Vipera - The Upper End of Speculative

http://www.vipera.com


Vipera (LSE:VIP) is what can only be categorised as a highly speculative company. The company, which now deals with mobile financial services, has been one of those companies. By that I mean the sort of company that investors like to forget about in a hurry. After a sharp spike up during the latter stages of 2010, and 2011, the shares drifted from over 35p down to just above 3p. During this time, the company has encountered significant financial difficulty and changes within its business model. The result is that investor confidence in Vipera, and awareness is rightfully low. However, after clearing up some of the black holes within the business, it has made a turnaround over the past few months with the shares rallying up to a current price of 8.25p. That has been backed by news which does actually seem fairly encouraging albeit it certainly doesn't mean that Vipera is in the clear. A dismal few years of dismal performance has left its mark on the shares, although there are a few lights turning on at the end of the tunnel. With 130m shares in issue, and a share price of 8.25p, Vipera is capitalised at £10.73m.


Vipera's technical position is currently at a tipping point. Whilst much higher than average volumes have backed the rise and a golden cross has formed, it remains the case that the next few weeks of trading are crucial. Should the shares stay above around 7.50p, the target remains of 10p+ whereas if it falls below, there is a risk of a return to the likes of 6p. However, at the current position, the company is poised fairly neutrally. As I say, the outcome will be determined in the very short-term. The RSI has moved back down meaning a move up can now re-occur with strength should fundamentals allow.

The majority of Vipera shares are actually owned by directors with roughly 90m within their hands. That equates to roughly 70% of the shares. This is a double-edged sword. In one case, as seen with Mobile Streams, any director sales can weigh heavily on the share price and furthermore, liquidity can dry up. That liquidity issue depends upon the share price - the higher the share price the more liquidity in general, because the value of stock on the open market increases. The benefit of directors having a large shareholding is that they are self-driven to increase the share price. However, on balance, 70% is too high for my liking and a level closer to 30% is preferable. If they can grow the company further, a similar scheme to that implemented in Mobile Streams would be beneficial in that the directors could sell shares to institutions. As it stands though, I cannot see any well-known institutions being interested in Vipera because it is too small a company, and does not have the strong financials that they would look for. An equity raising somewhere down the line could also unveil liquidity, but that is only beneficial if it is done at a higher share price.

The first thing to note about Vipera is that it is really difficult to research beyond what the company gives out. There are no recent broker reports, no broker targets and not really much in the way of up-to-date external research. Therefore there is a certain level of reliance on what the company churns out so a pinch of salt is probably required. The company should try to improve its news flow and retain a broker to increase PR and data available to the market. Otherwise investors are investing somewhat 'blind'.

Vipera is based in Milan, but has its business focused in the Middle-East and further towards Asia. the group listed in 2010 and made a positive start to trading, but as highlighted in the chart, it quickly went down hill. In fact, during the last years one problem it encountered was that its financial position was clearly weak thus it embarked on a potential reverse takeover of another company which eventually ended in the idea being scrapped. The reason given was that the "company's strategic objectives [were] not best served by completing the Transaction on the terms available." In other words, Vipera embarked upon a swift U-turn. Indeed, following this, two very poor sets of financial results were released which showed substantial losses, upon low revenues. The reasons given for this were longer than expected lead times and the state of the economic climate. As a re-statement that the company's position was dire, the CFO departed from the company and was replaced by Martin Perrin. This marked an important step for the company.

Vipera's mobile platform is known as Motif - their offerings thus can be sub-divided into several sections; m-payments, m-transfer, and m-banking. This can then be split into software licensing for customers and the provision of managed service offering  The mobile payments market is booming at the moment and that has been materially due to the smartphone revolution. Firms are now seeking to integrate financial transaction methods into a single handheld device in a secure manner (The security concerns have largely been dismissed now due to technological advances). With the market Vipera operates in, continuing to have a bright future, they therefore satisfy that criterion. The question is whether they can actually capitalise upon that.

Vipera derives its revenue from two methods; setting up the software combined with annual maintenance payments, and transaction revenue (i.e. per user per year as a percentage). One example of Vipera's growing presence is Mashreq, a UAE based retail bank who Vipera have established as a repeat customer. Masheq's mobile solution is based solely on Vipera's software and there are many other clients in the region also using Vipera - Qatar National Bank and First Gulf Bank are a couple of examples. With new technologies such as NFC (Near-Field Communications) set to increase in use in the future, the applications that Vipera's product suite can have will continue to grow. Some of these additions to the suite were announced to the market earlier in the year when Vipera implemented Red Zebra Analytics' software into the bundle.

A key point with software and the ilk is that it initially requires a fair amount of money to set up, but once that is complete, the long-term operating costs are low compared with other industries, and the main cost incurred is actually in scaling up. Vipera is definitely in its earlier stages with regard to software rollout, but that does seem to be gaining some traction and that has been iterated in the later 2012 and 2013 company announcements to date:

- June 2012: £1.5m contract spanning 3 years signed with one of the top 10 global gaming companies
- November 2012: £1.5m value of the contract revised upwards
- November 2012: Directors purchase shares around the 5p mark
- January 2013: Mobile Banking project launched with an Italian Bank -Marco Casartelli, Chief Executive of Vipera said "this contract demonstrates how Vipera continues to develop its position in the international financial services markets. We are able to deliver our highly recognised product offering to leading institutions. We look forward to assisting the bank in developing critical mobile services for its customers."
June 2013: Deal agreed with Equens (Largest Pan-European payments provider) whereby Equens will promote Vipera to customers following successful initial test of software. "Providing a trusted platform to allow banking and payments via mobile is key to Vipera aspirations and we are delighted by the role we are playing in making that happen. Financial institutions demand resilient and robust infrastructure and Vipera's credentials in this arena are now starting to give it increased traction in many business segments."
- August 2013: Commercial partnership agreed with KPMG's Italian division to help Vipera gain access to Italian banks
- September 2013: New contract signed with a Middle-Eastern Utilities company. "The significance of this contract is that it expands Motif's installed base outside the pure banking sector and is a further endorsement of Vipera's trusted platform."

This is all positive news although to be fair, there hasn't been a great deal of news. With the agreements now signed, if Motif stacks up well, then you would expect to see news follow. They seem to be targeting the European market increasingly through these methods, whilst keeping a hand on the Middle-Eastern market. Vipera needs to achieve critical mass as well. Currently, once again assuming the quality of the product (this seems to be the case based on some of the names signed up), what is holding it back is the size of the company. A small company valued at just £10m is not exactly the best proposition for hosting a payments system. Why? Well if the company goes bankrupt, the whole system is useless. Therefore, you would expect that a growing market cap would help the company secure more deals. That should also occur in combination with the arrangements set up. The calibre of the deals announced to date should re-assure potential clients.

These deals are still in the early stages though so these need to feed through to revenues in the financial statements. Below are the main points from the Half-Yearly report announced in July:

- "I find myself being able to repeat a comment which I made in last year's interim statement: that we anticipate that our full year revenues will comfortably exceed that of the prior year; by just how much depends on a number of factors, including speed of delivery and our customers' own preparedness for the product roll-outs which we are delivering."
- H1 revenues of £732,752 (vs. £249,981)
- Operating expenses of £742,547 (vs. £786,580)
- Operating loss of £9,795 (vs. £536,599)
- Post-tax final loss of £50,278 (vs. £554,114)
- Cash and equivalents of £176,715
- Net Payables of £166,290
- 93% of revenues derived from licence and deployment fees. 7% derived from support and maintenance charges. This represents an influx of new revenues from new customers
- Loss per share of 0.04p (vs. 0.43p)

The results show a couple of things. Firstly revenues seem to be gaining some significant traction following the decline during 2013. Secondly the cash position remains tight albeit improving. Therefore Vipera is in a stage of its development where it's financial situation seems to be turning back up. It is by no means comfortable and it is highly risky, but the financial numbers are certainly better than last year when there was an obvious decline in revenues. The year-on-year revenue growth represents 193% which is perhaps a bit misleading considering it started off from a low base. Nonetheless, it is encouraging and the statement about revenues continuing to grow (although noted to be somewhat 'lumpy') bodes well. It is important though for Vipera to follow this progress up over a sustained period of time. They have had the mobile finance solution out for years now and the first launch failed to really gain any long-term traction. It does appear to be more convincing on this second occasion due to the partnerships formed, but ultimately, those partnerships do need to deliver and the revenues need to keep on growing at a fast rate. Vipera does seem to be making some tangible progress in that respect - Italian Retail Bank CheBanca! recently revamped their mobile banking app with Vipera which reinforces that Vipera's actual product must be worth pursuing.

The difficult thing to do with Vipera is to put a value on it. Mobile-based technology shares tend to be highly rated by the market due to the promise they hold. They therefore tend to overshoot what can be deemed 'fair value' at a particular point in time. Arguably there is some expectation already priced into Vipera after the recent rise, however a key point is that the average investor won't have heard of the company. It is not well known so if the wider investment community deems it investment worthy you can bet that, once awareness picks up, it will continue to rise albeit modestly. A good example of one such stock is Monetise who operate in a broadly similar set of operations to Vipera. The company is valued at £923m yet has revenues for 2012 booked at less than £75m. The reason? Expectation and rapid growth. Of course though, all high-growth companies have to start somewhere.

If Vipera can follow suit, then it would not be unreasonable to see it with a much higher market cap. Another company, Mobile Tornado which operates in a different sub-sector, booked 2012 revenues of £1.5m yet it is valued at over £60m. Both the companies made no profit for the last financial year. Market psychology is a powerful idea and this proves that sometimes you have to discard fundamental rationality in order to benefit from trends. I personally don't see any attraction in the high valuations of Mobile Tornado (for example), but if the market can support that valuation (and it has), then it has to be accepted. The 300% rise earlier in the year therefore augurs well as it shows that the market is starting to side with Vipera. That is all that Vipera will need to see its market cap be driven higher. For that reason, it may well be worth having a small bite at this highly speculative cherry. This really is an all or nothing investment though as I would class it as being at the upper end of speculative and thus very risky. The cash position is not great so further financial improvements are required for security. However, as I said, sometimes you need to deviate away from fundamentals in order to take advantage of profit potential. I have a Buy tag at 8.25p for the possible speculative upside.

UPDATE (15/11/13): I have moved Vipera (LSE:VIP) from Buy to No Rating amidst talk of a possible placing at a large discount to the share price. Given that the weak balance sheet was one of my concerns, a placing seems plausible. Profit taken at 8.98p.

4 comments:

  1. Interesting elite. Thanks for your reviews as always

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  2. Its worth having some small exposure to this types of shares imv. Did not even know Vipera existed so will dabble a little. Then I can call myself a VIP :,)

    CraigJ

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  3. volumes building!

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  4. Thanks el1te for another top quality post

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