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.

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!

 

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.

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.