SyQic - "Pay TV on the go"

http://www.syqic.com/


The London IPO market has been seeing increased activity over the past year, in light of an improving economic outlook, but also increased investor receptiveness due to rising stock indexes boosting confidence. Syqic (LSE:SYQ) is one of the companies that has listed over the past year. Syqic is a technology company that delivers a wide range of video-on-demand (VOD), and live TV content to mobile and tablet devices. Since listing, Syqic's shares have drifted down slightly albeit the share price still lies above the 62p IPO price. The current share price is 64.50p, so with 23.20m shares in issue the company's market cap is £14.96m.


Given the short amount of time that Syqic has been listed for, there isn't a great deal to say about Syqic's technical position. Despite a positive start to trading (with the shares reaching as high as 91p), the share price action has formed a downtrend. The shares lie just above the initial IPO price, and given that the IPO was oversubscribed, it will be interesting to see whether or not buyers will try to acquire stakes on the open market. There haven't been any holdings RNS' since listing but a little bit of digging shows Webb Capital have taken a stake equivalent to 4.56% of their £4.7m fund.

The company IPO'd at 62p back in early December when it raised net proceeds of £1.8m. The newly issued shares represented 17% of the total new share capital. In the absence of lock-in arrangements, a low percentage of placed shares can mean that the pre-IPO shareholders can drive the share price.

As mentioned above, lock-in agreements are essential when the placed shares are a low percentage of the total shares. They are so important as it prevents pre-IPO investors from selling down huge stakes onto the market and depressing the price - after an IPO, that would dent market confidence pretty severely. As is usually the case, Syqic does have lock-in agreements in place with 75% of the share capital locked in for at least a year. That means that the shareholders who are locked in, cannot sell for at least a year and when they do, there is often a condition to ensure it is done in a way that maintains an 'orderly market'. At the admission, directors held 47.2% of shares directly, and a further 13.4% indirectly. Of that figure, CEO Jamal Hassim holds 38.1%.

The strong start to trading was probably as a result of the IPO being oversubscribed (i.e. more people applied for shares than the initially allocated space). In theory, that does mean there should be support at around 62p, but that doesn't always hold true in reality, so it will be interesting to see whether there is support at around that IPO price.

There are several other major shareholders, two of which seem to be individuals, namely Emanuele Edoardo Angelidis (9.7%) and Liew Tze Min (4.8%). Stream Global Pte holds a further 5.9% and should be a supportive shareholder given that two partners are on the Syqic board. I've spoken before about how large director holdings can be a bit of a double edged sword. Negatively, there can be a lack of liquidity and if they sell their shares the share price can suffer dramatically. On the other hand, as long as they don't sell, they have a large incentive to see the share price rise and their holdings can be supportive to the share price in the long-run.

Yoonic's website: http://www.yoonic.tv/
Turning to the business, Syqic is a provider of live TV and on-demand paid video content via mobiles and other internet enabled devices. In essence, the company has a database of licensed video content and agreements for live TV streaming, that it sells to consumers on a subscription basis. In Q2 2011, Syqic launched Yoomob - this was the platform that content was accessible through. The platform had proprietary technology that enabled streaming at extremely low bit rates of just 80 kilobytes per second (kbps). That compares to those of competitors that are in excess of 150kbps. This is a huge benefit as the initial target markets were Asian economies where GPRS and EDGE networks reign. However, the Yoomob platform is now being phased out with the enhanced Yoonic platform taking its place. Yoonic works on a variety of mobile operating systems including Blackberry, Android, Symbian, iOS, but also on PC internet browsers. Along with Yoonic come a lot more social networking features, HD streaming, and features such as pause live TV and catch-up TV. These should boost the attractiveness of Yoonic compared to competitors.

Syqic's catalogue of licensed content has been growing rapidly with now 20,000 titles and 70 live channels on offer. The content is delivered Over-The-Top (OTT), which essentially means that it is delivered over the internet without an intermediary system operator. Research from Generator Research estimates OTT internet services revenues to rise from $9.1bn in 2013 to $49.8bn in 2017 - there is little doubt that this is a growth market. Despite being headquartered in the UK, Syqic's current main markets are the Philippines, Indonesia and Malaysia where is has built up a substantial user base. To date, Syqic has sold its content through the following method:

Content licensed -> Form partnerships with Telecom operators (Telcos) -> Market and sell subscriptions through the Telcos

Syqic pays to license the content and shows the content on their platform. Consumers sign up for a subscription and then the telcos take the end payment via the consumers' bills where the revenue is split between the telco and Syqic. The revenue is generated through subscription fees as opposed to advertising. Within the subscription fees, there are options to either pay per content consumed, or pay per time period, which includes daily, weekly and monthly passes. At the time of the IPO, 55% of the subscriptions were for weekly passes, although they are lowering the prices of monthly passes in order to try to attract customers to use the service for an extended period of time.

This revenue model is interesting as it sees Syqic go head-to-head with other competitors who offer similar video content but use advertising as opposed to a subscription service. Personally, I would be more inclined to watch the advertising than pay a fee, but I'd imagine there are a lot of people who would rather go for the more convenient method and pay the small fee, especially if the consumption price is competitive. In this respect, arguably their biggest advantage is that they compile content for a range of sources, rather than rivals who tend to focus on the market of one or two countries. There is no doubting that competition is rife in this fast-paced market, and it will likely only increase in the future.

To date, Syqic has formed some impressive partnerships on this front, with Maxis Telecommunications (a firm with over £1bn in revenues annually) among others high status firms. These partnerships are incredibly important in the Asian region where marketing and getting a convenient payment method can be difficult, and to that end, Syqic has noted that further partnerships are likely to be formed over the coming months. However, Syqic is already outlining its expansion plans, citing the UK (set to be done by Q2 2014), IndoChina (among other Asian countries), and the USA. The content licensed to date probably wouldn't be particularly attractive to the common individual in the more western economies (due to cultural and linguistic differences), so the plan is to focus on migrant and expatriate communities within these western economies. This is planned to be achieved through forming relationships with tier-2 telcos such as Lycamobile. Whilst this method will limit their target markets, it seems a sensible starting move. The issue they face is that there are already content providers such as BBC iPlayer who offer the content for free and without subscription or advertising. That said, there is some content suited to more western audiences, and that will probably increase.

Syqic has recently formed an agreement with Bango (LSE:BGO) so that Bango provides a payment platform for Syqic. That is crucial for the western economies where that payment method is preferable with PayPal and Visa being options. Moreover, this method cuts out the 'middle-man' that is the telco itself. In theory that means that Syqic will experience higher margins in the future, as money is lost through the revenue split with the telco. Of course there is the catch that you would then lose their marketing presence, but in some cases that is an acceptable loss. On other occasions it probably makes more sense for Syqic to retain marketing relationships, especially in the Asian regions. In mid-December, Syqic announced its intention to launch Yoonic in the UK. The first step was to release the platform to universities in order to gauge feedback, ahead of a national roll-out during the first half of the year.

The rapid expansion of SyQic's platforms is reflected in Syqic's historical performance:
SYQ enjoys a 100% tax exemption on their Malaysian profits until January 2017
Between 2010 and 2012, Syqic enjoyed strong revenue growth and good growth in their pre-tax profit. Despite this, the H1 2013 performance looks very disappointing, with greatly reduced revenues, and a wafer thin pre-tax profit. However, that result is badly skewed by the lagging impact of a one-off regulatory issue in Indonesia, which affected a contract with a telco (PT Nextnation Prisma). An investigation involving the telco led to Syqic ceasing business until the investigation was concluded. The investigation concluded without penalty. To settle the revenues that hadn't passed to Syqic, the pair implemented a payment plan which sees the £2.0m receivable due to Syqic, paid back moving forward. Business with PT Nextnation has recommenced. A secondary (less material) reason for the reduced revenue was due to reduced marketing of Yoomob pending the transfer to the Yoonic platform. The all important point is that revenues bounced back strongly, with £2.08m revenues during the four months of July through October.

The balance sheet was a bit messy at the time of the IPO, but that will have improved as a result of the £1.8m net proceeds. As at June 2013, there were payments from a foreign customer of £816k overdue, although there is a payment plan in place that should see the cast recovered by December 2015. There was also £292k of convertible bonds (low 5% interest) on the books, and an interest free directors loan. Non-current receivables of £1.92m were shown along with £118k of cash (+ £1.8m from listing) and £1.16m of current liabilities.

Looking at the valuation and using the 2012 figures, EPS (using the current number of shares in issue) came in at 2.7p giving a PER of 23.9 which is fully pricing in this years growth, especially since H1 EPS only totalled 0.15p for the reasons given earlier. That PER falls if you strip that cash out, but perhaps that's a step far given that the cash will be expended quickly. Despite this, house-broker Allenby Capital has estimated £4.7m of revenues for 2013, along with EPS of 3.68p. That should be achievable given the publicly available figures for the start of H2. At 3.68p, Syqic is trading on a PER of 17.5 which is pretty fair for a fast-growing company - in fact, it wouldn't be unreasonable to see Syqic trading on a PER of 25 since 2014 revenues are expected at £7.8m, giving EPS of 8.68p. If that is met, which Allenby definitely believes it should be, then the PER would be only 7.4 which is far too low. That figure is made more believable when you read that revenues for 2013 would have been estimated at £5.95m, had it not been for the issue with the telco investigation.

The only fly in the ointment (for 2013), is that exchange rates will affect Syqic until it launches into other countries during 2014. The 10% weakening of the Malaysian Ringgitt could impact profits in H2, but that is not a huge impact, and not one that should materially affect profit expectations given the growth momentum experienced. As I say, beyond that set of results, the currency issue should continue to lesson until Syqic are in a situation where they have a basket of currencies. That possible 'fly' is also hardly an issue when you look at Allenby's 2015 predictions which are for £11m of revenues and EPS of 14.50p. Of course, it's extremely difficult to predict figures that far down the line, so take that with a pinch of salt. That said, Syqic could materially overshoot or undershoot those figures given the rate of intended expansion, and whether or not the business model catches on. Allenby has put fair value for Syqic at 130p basing that figure on being 15x the 2014 EPS.

The question therefore is; "Why has the share price not reacted as positively as expected?" The answer took some finding, but it was buried in the admissions document. "It is the directors current intention to raise further funds in 2014 in order to accelerate the growth of the group". This reminds me of the situation with Proxama a few months ago. Whilst Syqic does not specifically state that it will use an equity method as the method, you can infer that it will be, especially since a debt package would be odd at this point in the company's growth profile. After all, they listed on the LSE for a reason and that reason is found under the 'Reasons for Admission' heading. It still puzzles me why some companies put this in the admissions document if they do intend to do a further equity raise. The market would be far more receptive of these stocks if that was not the case, or at least if the market did not know.

You may think that's not the right way to treat shareholders, but ultimately the share price action would probably have been stronger, and market interest higher, prior to the fundraising being done. That means a higher share price, and the possibility of a higher placing price. If the funds are raised through equity, given that the 62p IPO was oversubscribed, you have to wonder what sort of discount would be given (if any at all). That is especially the case because the company is far from 'expensive' in valuation terms, even at the current price. There is a chance that the discount will be minimal, in which case it's worth re-looking at the situation. Unfortunately, that one sentence alone and the chance of dilution that it brings is enough to detract from the positive (and rapidly improving) fundamental position of Syqic. Nevertheless, Syqic is still worth keeping a close eye on. No Rating.

6 comments:

  1. Interesting little company. Could be a future gem

    ReplyDelete
  2. Thanks for your ongoing efforts with the site. I know it is appreciated by many others

    SyQic does look like a very blue-sky stock which is attractive. I shall be monitoring the situation to see if they do do a second placing, and will see how that progresses

    CraigJ

    ReplyDelete
  3. El1te, I have a huge amount of respect for you having read all the company reviews you made since I started trading a few months ago. And this is the first time I disagree with you.

    - This is a high growth company that seemed to have cracked on to a winning formula. For that reason SyQic have fantastic prospects for the future and this price is very low.

    - The business model is superb. It is very light weight / low cost and with great profit margins which will improve even more so with the launch of their OTT service.

    - The new emerging markets are the MINT economies. These consist of Malaysia, Indonesia, Nigeria and Turkey; and SyQic is very well positioned to capture a big chunk of these emerging markets considering it operates in Indonesia and Malaysia already.

    - From the IPO report you can see that the BOD are very competent and good at foreseeing p
    otential issues before they become a problem. They foresaw the limitations of their Yoomoo offering and therefore developed Yoonic. Like wise they can see that having an OTT service will make them a fortune but they can see how it has the potential to upset their Telco partners and so they're pricing the OTT service 25% above the service provided through the Telcos etc.

    - The 2014 revenue, profit and EPS figures set out in the IPO report do seem very achievable when you look at SyQic’s previous growth and now that the Indonesian issue has been resolved.

    In the scenario where there is no share dilution, a 2014 EPS around 9p makes Allenby Capital’s target of 130p is conservative. If we apply the average FTSE P/E ratio of 16, SyQic should be valuation of 144p. However the average P/E ratio for a high growth stock is much higher and gives a much higher price target. In this scenario a valuation of 200p would not be unreasonable.

    - El1te, you make a very good point concerning share dilution but – whilst that is undeniably a negative (that lowers my End of Year price target – I think it is unfair to say it counteracts all of the huge positives here entirely to make you give this a ‘No Rating’. Especially when you consider how the capital raised through the market would probably be used to further accelerate growth.

    It feels odd to disagree with you, El1te, but I honestly would say that SyQic is well worth buying into, and worth holding for the medium / long term.

    ReplyDelete
    Replies
    1. Hi there - Thanks for your detailed comment

      The point I am trying to convey is that it is difficult to put a Buy tag on SyQic when they are valued on standard valuation metrics, and since have indicated they are going to do another cash raising. The price action indicates that the market is waiting to see how that goes (otherwise I'd imagine the share price would be much higher), so you're then left with whether or not to buck the market trend. This situation is very much reminiscent of that with Proxama (although there is no way that any SYQ placing would attract such a discount).

      The issue isn't really with the EPS getting hit badly either: Using the figures above (2014 EPS of 8.68p), that equates to around £2.01m of post tax profit using 23.2m shares in issue. If they raise £3m net at 60p, they will issue around 5m more shares taking the SII to 28.2m. That takes the EPS down to roughly 7.1p which would still give SYQ a low valuation, especially when you factor in the cash.

      The issue is more with market sentiment, and how the stock has performed to date. The market is factoring in the placing (probably over-factoring in), so until the next set of results (or the placing itself if this comes sooner) it may struggle to push ahead. However, given that the results are due in 'early 2014', which usually implies Q1, that could be the necessary catalyst.

      I plan to look back over SYQ when those results are announced, or when the placing is done. The only other issue I have is with the relatively low free float - I am wary of RapidCloud (LSE:RCI) being another company that had a low free float and despite its low valuation, it has struggled to find its feet (so far. It has also exhibited the same level of volatility as SYQ). That doesn't mean it won't, but the low free float can make the stock a slow burner. With very few spaces in the site portfolio left (just 3), I'd expect that I could re-look at SYQ in the medium-term at a price that's not too dissimilar to the current level.

      Long-term the future looks bright assuming that the pay-to-consume business model continues to be preferable to the advertising-centric business model.

      El1te

      Delete
    2. Hi Elte,

      Not a problem mate. Thanks for all of your very detailed articles!

      I am glad you agree that this is a strong long-term buy.

      It seems as though your main reason for not giving this a buy rating now is to do with the market sentiment, which - at the time you wrote this - was totally understandable.

      However it feels as though SyQic's downward trend has broken today following a very positive Trading Update. SyQic is currently trading at 67p as I type this out and that is above the 65p resistance level.

      I also think that you're potentially over-factoring in the negative impact of there being some equity raising yourself because

      1) This is a profitable company that would not raise equity through a placing without very good reason to and, providing it is accelerate SyQic's already fast growth, I don't think it would be a bad thing. Sure there might be a small dip as a result of it but, ultimately, it could prove to be a very positive thing.

      2) There's a good chance you've overestimated how many more shares they would issue. Who says it would be for £3m? etc

      3) Providing their is a placing, and even if we assume it was for £3m at 60p, an EPS of 7.1p for a high-growth stock would still warrant a much higher share price than it trades currently.

      I personally think SyQic's biggest short term problem is that not enough people know about it. Their was the usual IPO buzz and then, since then, the volumes traded have been tiny.

      But that really is a short term thing that will be remedied as time goes on, and once they announce their stellar 2014 results it'll attract more much attention. Surely it is better to take a position before everyone else discovers this under the radar gem?

      Thank you for your detailed reply, El1te, but I maintain my end of 2014 conservative target of 144p.

      Libero

      Delete
    3. Hi Libero,

      Yes - the main reason is market sentiment and not really down to the fundamental impacts of any possible placing. It has picked up today on decent volumes. I used the £3m figure as I deemed it to be reasonable (for working capital etc.) but it could be higher than necessary - it all depends upon how quickly they want to roll out Yoonic. However, even with the £3m figure, the EPS impacts are not particularly negative (given the current rating) which is what I was trying to demonstrate. At the end of trading today, there were a couple of sells at 65p so I wouldn't say that the trend has changed just yet - it may well just bounce around for a little while.

      Re: the short-term problem, you are correct. I see this as being very similar to Rapidcloud's IPO which has been equally volatile. The spread for SYQ is currently 65-68 which shows that. It's worth looking over RCI to see how that has played out - both companies have very low free floats so that is probably the cause. Unfortunately, that will put off some investors.

      So whilst it has broken out of that short-term downtrend, it isn't conclusive. The next point to look out for is 68.5p. If it can break past that on an intra-day basis then the chart starts to look a lot more positive. With the results due in April, there is still quite a long time for investors to wait so I'm not too keen on changing my stance on SYQ yet - the site portfolio has been approaching 20 over the past couple of months and so I intend to keep space open in case a share catches my eye in the interim.

      It is partly down to instinct, but I do see movements here being similar to RCI until the wider market catches interest.

      El1te

      Delete