I had an informative results call this morning with the full management team of Aim-traded Bango (BGO:125p), 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, and one that adds weight to my earlier call to recommend buying the shares, at 89p (‘Bango's robust trading update’, 10 July 2019).
The company has maintained its five-year trend of more than doubling end user spend (EUS) year-on-year, reporting an increase in EUS from £220m to in excess of £465m in the six months to end June 2019, and is on course to achieve EUS of around £1.2bn for the full-year, as analysts predict. Although confidentiality clauses prevent Bango from disclosing names of some of its customers, I can reveal from my sources that a major global merchant has signed up with Bango in the past few weeks, and the directors confirm that it is already generating income for the company. This and recent contract wins of new Google Play, Amazon and Microsoft routes, and others including deals with streaming subscription service Spotify and toll road operator AE Tolls (enabling American drivers to place road toll charges on their monthly phone bills), add further substance to house broker finnCap’s estimate that Bango's revenue will accelerate from £4.3m in the first half to £7.5m in the second half of 2019.
I can also reveal that Bango’s chief executive Ray Anderson says that the company’s data monetisation business, which almost trebled revenue to £1.14m in the first half, should book license revenue of £1.5m in the second half and has other licensing deals in the offing for completion in the first half of 2020. He also notes that Bango Marketplace, a product that enables app developers to direct their marketing towards selected customer audiences that are far more likely to respond, helping them to choose customer segments in countries they want to focus on and generate a higher return on their marketing spend, already has 60 audience groups from a standing start this year.
The point being that by increasing its customer base to generate more payments for processing, Bango is attracting more merchants who are seeing the financial and operational benefits of using its payment processing platform and scope to earn greater returns from their own customers by deploying Bango’s customer insight technology. Indeed, I can also reveal that Bango has been approached by “providers of payment data beyond its direct carrier billing (DCB) partners and is investigating processing these new data sources to provider audiences that have greater reach than DCB alone”.
The other major important point worth flagging up is that the business has passed the inflexion point at which it can start generating cash. This explains why finnCap predicts Bango will generate free cash flow of £2m in 2020 to boost net funds from £2.25m to £3.9m (5.5p a share) based on annual cash profit doubling to £5.1m on revenue of £16.4m in 2020. On this basis, expect a pre-tax profit of £2.7m and earnings per share (EPS) of 4.2p. I feel there is scope for these forecasts to be exceeded, too.
That’s because Bango’s processing business earned an estimated operating profit of £0.5m in the first half of 2019, which was offset by an identical loss on the fast growing data monetisation business. So, as the business continues to scale up rapidly, not only will profits from processing payments ramp up at a minimal incremental cost given the platform has been tested to process £15bn of transactions a year and has fixed overheads, but the data monetisation business could move towards profitability far sooner than analysts predict.
In fact, I maintain my view that Bango is a business that offers real potential to be generating £10m of annualised cash profit on revenue of £20m in two years time, and generating free cash flow, too. That possibility is simply not priced into Bango’s enterprise valuation of £85m. Buy.
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