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 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.