Crowd Mobile Limited (ASX:CM8)

June 30, 2015 | Price: $0.19

Track Deal Drives Valuation Upgrade

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.

Figure 1: Track is projected to record its fifth consecutive year of increasing revenue and EBITDA in 2015. Note that periods are calendar years. 2014 result is derived from unaudited management accounts and 2015 represents a forecast result. Source: Crowd Mobile.

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.

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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 3rd report, we have considered the Company’s potential worth using a Comparables approach and Capitalisation of Future Maintainable Earnings (“CFME”) methodologies.

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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.

Figure 2: Impact of different funding and earning scenario’s on our valuation. Note that the valuation is most sensitive to the proportion of ordinary equity issued to fund the acquisition. We estimate an all equity-funded deal @ $0.20/share results in a valuation of $0.36/share. Should the transaction be funded entirely by convertible note exchanging at $0.40/share, we estimate the valuation would be $0.50/share. Our base case scenario is for a 50/50 corporate debt and convertible note package (excluding vendor shares), resulting in a valuation of $0.63share.

 

THE BULLS AND THE BEARS

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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
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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.
Disclaimer

S3 Consortium Pty Ltd (CAR No.433913) is a corporate authorised representative of LeMessurier Securities Pty Ltd (AFSL No. 296877). The information contained in this report is general information only. Any advice is general advice only. Neither your personal objectives, financial situation nor needs have been taken into consideration. Accordingly you should consider how appropriate the advice (if any) is to those objectives, financial situation and needs, before acting on the advice.

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The information contained in this report is current at the finalised date. The information contained in this report is based on sources reasonably considered to be reliable by S3 Consortium Pty Ltd, and available in the public domain. No “insider information” is ever sourced, disclosed or used by S3 Consortium.

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