Shareholders in Aim-traded Bango (BGO:110p), 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 endured a rollercoaster ride since I first advised buying the shares, at 93p, two years ago ('Bang on the money', 26 September 2016). Having almost trebled in value to 266p by January this year, the share price has headed south since.
True, the IPO of larger rival Boku (BKU:143p) at the end of 2017 may have seen some investors bank their hefty profits on Bango’s shares with a view to capitalising on Boku’s high growth potential and the need for Aim-traded tracker funds to buy its shares. However, that factor alone can only explain part of the de-rating in Bango’s shares.
A greater factor was probably a change in investor sentiment following Bango’s small acquisition of Audiens, a developer of a cloud-based platform that collects and analyses valuable consumer data at the end of January this year ('Six small-cap plays', 22 January 2018). It made commercial sense for Bango to acquire the business, part-funded by the proceeds of a £5m placing, as it has accelerated the company’s own data strategy and enabled its customers and advertisers to market more efficiently. It also means that Bango has been able to target a new revenue stream from monetising this valuable data.
However, the short-term cost of investment in accelerating the data strategy is that Bango’s cash profitability will be less this year than analysts were anticipating at the start of the year, albeit the upside in 2019 is greater too. To put this into perspective, back in March analysts at house broker Cenkos Securities were expecting the exit run rate of end user spend (EUS) processed through Bango’s payment platform to end this year at £915m (they still do by the way) to deliver gross profits of £9.3m and a cash profit of £2.8m. However, to reflect the greater investment in its data strategy Cenkos’ 2018 gross profit estimates were subsequently trimmed over the summer to £7.5m to produce a cash profit of £1m.
The flip side is that because the £35m investment in Bango’s platform has already been made, and tested to process in excess of £5bn of transactions a year, then a high proportion of the forecast increase in gross profit in 2019 drops straight down to the bottom line given the operational gearing of the business. As a result Cenkos expects gross profit to be £15.3m in 2019 (£1.5m higher than it had been forecasting in March 2018 and double this year’s forecast outcome) and predicts Bango will deliver a 2019 cash profit of £8.4m. Cenkos 2019 pre-tax profit estimate of £5.6m is higher too as are analysts’ end 2019 annualised exit EUS run rate forecast of £1.97bn. That’s hardly a sign of a company’s prospects going into reverse. Moreover, with operational costs held in check, a high proportion of cash profit estimates of £8.4m in 2019 will be converted into cash, which is why net funds are forecast to more than double to £12.3m – a sum worth 17.5p a share – by the end of 2019.
Contracts in pipeline have potential to be transformational
Of course, there is execution risk and Bango needs to land some of the massive contracts in its near-term pipeline. Bearing this in mind, when I interviewed chief executive Ray Anderson at the time of the interim results four weeks ago (‘Bango’s $4bn contract pipeline’, 18 September 2018), he revealed that Bango’s “nearest to arrival pipeline of EUS is worth $4bn [most contracts are in the range between $100m and $400m (£303m), and a couple are over $1bn] and has been in principle approved by clients internally with technical due diligence complete.” Clearly, if the company lands even half of these massive contracts in the coming months then it will significantly de-risk the aforementioned 2019 revenue and pre-tax profit estimates. Bearing in mind the need for Bango to land these contracts, let’s not forget that it is bang on course to achieve house broker Cenkos Securities' EUS target of £592m for the full year, up from £220m in the first half of 2018, and £271m for the whole of 2017, so has a track record of converting its pipeline that has delivered such impressive growth rates.
Furthermore, if these contracts are landed it is likely to send Bango’s share price rocketing. That’s because at the current share price of 113p the company’s £77m market capitalisation implies an end 2019 enterprise value of £65m and a cash-adjusted 2019 PE ratio of 11.5 based on Bango delivering basic EPS of 8.1p. It’s a massive valuation discrepancy to larger rival Boku, which my colleague Harriet Clarfelt tipped last Thursday (‘Merci Boku’, 18 October 2018). At the current share price of 143p, Boku has a market valuation of £306.3m. Analysts at Peel Hunt expect Boku to end 2019 with net cash of $36.9m (a sum worth 13p a share based on 214.2m shares in issue and converted at the current sterling:US dollar exchange rate) implying Boku’s shares are trading on a cash-adjusted 2019 PE ratio of 68 based on the company delivering EPS of 2.5c (1.9p). Boku’s cash-adjusted 2020 PE ratio is 32 based on EPS doubling in 2020 to 4.9c and net funds building to $58m, or 21p a share.
I would also flag up that Boku’s shares have started to recover some of this month’s fall – at one point its share price fell from 184p to 128p in less than a week during the market rout – as bargain hunters have emerged. The fact the Bango’s share price has yet to recover is undoubtedly down to the announcement that finance director Rachel Elias-Jones is leaving the company. I can reveal that she has been poached by artificial intelligence group Darktrace, having worked for Bango for four years and the last two as finance director. This has been taken badly by the market which is another reason Bango’s share price has sagged.
However, an interim chief finance officer has already been appointed, Carolyn Rand. Her previous appointments include group finance, treasury and financial director roles at medical technology group Smith & Nephew (SN.), and technology companies Zinwave and Isogenica. She will remain in place until a full-time replacement is appointed. Clearly, the timing is not ideal, but I can confirm that financial guidance from Bango has not changed since the interim results and the company continues to work on landing its $4bn near-term pipeline of opportunities.
Ultimately, it’s the sales and marketing teams that will convert deals in the pipeline, as they have been doing so successfully for the past four years. I am also encouraged by comments from Mr Anderson who points out that Bango rarely faces competition from larger rival Boku in the markets they address, suggesting space for both fast-growing operators. It’s worth pointing out that Bango has valuable relationships with Google and Amazon, and the strategy in place to monetise data capture can only be positive to winning new business. It is also highly operationally geared to rising EUS.
Bottom line
The bottom line is that the sell-off in small-cap companies has been pretty indiscriminate this month – a fortnight ago I noted that the share prices of over 500 companies on the London Stock Exchange had fallen by over 5 per cent intra-day at one point. And it's not just small-caps. Take artificial intelligence software company Blue Prism as an example. The share price of the £1bn market value company is off 43 per cent in the past six weeks. This is creating bargains and I feel that Bango is one of them. I also note that with the share price back at the 107.5p intra-day low hit earlier this month and the shares in heavily oversold territory, the 14-day relative strength indicator (RSI) is showing a higher reading now than on the 11 October, suggesting that positive divergence is emerging on the chart.
So, with newsflow on contract wins in the coming months set to instil confidence in Bango achieving Cenkos’ 2019 numbers, and the company been seriously undervalued if it achieves those forecasts, then I still expect a positive outcome here despite the erosion of the hefty paper gains previously made on this investment. Buy.
■ Simon Thompson's new book Successful Stock Picking Strategies can be purchased online at www.ypdbooks.com, or by telephoning YPDBooks on 01904 431 213 to place an order. It is being sold through no other source and is priced at £16.95 plus £2.95 postage and packaging. Simon's second book Stock Picking for Profit has been reprinted and is available to purchase online at www.ypdbooks.com for £16.95, plus £2.95 postage and packaging, or by telephoning YPDBooks on 01904 431 213 to place an order. Details of the content of both books can be viewed on www.ypdbooks.com.
