the first parcel, but I have. I put in an order at 30.5c after it opened at 32.5c. There was good support at 30c so I thought I'd jump in the queue. Anyway - just before the end of day auction my order had been filled. 

7,350 shares at 30.5. My position in MBE is now complete. I will add a post to track my positions and performance.

The First Purchase

The first purchase in the $20K challenge portfolio is......

Mobile Embrace Limited (ASX:MBE)

On Friday 22 January 2016 I purchased 7,275 shares at 31.5c. I intend to spend the remaining $2,500 allocated to the company over the next few days.

Investment Thesis

I won't go into huge detail here, but I will outline the primary reasons for investing in the company.

I have followed this company for a couple of years while they have experienced some good growth.

The business has two main arms: mobile advertising and mobile payments. The worldwide shift towards smartphones is obviously a massive tailwind for the industry and why I am excited about the company. The company is based in Australia where it has built a successful business. It has recently become fully operational in the UK along with some South East Asian countries. Revenue from overseas is expanding at a rapid rate.

Due to increasing business costs profitability has been patchy and hard to predict, however, a lot of the expenses that have caused this are becoming more predictable.

Key financial information

Revenue Growth:

FY13 - $12.2m

FY14 - $19.3m

FY15 - $33m

HY16 forecast - >$27m

The above shows some impressive revenue growth over the past few years, and a good forecast going forward. However, revenue growth means nothing if it doesn't eventually reach the bottom line. The company is close to leveraging good returns from its cost base.

HY16 profit forecast is for >$3.5m EBITDA, and >$7.5m underlying EBITDA. The $4m difference comes from a one-off cost associated with customer acquisition that will be earnings accretive over the next few years.

I expect H2 of FY16 to be considerably better than H1, however for the purpose of conservatism I will assume they will be the same.

Reported EBITDA, assuming further one-offs for FY16~ $7.5m. This will roughly translate to $4.9m NPAT or 1.2cps

Reported EBITDA, assuming no further one-offs (further one-offs are entirely possible) for FY16~ $11m. This will roughly translate to $7.1m NPAT or 1.8cps.

Underlying EBITDA for FY16~ $15m, or approximately $9.7m NPAT or 2.4cps.

Given the rapid growth I will conservatively use a forward PE of 20. This means an SP of between 24c and 48c is justified. However, I am more inclined to lean towards the underlying number as this is more representative of earnings going forward. Given management historically beat their own guidance, and a PE of 20 is potentially conservative, I see significant upside from here to an SP of 50c in the next year (~50% above my purchase price).

Technical Analysis

On Thursday 21 January 2016 a number of important technical indicators occurred. The price bounced off previous resistance of 29c, a gap was closed between 29 and 29.5c, the SP bounced off the 200 day EMA and the RSI hit oversold levels. The next few trading days will be interesting and if it holds above these levels we should see a turnaround in SP direction.

SP Performance

The recent high of 44c a month or so ago has marked the short term peak. Since then the price has been beaten down to current levels. There has been no change to the business fundamentals. The worldwide markets have been very nervous and been selling down higher risk companies. This stock has always been extremely volatile and large SP swings are common. I see the recent SP action as an extremely good buying opportunity. And as always if it drops further I will buy more. 

Conclusion

Mobile Embrace is a company that has proven itself over the past few years. The industry it is in has significant tailwinds, and they are at the beginning of an international growth spurt. The relatively fixed cost base is likely to see margins expand and new revenue will find its way to the bottom line a lot faster. Recent SP action has resulted in a very good buying opportunity.