Aim-traded shares in Bango (BGO:160p), a provider of a state-of-the-art mobile payment platform enabling smartphone users to charge purchases made in app stores straight to their mobile phone account, have pulled back from their summer high of 197p, giving up almost all the 25 per cent paper profit made after I recommended buying at 157p (‘Bango dials the right tune in Chile’, 18 Jun 2018). Long-term holders are still showing healthy gains, though, with the share price about 72 per cent ahead of my original 93p recommended entry point ('Bang on the money', 26 Sep 2016).
Interestingly, last Friday the shares tested the 148p support level off which they bounced strongly in both March and June this year. With the 14-day relative strength indicator showing a neutral reading in the lows 50s, I feel the risk:reward ratio is favourable once again for another strong rally ahead of the half-year results on Tuesday 18 September 2018.
I have strong reason to think this way as the company’s pre-close trading update on Friday 20 July confirmed that end-user spend (EUS) processed through its payment platform and from which Bango takes a cut, has continued its four-year trend of doubling every 12 months. Total EUS was £220m in the first six months of this year, up from £92m in the same period in 2017, in line with house broker Cenkos Securities EUS forecast of £592m for the full year after taking into account the normal seasonal second-half weighting.
One reason for the share price pull back is perhaps investors may be concerned that Bango has offered keener prices to persuade some of the 30 mobile operators it’s in discussions with to switch their Google Play routes from other channels to the company’s payment platform. I am not as the total upgrade opportunity is worth more than $3bn (£2.35bn) of EUS. Neither is analyst Ian McInally at Cenkos Securities as he actually raised his total EUS forecast for 2019 from £1.12bn to £1.33bn post the pre-close trading update to take into account the deals landed. This is based on annualised EUS hitting £913m by end 2018, doubling again to £1.97bn by end of 2019. Bango’s payment platform has been tested to process £5bn of transactions, and on relatively flat operating costs, so is easily capable of handling this level of traffic without requiring further investment.
True, the pricing incentives offered to capture new high volume contracts, and the fact that they will flow through from 2019 onwards, means that Cenkos has clipped its gross profit figure from £9.3m to £7.5m for 2018, which results in a corresponding £1.8m reduction in annual cash profits to £1m. However, analysts raised their 2019 gross profit estimate by £1.5m to £15.3m and upgraded their cash profit forecast to £8.4m. On this basis, expect 2019 pre-tax profit of £5.6m and EPS of 8.1p. These forecasts are underpinned by Bango’s acquisition at the start of this year of Audiens, a developer of a cloud-based platform that collects and analyses valuable consumer data. By integrating Audiens’ technology into its own data platform Bango has accelerated its own data strategy, which in turn enables its customers and advertisers to market more efficiently to boost their own traffic. The improved data offering clearly provides potential clients tangible evidence of the additional benefits of switching their payment routes to Bango’s platform.
I am also reassured that Bango’s cash position remains strong, rising by £1m to £5.8m in the latest six-month trading period. Assuming the company delivers on Cenkos’s 2019 forecasts, then all of the £8.4m cash profits forecast next year will be converted into free cash flow. This explains why Cenkos is pencilling in an end 2019 cash pile of £12.3m, a sum worth 17.5p a share, and not insignificant in relation to Bango’s market capitalisation of £112m.
The bottom line is that with the shares priced on a cash-adjusted forward PE ratio of 18 for 2019, and with the migration of high volume EUS from recent contract wins underpinning forecasts, the risk is firmly skewed to the upside for the oversold shares. Investment managers at Odey Asset Management clearly think so as they have raised their stake from 9.87 to 12.41 per cent since July’s trading update. Buy.
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