Track Deal Drives Valuation Upgrade
Hey! Looks like you have stumbled on the section of our website where we have archived articles from our old business model.
In 2019 the original founding team returned to run Next Investors, we changed our business model to only write about stocks we carefully research and are invested in for the long term.
The below articles were written under our previous business model. We have kept these articles online here for your reference.
Our new mission is to build a high performing ASX micro cap investment portfolio and share our research, analysis and investment strategy with our readers.
Click Here to View Latest Articles
Overview: Crowd Mobile Limited ("Crowd Mobile", "the Company") is an Australian technology Company focused on mobile software and services. Its principal assets include product distribution capability via 60 mobile phone carriers in 25 countries, and proprietary content production capabilities focused on consumer advice. Founded in 2005, the Company listed on the ASX via a reverse merger with Q Limited. Crowd Mobile has entered into a Heads of Agreement to acquire Netherlands-based Track Holdings BV ("Track"). Founded in 2008, Track is focused on the distribution of mobile services via 140 carriers in 38 countries.
Catalysts: The Track acquisition represents a transformational deal for Crowd Mobile, adding to the Company a strong earnings growth history and immediate scale. Distribution capability in terms of quantity of mobile carriers and geographic presence is forecast to rise 170 percent, and 100 percent respectively. The transaction also delivers a step-change in Crowd Mobile’s financial performance. The track is on course to generate its fifth consecutive year of increased revenue and earnings. Relative to our pre-existing forecasts, pro forma FY16f revenue is scheduled to double, whilst EBITDA is scheduled to be over 4x higher.
Hurdles: Whilst the operations of Track and Crowd Mobile are relatively similar, the scale of this transaction creates integration and funding risks. There is no guarantee forecast synergies will materialise, or that Crowd Mobile can generate returns sufficient to justify and service the required expansion of its capital base. With entry barriers to the industry primarily limited to complexities surrounding the procurement of carrier relationships, Crowd Mobile may face increasing competition.
Investment View: Crowd Mobile provides profitable exposure to the market for mobile software and services. We remain attracted to its established income profile and view the Track transaction to be highly complementary and value accretive. Incorporating Track and associated funding requirements, our valuation has been upgraded by over 50 percent to $0.63/share. Representing a 200 percent premium to recent trade, we maintain our positive view and are upgrading our recommendation to ‘buy’.
TARGET OVERVIEW – TRACK HOLDINGS BV
Track is a Netherlands technology Company focused on mobile software and services. Its principal assets include product distribution capability via 140 carriers in 38 countries. Founded in 2008, Track is on course to generate its fifth consecutive year of increased revenue and earnings.
We view Crowd Mobile’s acquisition of track as immediately value accretive and strategically sound. The transaction has an enormous impact on Crowd Mobile’s distribution capabilities, expanding its quantity of telco distribution partners by 170 percent, doubling its national market presence, and increasing language compatibility by 60 percent.
Whereas Crowd’s existing operations have been primarily ANZ and EU focused, Track provides immediate entry into new Asian and South American territories.
Five years of profitable growth
The transaction is forecast to double Crowd Mobile’s earnings margin and priced below three times earnings, represents an attractive purchase multiple.
Immediate synergies available to Crowd which underpin our pro forma earnings projections relate to the Company’s ability to distribute its proprietary content through Track’s distribution channels. Roll out of Track’s payment processing infrastructure across Crowd Mobile’s existing operations also presents a growth opportunity.
VALUATION
Crowd Mobile’s investment appeal rests in the current and future revenue streams generated by its mobile services portfolio. We have updated our forecasts to incorporate the Track acquisition. Relative to our pre-existing forecasts, pro forma FY16f revenue is 2x higher, whilst EBITDA is scheduled to be over 4x higher.
Consistent with our initial February 3 rd report, we have considered the Company’s potential worth using a Comparables approach and Capitalisation of Future Maintainable Earnings ("CFME") methodologies.
Track deal lifts valuation by 50 per cent
Our appraisal assumes the Track acquisition is funded utilising a combination of corporate debt and convertible notes, resulting in a fully diluted share base of 150.7million. The funding mechanisms are assumed to be non-amortising and the average cost of funds is assumed to be 11.25 percent, resulting in interest coverage rising from 4.1x in FY16 to 5.7x by FY18. The convertible notes are assumed to exchange into ordinary shares at $0.40/share.
Our Comparables approach arrives at an equity valuation of $96.5million, or $0.74/share. Our CFME method arrives at an equity valuation of $61.7million, or $0.51/share Applying equal weightings both methods deliver an aggregate valuation of $79.1million or $0.62/share.
To consider the impact on differences in the funding mix, we have run multiple scenarios as part of a sensitivity analysis. Our valuation is most sensitive to the amount of ordinary equity funding. Every 10 per cent increase in equity funding reduces our valuation by 6 per cent.
THE BULLS AND THE BEARS
THE BULLS SAY
- Crowd Mobile’s is accelerating its growth strategy via the acquisition of Track – a highly complimentary business on course to deliver its fifth consecutive year of earnings growth.
- The Track deal significantly enhances Crowd Mobile’s distribution capability expanding the quantity of mobile carrier relationships by 170 percent and national markets by 100 percent.
- Delivery of Crowd’s proprietary content via Track’s distribution channels and increased utilisation of Track’s sophisticated payments systems are expected to realise significant synergies
- Our valuation has increased 50 percent due to the Track acquisition and represents a significant premium to recent trade
THE BEARS SAY
- Track is a large acquisition relative to the size of Crowd Mobile’s existing operations and is accompanied by integration and funding risks
- As the combined group has a significant global presence, further geographical expansion opportunities may be limited, increasing the importance of market penetration for further growth.
- There are no guarantee synergies targeted from the Track acquisition will materialise, which could jeopardise Crowd Mobile’s ability to generate returns sufficient to justify and service the required expansion of its capital base.
- Valuation is contingent on Crowd Mobile delivering a sustained period of earnings growth and successfully financing the Track acquisition utilising debt and hybrid securities.
General Information Only
S3 Consortium Pty Ltd (S3, ‘we’, ‘us’, ‘our’) (CAR No. 433913) is a corporate authorised representative of LeMessurier Securities Pty Ltd (AFSL No. 296877). The information contained in this article is general information and is for informational purposes only. Any advice is general advice only. Any advice contained in this article does not constitute personal advice and S3 has not taken into consideration your personal objectives, financial situation or needs. Please seek your own independent professional advice before making any financial investment decision. Those persons acting upon information contained in this article do so entirely at their own risk.
Conflicts of Interest Notice
S3 and its associated entities may hold investments in companies featured in its articles, including through being paid in the securities of the companies we provide commentary on. We disclose the securities held in relation to a particular company that we provide commentary on. Refer to our Disclosure Policy for information on our self-imposed trading blackouts, hold conditions and de-risking (sell conditions) which seek to mitigate against any potential conflicts of interest.
Publication Notice and Disclaimer
The information contained in this article is current as at the publication date. At the time of publishing, the information contained in this article is based on sources which are available in the public domain that we consider to be reliable, and our own analysis of those sources. The views of the author may not reflect the views of the AFSL holder. Any decision by you to purchase securities in the companies featured in this article should be done so after you have sought your own independent professional advice regarding this information and made your own inquiries as to the validity of any information in this article.
Any forward-looking statements contained in this article are not guarantees or predictions of future performance, and involve known and unknown risks, uncertainties and other factors, many of which are beyond our control, and which may cause actual results or performance of companies featured to differ materially from those expressed in the statements contained in this article. S3 cannot and does not give any assurance that the results or performance expressed or implied by any forward-looking statements contained in this article will actually occur and readers are cautioned not to put undue reliance on forward-looking statements.
This article may include references to our past investing performance. Past performance is not a reliable indicator of our future investing performance.
