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Shareholders of ASX small cap company Crowd Mobile (ASX:CM8) had to be very patient in the past 18 months as the company faced operational and fiscal challenges after the acquisition of m-payments company Track Holdings in 2015. However management is taking the necessary actions to address these issues, and we believe it is a stock that deserves attention if you are looking to gain exposure to the growing mobile software and services industry.
Source: nabtrade (as at 10 July 2017)
Crowd Mobile completed the $42 million acquisition of Netherlands based mobile services company Track Holdings in October 2015. The deal resulted in a valuation upgrade from Wise-owl as we believed the deal would add to the company’s strong earnings growth history and offer immediate scale. Distribution capabilities were forecasted to rise significantly and add shareholder value in the near-term. However, the integration and funding risks that we pointed out, turned out to be more severe than expected.
In addition, the Track business substantially underperformed, with EBITDA declining by more than 50 per cent versus its historical results, whilst uncertainty regarding the Company’s capital structure has further diluted investor confidence.
As a result, the stock declined significantly in 2016, dipping to just 8 cents in December 2016. It turns out we don’t get all our forecasts right. We are not afraid to admit if we are either too bullish or too pessimistic about a stock and, in this instance, Crowd Mobile missed our forecasts.
However, a great investor continuously reassesses investment opportunities whilst maintaining strong emotional control. With Crowd Mobile’s share price showing signs of a turnaround, we believe it is time to take a second look regardless of past performance.
Nearly two years after its acquisition of Track Holdings, Crowd Mobile’s management has taken the necessary steps to overcome challenges associated with the business.
Following a $5.4m capital raising in April at a premium to market, Crowd Mobile has significantly improved its balance sheet, and surplus cash will increasingly be directed to expansion initiatives. Visibility on Crowd Mobile’s capital structure is also being resolved via aggressive principal repayments of its convertible loan facility.
The April placement secured cornerstone institutional support. Executed at a premium to market, and cornerstoned by Collins St Value Fund, the placement is a testament to Crowd Mobile’s strong cash generation ability and growth opportunities.
Underneath headwinds stemming from the Track acquisition, Crowd Mobile’s Q&A division has continued to generate free cash flow and witnessed double digit growth. In the company’s steadily growing Q&A unit, marketing spend is a primary driver. With reduced debt obligations, an increasing amount of cash flow can be directed towards such investments which have thus far delivered volume growth in 11 of the past 12 quarters.
Although the Track acquisition introduced challenges, underlying distribution assets stemming from the deal remain highly strategic. The expanded m-payments network is helping to drive growth in the Q&A unit whilst also opening opportunities covering social commerce.
Now that capital structure issues are being resolved and earnings stabilise, will the company be able to attract a fair value of its stock?
While the story sounds good, a company’s share price is eventually a result of numbers and financial performance. So let’s look at the numbers.
We have considered the Company’s potential worth using two valuation methodologies being the Comparables Method (“Comparables”) and Capitalisation of Future Maintainable Earnings (“CFME”) method. Our appraisal is based on an expanded share count of 242.3 million, reflecting the sum of all existing shares and all options with a strike price < $0.28, expiring in 2018.
Please note that this model was built in June 2017, ahead of the company’s full year results.
Source: Wise-owl (please note that this model was built in June 2017, ahead of the company’s full year results).
We have assembled a universe of comparable companies engaged in the provision of consumer orientated mobile services for the Comparables methodology. Price to sales ratios range from 0.3x to 16x FY16 revenue with a median ratio of 5.9x. As we want to ensure that our valuation remains conservative we have applied an arbitrary discount of 66% to arrive at a multiple of 2x sales. Based on the expanded share count we arrive at a valuation of $0.32 per share.
The CFME methodology is based on forward projections that could represent a sustainable earnings capacity. To our estimation of future maintainable earnings, an industry based multiple has been applied to arrive at a valuation of the Company. Utilising a similar approach as above, the industry multiple we have used is 5.7x forecasted FY18 EBITDA (a result of average trading multiples and a large discount).
Forecasting EBITDA is probably the trickiest part and subject to errors. In FY16, Crowd Mobile’s posted EBITDA of $6.3 million. Based off quarterly trading updates for FY17 and applying conservative growth rates for billed messages in its Q&A division, we forecast just over $9 million and $10.7 million in EBITDA for FY17 and FY18 respectively. If you add these numbers to our model, we arrive at a valuation of $0.26.
Applying equal weightings both methods deliver an aggregate valuation of $62.8 million or $0.29/share, a significant premium to the last traded price of $0.17.5 cents/share. Even if you were to apply an additional discount to this valuation you would still arrive at a value well above the market price.
Finding value in what seems to be a fully valued market is one of the most challenging tasks for analysts and investors alike. We believe that small-mid cap companies with strong underlying fundamentals, an attractive valuation and little exposure to the property market are certainly worth a look.
There is no guarantee that a stock will trade at or above its equity valuation and Crowd Mobile is subject to a number of risks including competition, funding and general market risks. However, there is no doubt that the current valuation seems attractive and if management can deliver the numbers and restore market confidence, we believe that CM8’s share price recovery is just starting.
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