Mobile Streams - Expanding into Brazil

http://www.mobilestreams.com/


I first looked at Mobile Streams (LSE:MOS) back in September when the shares were changing hands at 77p. Since then the company have released several news statements which sent out mixed messages. The shares have drifted following a false technical breakout and currently stand at 66.50p. I retain my Buy stance although there are several points which are worth re-covering and it's also worth looking at the recent news statements as they shed some much needed light on the company's current operations. Mobile Streams (abbreviated MStreams from here onwards) is exactly what the market should be interested in - a high growth, undervalued, technology company. The last few weeks have demonstrated that the market is not quite convinced although I reckon the main reasons for that are exogenous (albeit that is not entirely the case). At 66.50p/share, MStreams is now valued at £24.5m. This is a very interesting play at an undemanding price.

This article is a follow-on from the below post. For full context and information, read this article first:
http://www.theel1tetrader.com/2013/09/mobile-streams-focused-on-mobile-growth.html


In my first article I noted how the technical position of MStreams was highly encouraging. That was down to strong buying pressure, a breakout from the bullish pennant and an upcoming results statement. Unfortunately, for one reason alone, the shares have lost all their momentum and are now stuck in a period of horizontal movement. That is backed up by very low volumes and a drop off in liquidity. The reason? A share sale by CEO Simon Buckingham on the day of the results. On the results day (02/10/13), the shares started higher and there was decent buying pressure. However, that quickly dissipated when large share sales were passed through. Let me state the point early on - the results were good and had Simon not sold, it would have confirmed a breakout. Due to the lack of institutions, it was fairly obvious that it was indeed Simon who was selling (due to the high selling volumes). On the following day, a director RNS was released:

"Mobile Streams plc (AIM: MOS) (the "Company" or "Mobile Streams"), today announces that Simon Buckingham, CEO of Mobile Streams, has notified the Company that on 2 October 2013 he sold 630,000 ordinary shares of 0.2 pence each in the Company ("Ordinary Shares") at an average price of 70.133 pence per Ordinary Share. Following this transaction, Simon Buckingham's beneficial interest in the Company is 16,382,500 Ordinary Shares representing 44.72% of the issued share capital of the Company.
Simon Buckingham commented: "As announced yesterday in the Company's final results statement, the Company continues to enjoy record growth in revenues and profits and I remain excited by the Company's strong long term growth prospects. The sale of these shares is for personal financial reasons only."
 
That was followed by continued selling through the first half of October, where he proceeded to sell a further 6 million shares - Simon now holds 28.34% of the total share issue. In one way that is highly positive in that there should be increased liquidity in the long run. In the other, more negative way, it managed to choke off a price rise on the all important results day. The important question is, why? Why sell shares after good results? On the first occasion Simon noted that the reason to sell on results day was down to 'personal financial reasons'. I believe that. Selling on the results day implies urgency, the reason being that is the first day the company comes out of the closed period. Furthermore, if it is that urgent, he would not have been able to discuss a share transfer with institutions before the results, and seeing as those discussions take time, it once again tallies that it really was for personal financial reasons. In an interview with another publication, it was noted that the personal reason was to complete the purchase of a property in Manhattan.
 
What about the second sale? The reason given for that was to increase liquidity, and to satisfy institutional demand. Given that it was completed in a large share transfer, that also tallies. I encourage such moves as well. Interestingly, Simon signed a year long lock-in agreement to not dispose of any shares. I reckon that was merely to reassure the market. The agreement did not need to be done as Simon is the CEO of the company - he didn't technically need to sign an agreement in order to not sell any shares. However, what it does do is emphasise the non-recurring nature of the sales going forward. The agreement is effectively to provide assurance to the market, and I welcome that. It is an uncertainty that has been removed. The transfer to institutions was completed at 55p, which was a fair discount, and that could have weighed on the share price a little. Nonetheless, Henderson Global Investors have taken a stake through Simon's share transfer, as have Artemis Investment Management. That bodes well and is a positive development as it proves institutions are happy to hold MStreams despite its low market capitalisation.
 

Before delving into the FY results, it's worth briefly re-covering the main segments of MStreams' operations (Read the initial review for further details). The company generates revenues from two main channels:
1. The sale of mobile content through operators
2. The sale of mobile content over the internet
The majority of content is licensed from rights holders and is distributed through MStreams' mobile platforms which include the Appitalism app store. The consumers tend to take out recurring contracts meaning that there is enhanced forward visibility. Point 1 has traditionally been decreasing over time due to changing consumer trends, whereas point 2 has been increasing rapidly. This is reflected in the company's results which saw a modest decline in 1, and a rapid increase in 2. The company's main market is Latin America, Argentina constituting the largest proportion of both revenue and profits. These are the following points to note from the results:

- Revenue increased 145% to £53.9m. Internet mobile content (point 2) rose 201% to £49.6m. Latin America constituted 97% of revenues
- Pre-tax profits up 200% to £4.8m. Post-tax profits of £2.6m
- Basic EPS up 238% to 7.1p (That did slightly miss my previous 7.3p estimate, but that was due to the exchange rate impact which I failed to account for)
- Sales and marketing costs more than doubled to £7.8m
- Trading EBITDA of £5.2m
- Mobile internet subscribers in Latin America (LatAm) rose 95% to over 3.4m
- No debt with cash of £2.8m

Beside from those headline figures (which are clearly exceptional), there are a number of points to note. The unadjusted basic EPS of 7.1p means the shares are trading on a PE ratio of just 9.3x. Given the stunning growth rates (which admittedly could slow this year), that still means the shares are very cheap on normal metrics. The profit levels are good, and there is a decent cash balance. However, there is a catch. As noted in the original review, Argentina imposed strict currency rules which prevent the repatriation of funds from Argentina, back to the parent company. That means that the 73% of cash there is liable to the very high inflation rate (in excess of 20%) [Note: this trend is quickly improving with cash in Argentina at 94% in 2012). Therefore, there is only £756k freely available. The picture is not that bleak though - "Vendor related payments can be made from Argentina on behalf of other subsidiaries". In other words, money in Argentina can be used to pay for services in some other countries. Furthermore, considering that most of the operations are in Argentina anyway, the cash position is acceptable. Even if you assume MStreams were to only have £756k in the bank (none in Argentina), the valuation is low anyway. Thus I don't deem cash to be what is inhibiting the share price. The relocation of the company finance centre to Argentina has been completed and measures are being employed to diversify cash generation.

MStreams also started its penetration into Brazil during the period - the first signs of how successful that has been should be visible in the half year results set to be released in January 2014. Admittedly initial marketing costs could stem profits from the region, but the prospectivity is good, especially since there is the 2014 Brazil World Cup. A recent Deloitte survey showed that in Argentina, the average number of Internet connected devices per person rose by 52% to 2.4 in 2014. Brazil and Mexico rose 7% and 5% respectively, but from a higher base. The region is undergoing strong mobile growth, so fundamentally the sector remains strong.
The movement into other countries will only help to mitigate the risk profile of the company. MStreams also noted that they "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 in North America."

On the results, Simon Buckingham commented: "Mobile Streams has had another fantastic year, with record growth in revenues and profits as a result of our successful and expanding operations around the world, most notably in Latin America. We are delivering mobile entertainment content across a wide range of devices to an ever expanding customer base and we have strong momentum behind.  We are very excited about the Company's future as demand for mobile services continues to grow across Latin America and further afield."

MStreams recently began to
operate Australia's Optus Games store
http://www.optusgames.com.au/
Just before getting on to the main point of discussion, MStreams renewed an expanded contract with IMImobile in early December. Mobile Streams has had a partnership with the Indian based company for several years, but that was largely limited to the distribution of ringtones. The new contract involves the distribution of apps as well with the main target being Africa. More specifically, there are two developed countries initially targeted; South Africa and Nigeria. Mobile phone usage in Africa has been growing quickly, and in a recent interview the CEO noted that Africa now has 80% mobile penetration (although most of this is largest confined to earlier phone platforms). Nonetheless, the deal provides MStreams with a good trial model. If the two economies demonstrate good revenue potential, then the company should be able to establish a foothold, especially because IMImobile already have a number of creditable connections with operators. The African region is not expected to contribute too much towards the financial results in the medium-term.

You may well be thinking that the company is hugely undervalued at this point. To a large extent I would agree. It is valued on less than half its revenues, makes substantial profits and is growing at a strong rate. There is one problem that is damaging sentiment. The main operating arena is Argentina. I did cover this in the initial review, but it's worth looking at it again. (To note, during the FY MStreams had a £385,000 loss from exchange rate fluctuations).

The problem is the state of the Argentine economy. On the surface, GDP growth is good with Q2 GDP of 2.6% vs. Q1 GDP of 2.2%. That masks over the cracks though. The company has excessively high inflation of almost 25%. That figure is unofficial but is more accurate than the government's 10-11% figure which has essentially been called false by the International Monetary Fund. That means that the money held within the country is being eroded away as interest rates only stand around 17-18%. There are deeper causes for that. Argentina's president is currently President Kirchner. Since around 2003/4, the Argentine government financed heavy subsidisation through the printing of Argentine Pesos. That is unsustainable and has led to the increase in inflation. Furthermore, this has led to a sharp continued decline in the Peso exchange rate. Economists will know that a weak exchange rate boosts exports, but that boosts inflation and makes imports comparatively dearer. In an attempt to control prices, currency control measures were imposed by the government. Those prevented the loss of US dollars from the country (the government wants to keep US dollars within). The problem is that it has failed as a policy and now the exchange rate is weakening at an increasing speed (rather than the strengthening that was hoped for). Since January alone, the exchange rate has weakened from 8 pesos to the pound, to 10 pesos to the pound. That will mean that MStreams will likely incur a larger exchange rate loss for the half year.

That 25%+ rise in the last 11 months compares to a ~20% rise from January 1st 2011 to January 1st 2012. Given that MStreams operates with Argentine Pesos, but reports in GBP, the financial results are therefore negative impacted upon conversion back to GBP. That is what is dampening sentiment at the moment. Investors are concerned about the state of the Argentine economy. To be fair, that is an acceptable concern. However, with Kirchner failing to instill confidence, the exchange rate weakening has only accelerated in recent weeks. To Kirchner's credit, the government has introduced a couple of measures, including an increased credit card tourism tax, and has reshuffled key positions such as economic ministers and the head of the central bank. The tax on overseas credit card transactions has been hiked to 35% to 20% in an effort to hinder the outflows. Quite frankly, it's all a very messy situation and is not one that will blow over in a matter of weeks - it will take years to solve and there are no certainties that the recent changes will make any difference. The president is likely to lose her position in 2015 after poor pre-election results, but there is a concern of that being too little, too late.

Image from freedigitalphotos.net
Looking past the macroeconomic uncertainty, the reality of the situation is that mobile trends in the country continue to improve. There are the risks to profits (in the form of the exchange rate), but that is priced in I reckon. The valuation multiple is so low that the risk of Argentina is overplayed in my opinion. There should be a hefty discount due to the Argentine risk, but on all valuation metrics it is 'cheap'. It is certainly worth keeping an eye on the Argentine situation though as it is not something the market will pick up on straight away. Any prolonged respite in the exchange rate weakness would be positive for the company, and sentiment.  Crucially the company is not standing still. The moves into three other major LatAm economies; Colombia, Mexico and Brazil, give plenty of reason for optimism. The movement away from Argentina is sensible. Currently these countries contribute a minority proportion of the revenues, but that is because they are relatively new ventures (Brazil was only entered in October). Given time, they could grow to an equal or greater extent than Argentina has.

The only change I would like to see Mobile Streams make would be to engage more with shareholders. That may not be a choice now that institutions are on board, but the commissioning of research reports would be a good starting point. In that respect, Simon Buckingham does seem to have taken note having conducted a couple of interviews recently. The recent period of consolidation is not completely shocking given the strong price performance over the past two years, but seeing as the market has accepted the Argentine risk in the past, there is little extra reason the market won't accept it again. The fundamental valuation remains compelling, as does the growth story. Fiscal/Monetary developments in Argentina could throw up both upside and downside cataylsts along the way. The risk has increased slightly, but the reward potential remains strong. A break above 70p would signal that a share price run up should return. At the start of the article I noted that this is the sort of company the market should love. It is out of favour at the moment, but that could change and for that reason I retain the Buy rating.

UPDATE (29/01/14) - I have moved MOS from Buy to No Rating at 42.50p for close to a massive 45% loss. The move to take the loss comes on the back of a further sharp, and unprecendented devaluation of the Peso. This will adversely impact the FY results, possibly meaning that MOS make a very slim profit, or even a loss if the peso continues to weaken. A very disappointing investment

5 comments:

  1. Hi El1te. Thanks for your continuing write ups. Invaluable to investors so keep up the good work. I always look forward to receiving the emails in my inbox.

    Solooiler

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  2. Thanks el1te. The Argentine risk looks well overdone (even burnt!). Good update

    CraigJ

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  3. Nicw write up! Cheers fron Biomole

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  4. How bizarre, just got here from a link by Leeson, just recently ordered some Jo Malone for my daughter, and I have had an excellent read of your article. Thank you

    ReplyDelete