The Third Purchase

Yesterday I bought my first parcel in Prophecy International (ASX:PRO) for the 20K challenge portfolio. I've written previously about why I like the company, but yesterday's drop where the share price touched $1.50 after opening at $1.70 was an opportunity too good to pass up. The price could still drop further obviously, and I'll wait for a turn around in momentum before I complete the position.

At $1.50 the SP was 40% below its peak of $2.53. Based on guidance for this FY that's a a forward PE of 20. I made my purchase at the closing price of $1.58. The revenue growth target of 67% is on track, and this  growth momentum looks like it will continue. 

Recently, the company announced its revenue for the first half of $8m. This appears on track to achieve guidance of not exceed it slightly. Commentary was positive about the coming quarter.

Given current market conditions it is easily perceivable that the SP will drop further in the short term. However, removing this from our minds, the value on offer is very good for such a high growth, profitable, cash flow positive company. It is also relatively under the market radar. The current entry point looks like a very good one if we look a few years out. I believe due to the news stream in the next year it will also perform well for my 20K challenge portfolio.

The next few days of SP action will be interesting and if it continues to fall I will be grateful for the continued opportunity!

Prophecy International is Looking like a Bargain

I recently wrote a brief post about Prophecy International (ASX:PRO). This is a company I really like. They are experiencing huge growth, and the growth is funding more sales staff to chase more growth.

They are in the business of developing and selling software.

Their two biggest selling (and feature) pieces of software are SNARE and eMite. SNARE is a cyber security monitoring program, and eMite is a business dashboard program. Both are in markets that are growing rapidly. Businesses are increasingly at risk from cyber attack and budgets are increasingly expanding to prevent it. Dashboards are also becoming increasingly used as the amount of data a business produces has expanded hugely in recent years. eMite allows the operations manager to monitor key data and react accordingly. In yesteryear such action wasn't possible until reports were manually produced when the events become historic.

The current SP on offer has prophecy trading on a forward PE of 19. This is for a business growing revenue at 67% and profit by significantly more. That is very good value and looking a couple of years ahead the PE is easily single figures. Their half year results are due to be reported in the very near future which I believe will back up its forecast growth and provide a catalyst to SP appreciation.

Their two primary packages have been acquired in recent years and added to the companies infrastructure. eMite was added last year and is benefiting from the sales network already in place that has proved so successful for SNARE. The company knows how to get the most out of excellent software. It is also on the lookout for earnings accretive additions to its existing portfolio.

Looking at the chart it closed on Friday at its 200 day EMA at 170c. It also bounced off recent support in the low 160s. Monday will be interesting as Wall Street closed heavily in the green on Friday. I expect to see good support and a short term bounce. However, I will wait for a reversal in momentum before getting on board at this stage.

Another thing to consider about the SP is that in appreciated hugely last year. A number of institutions were invested and are likely realising these profits as the world moves into a de-risking phase. Once this pressure alleviates then the relative illiquidity of the shares should see good upwards momentum based on fundamentals.

The value on offer is huge and it is only a matter of time before the SP turns around. Once global concerns stabilise this will be a very interesting proposition. One that I think will end up in the 20k challenge portfolio. While others run and duck for cover, those who can remain rational have the ability to buy solid companies for a lot cheaper than they should be!

Market Capitulation? Or not yet..

Unless you've been living under a rock, you will have heard about all the doom and gloom surrounding the markets and world economy. It has been building for some time. Over the course of January the markets retreated a significant amount. Early February trading has felt even more volatile. The last few days have seen various markets around the world enter bear territory. 

Today feels different. The stocks I own (many of them being small cap and thinly traded) felt the heat today. Today felt like a "oh screw it, I give up" day. A few of my stocks that haven't felt the recent decline didn't escape today. MBE has felt the recent heat, but today it dropped another 10% on the back of stellar (record) results. I can't help but thinking we are nearing capitulation territory.

The market plays off against two things: fundamentals and sentiment. Sentiment following this well known cycle:

It's hard to pick where we are on the curve, but I think we are somewhere around panic or capitulation. Pessimism may have described January, and the beginning of February looks like panic to me. Could the last few days on the ASX mark capitulation? Time will tell. I think there may be another few ugly days yet, but we are well into the downward spiral with some markets down 20%.

Now on the face of it this makes 2016 look pretty grim, which doesn't bode well for my challenge. However, I have bought companies that were already well sold off so their downside is not from the maximum, but from 30% off the peak already. This means my downside should be limited to a certain extent. It will also offer some very nice bargains that will fuel gains in the future. Don't get me wrong thoug, the short term could be ugly.

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.

Prophecy International Tempts

I won't do a full write up on Prophecy International (ASX:PRO), but I will just document that I am very tempted to get on board (again).

Prophecy sells software and has two major products - SNARE and eMite. SNARE is a cyber security program and eMite is an operations dashboard. Both are forecast to grow sales 67% this year (and profit by more). The forward PE is in the low 20s. Based on recent sales figures I believe they are ahead of their forecasts. They have created a virtuous circle where growth funds further growth - the best thing for investors!

I would invest in Prophecy (again) today if it weren't for the significant percentage of my portfolio that it takes up. Even then I am very tempted to increase my exposure in the short to mid term as I think a rerate isn't too far away. The company has had a very good run over the last year and since then has taken a breather. The good run is very much justified based on fundamentals! 

The below chart shows the recent price action and the possible formation of a symmetrical triangle pattern. If it were to breakout of this pattern the price target would be around $2.90.

I only use TA to back up fundamentals, and in this case I like what I see. Even if I don't add Prophecy to the 20k challenge portfolio I hope I've raised awareness of this great company for others. As always do your own research, this is just an idea.