Mobile Streams - Focused on Mobile Growth Opportunities

http://www.mobilestreams.com

Mobile Streams Logo

Sometimes when researching companies, you come across a firm that shows high growth potential, both fundamentally and technically, but it has already re-rated significantly. That is the case with Latin American focused Mobile Streams (LSE:MOS), which has seen its share price rise by well over 150% year-to-date. Immediately that is an deterrent in my opinion, as it is possible that most of the profit has been missed. However, sometimes you have to look past that. In the case of Mobile Streams, the growth story certainly does not appear to be over. Whilst Apple (through the App Store) and other operators have captured the mobile applications/media market in established economies such as the US and Europe, the mobile and tablet markets in less developed economies remain relatively unexploited. Mobile Streams (abbreviated from now on as 'MStreams') is gaining market share in some of these countries. MStreams currently has a share price of 77p, and with 36.6m shares in issue, the company is capitalised at £28.21m.


On the charts, MStreams is on the brink of a major breakout from a bullish pennant. The shares have been stuck in a wide trading range since April, although this has been narrowing over the period. Now, a number of technical indicators are coming together to provide a bullish outlook for the share. The moving averages, RSI and MACD all hint at continued price strength and importantly, so does the On-Balance Volume. I have not used this indicator on any previous reviews - what the OBV does is it creates a correlation between price movements, and traded volumes. In the simplest terms, for a breakout, the first thing to look for is a period of horizontal consolidation on the OBV. This happened in late May, but turned out to be a false alert which is not unusual considering there was a large pullback off the ~89p high. However, this same consolidation has been taking place since July, and this time there has been a recent gaining of momentum which translates to an upward trend. This means that this rise is being backed by large volumes which in turn means that a breakout, and push higher will likely be more successful.

Technically, the shares do look strong, but it is important to look for the breakout confirmation. That will require as little as a 1-3% move up in the coming days. The shares finished off the days high today at 78.50p which would have been confirmation. The spread on MStreams is a few percent and currently is published at 76.00 - 78.00.

Just over 17m shares are held by the board of directors, with almost all of these held by CEO Simon Buckingham. The most recent trades have been sells by Buckingham of 1m at ~67p and 245k at ~73p, which are stated to be for personal finance reasons. This really is not an issue in my opinion considering he still holds a huge amount of shares. It is not unreasonable for a CEO release some cash, especially in light of such a price rise thus I would not take the sales to be indicative of a poor forthcoming financial performance by the company. If anything, they have released some liquidity into the market. However, institutional backing is limited with no funds reportedly holdings significant quantities of shares in the company. This lack of support is compounded by there being no broker reports available, and very little in the way of accessible information away from the corporate website. MStreams would be better off retaining a broker who will write reports/provide frequent updates to shareholders, or at least build their company profile in-house through the release of company presentations.

MStreams was founded just before the turn of the century in 1999 by Simon Buckingham (still CEO). It listed in February 2006 on the London market around 88p (which it recently just surpassed as noted earlier). The company focuses upon the provision of Mobile Internet Services, primarily to companies in Latin America with Argentina, Colombia and Mexico the prime targets. Brazil is also an upcoming expansion area for the company. "Mobile Streams licenses and distributes a wide range of mobile content- including games, apps, eBooks, music, pictures and videos- that are retailed around the world". Demand for these services has been increasing (apart from music which is being wound down), and in line with this a profit stream has begun to be generated. The distribution is done through the company's various platforms which include 'Appitalism', an app store. MStreams is therefore split into two main reportable areas: Mobile Operators and Mobile Internet.

As I alluded to earlier, it is crucial to remember that MStreams is not trying to take on Apple, it would obviously lose, but rather target a less mature set of economies that are not as saturated by other firms. In fact, the Appitalism store offers apps for all phone platforms in one location (i.e. iTunes, Google play store etc.) and tries to incorporate social media. The company do have other platforms and services, but I won't go into those. Unfortunately the company website has been recently updated and descriptions have not been added yet (content is currently weak and does not load properly with Internet Explorer) - that is a low-cost job that the company should improve especially since it's a technology-driven firm.

However, it is the financials that are what has caught my attention. In the last set of Half Year results, Simon Buckingham commented:

"Mobile Streams continued to grow strongly in the first six months of the new financial year. The ongoing improvement in the Company's revenues, profits and cash generation was driven primarily by solid growth in the Company's Mobile Internet subscriber base in the Latin America region, primarily in Argentina, Mexico and Colombia. Active Subscribers** passed 2.7m at end of December 2012, compared to 1.25m at 31 December 2011.
 
We entered 2013 with strong foundations and momentum and we now have in excess of 3m Active Subscribers. We continue to add new markets such as Brazil to our Mobile Internet rollout. We look forward to making further updates to our shareholders as 2013 progresses."
 
I'll start with the Full Year results for the 12 months to June 2012 (broken down into facts and figures). The financial year end did change dates s note that these figures compare with the 18 months to June 2011. That actually makes the results even more impressive:
 
- Revenues up 42% to £22m
- Mobile Internet Revenues up 120% to £16.5m
- Trading EBITDA rose to £2m
- Pre-tax Profit of £1.6m
- Cash and Equivalents of £1.8m with zero debt on the balance sheet. However, during 2012 Argentina imposed cash control laws which made it difficult for firms operating in Argentina, to transfer cash back abroad to their parent companies. This has impacted MStreams, but they have managed well as most of the operations are in Argentina. Nonetheless, the company has been prudent in using cash flows from Colombia and Mexico to invest abroad, and have tried to withdraw cash lumps from Argentina where possible
- Latin America represented 91% of revenues
- Trading from June 2012 started ahead of management's expectations
 
It is also important to note that the Argentinian Peso has fallen significantly over the last few years from 1 AP = 0.2 GBP in 2009 to 1 AP = 0.11 GBP currently. That is directly linked to the introduction of the Argentinian currency controls. The idea being to halt the weakening of the Peso through limiting capital outflows. That has not worked and the fall is worsened by a high rate of inflation in the country. For example, in August alone, inflation rose 2.11% to 25.2%. That is contrary to official government reports who have inflation running at less than half that figure - that is because of inaccuracy and manipulation by the government. In fact, the Argentinian government actually sought a court agreement that prevented anyone outside the government from publishing inflation statistics. That bid failed and now the government's agency must release accurate and valid data or face sanctions. Numerous attempts to lower the inflation rate have failed miserably, with some including blanket price freezes across retailers, on goods. This inflation issue is a problem for MStreams due to their Argentinian presence, but their expansion into other countries should lessen the impact, but only over time. The company has looked for ways to reduce the impact, including hedging the currency movements, but this has not happened yet.

Courtesy of freedigitalphotos.net
The most recent update on trading was released in late July in an unaudited Full Year Trading Update (12 months to July 2013). The announcement confirmed that revenues continued to grow, with a figure expected in excess of £50m for 2012. Having a revenue figure almost double the market cap of a company is proof that the company is still a growth stock, even in spite of the currency issues. EBITDA is said to have 'significantly increased' from the £2.0m level in 2011 and both post-tax profit and EPS will have increased. Most positively, cash stood at £2.85m, once again with zero debt. Over 73% of this is held in Argentina (£2.08m). That is an improvement upon previous figures and should allow the growth rates to be maintained. Over the 12 months, mobile internet subscribers nearly doubled to 3.41m also. That is a solid figure, but there is still a lot of potential within those countries as market penetration has not been fully addressed in Colombia and Mexico, and that is before adding in Brazil. The outlook was also bullish:

"Mobile Streams continued to enjoy record growth in revenues and profits for the most recent financial year, driven primarily by Argentina, Mexico and Colombia. We achieved another new new milestone in exceeding £50m in revenues for the year. Whilst Latin America has continued to grow strongly, we are pleased that we have also successfully leveraged our Appitalism (http://www.appitalism.com) expertise and market positioning and recently won new apps business in Asia Pacific with the recently announced Optus App Store deal and also launched apps services in partnership to market and distribute Appitalism with a major U.S. carrier which has immediately become our largest revenue generator for the North America region.
 
Mobile Streams enters the new financial year which started on 1st July 2013 with strong momentum and a clear focus on continuing to expand its operating base in Latin America and on open mobile Internet services including Appitalism for apps and games. The Company expects to see Brazil contribute to the new financial year upon the expected imminent launch of Mobile Internet services in that market. The Company's management remains upbeat for the new financial year, in which revenue is once again expected to be largely generated in Latin America in markets such as Argentina, Brazil, Colombia and Mexico. The Company has now completed the process of relocating its global finance function including our new CFO Gaston Cerf in Argentina."
 
Following the update, cash was also finally received from an Argentinian customer that amounted to £2.3m. This is obviously subject to the currency restrictions, but this has boosted the available cash pile such that it now stands at ~£4.5m or 16% of the market cap. Admittedly, during H1 2012 (which has been bundled into the FY Update above), gross margins did slip due to the entry into new regions, and both selling & marketing costs, and administrative expenses did rise. However, profit outstripped these rises as it reached £1.08m. On a perfectly symmetrical annualised basis that gives profits of £2.16m. Whether that figure is exceeded or fallen short of, will indicate the momentum of H2 2012. For 2011, basic EPS came in at 2.12p/share which means that MStreams is trading at 36.3x 2011 earnings. However, with H1 2012 basic earnings coming in at 2.96p, that means the company is trading on 26x H1 2012 earnings alone. On reflection, with over £50m in turnover expected, a conservative estimate would see profits rise in H2 to circa £1.6m when accounting for the higher costs associated with expansion. That equates to an EPS of 4.34p giving a FY EPS total of ~7.3p. That means the company is trading on a prospective PE ratio of just 10.5. For a growth stock, that is very low and for a tech stock that is very low and there is therefore clear potential for a re-rating. What is reasonable? Well, at 7.3p EPS, a PE Ratio of 20 is mid-range and implies a share price of 146p which far exceeds the technical price target.
 
The above demonstrates (in my opinion) that Mobile Streams has not reached its share price peak. Its fundamental valuation has room for improvement, it has nearly completely a period of technical consolidation (that looks to precede a breakout) and it is firmly within a growing market, with good products. If a rival company were looking to enter Latin America then Mobile Streams could even be a takeover target as it has a decent cash base and is rapidly increasing both revenues and users. Brazil alone represents a major opportunity for the group, as the country still represents an underdeveloped market. That is starting to change with eMarketer predicting that the percentage of the population who are mobile internet users will grow from 26.4% in 2013 to 58.3% in 2017. Brazil has a population tending towards 200m so once again, if only a small share of that market can be captured through Mobile Stream's relative first mover advantage, then there is plenty more to come from this tech stock. For now though, it is important to remain realistic and 100p seems a reasonable first target. I have therefore put a Buy tag on Mobile Streams.

10 comments:

  1. RIA is doing excellently! Now if this can do the same it's all good!
    Thanks El1te

    CraigJ

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  2. I have a limit buy set for 80p so will see how that goes

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  3. Thanks for this - its interesting - only one point is the EPS no. - I take your point on 'conservative' but it does hide the true picture somewhat.
    Mos 12-13 H1 did 23.7m turnover and EPS 2.96p ...but Q3 did 14.7m turnover and showed increased momentum - its hard to believe that Q4 will be less than 15.3m.

    So you seem to be suggesting that:
    H1 23.7m turnover - EPS 2.96
    H2 30m turnover - EPS 2.54

    The focus on historical data (we are waiting 12-13 finals) for a small fast growing company seems the wrong model ..as does EPS valuation considering the Argentine issue ...maybe a mention of PTS?

    Good work though for a conservative value investor!

    test4500

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    Replies
    1. As a fellow holder I'm keen to see what they come up with. Anything remotely similar to what you are suggesting would be great :)

      Delete
  4. Croylite,

    Turnover and subscribers in 12-13
    Q1 - 10.6m - 2.26m subs
    Q2 - 13.1M - 2.73 Subs ....so H1 - 23.7M Turnover and 2.96p EPS

    Q3 - 14.7m - 3.13m Subs
    Q4 - ??? - 3.4M Subs

    ....we don't know Q4 turnover but we know the subs end of Q4 showed good increase - so its fair to assume turnover was higher than 14.7m (I think it was @16.4m) - so unless expenses increased by more than 1m (6.4m to >7.4m - i am estimating 7.4m) EPS for 2H will be >5p ....almost double the 2.54p estimated here.

    Test4500

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    Replies
    1. Ok. I'll take H2 profit to be £1.8m as a guess. That is 4.9p/share or 7.86p in total. Costs may have been higher due to expansion into newer markets

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  5. Croylite

    - yes cost will be higher but we don't know by how much - if they are 1m higher than 1st half say 6.6m (5.6m H1 so nearly 20%+)..should get EPS @8.2p for the year.

    But the upside is the new mobile operator contracts in Asia and USA ...they could uplift the numbers a bit higher ....so could beat 8.2p EPS

    ReplyDelete
  6. I follow MOS for several years now.Fundamentally and predominant charttechnical.

    My targets are still:
    150p before end of 2013
    350p before end of 2014
    1000p before end of 2017 or beginning of 2017.

    MOS should be trading at least at 2 times revenue, would be 275p , NOW.
    I expext a revenue of 100mln BP for year 2013-2014 which is now 2.5 month on its way.
    Also 70 mln for first half year of 2014-2015.
    That's why my target is 350p before end of 2014.
    When Asia Pacific, China, Australia, US with mayor carrier, and esp Brasil , takes off,
    the revenue in 2016 , will be well over 200mln BP.
    Just a validation of just 1 times revenue would give then 550-600p in the year 2015-2016
    My charts give a maximum of 254 , at this moment what I can calculate .
    Time price analyses give a time for this 254 to reach before end of july 2014.

    But as you all know: There are now guaranties.
    On the otherhand : the fundamentals supports the charts.

    So I will hold on until my targets will be reached, one by one.

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    Replies
    1. Forgot to mention my name;

      sammie

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  7. this is what I wrote early in the morning:

    close above 79 gives 88

    Also gives my Weekly MACD cross-over, of
    which I am waiting for.
    For the next large run!

    First towards 113-117

    I expect the shareprice to BLOW through the 80p , this week

    Above 88p the target will be 158p or 164p , calculated from the weekly charts.
    Charts because I use different methods, and all of them point towards 150p and higher.

    My idea is ( just a possibility, no more no less )

    first to 95
    then fall back to 85-88
    motor up to 107-110
    fall back to 99
    then up to 117
    fall back to 110
    then motor up to 130-135

    we have got the weekly cross-over TODAY

    Flagg target gives also 158-164
    Elliott gives 150-160

    Time cycles I have are around nov 25th 2013

    sammie

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