- Total transaction value increases 10 per cent to £233m.
- Pre-tax profit up 14 per cent to £8.3m on revenue of £47.7m.
- Underlying free cash flow of £7.3m (7.3p a share).
- Dividend of 5.23p equates to 75 per cent of EPS of 7p.
- Double-digit profit forecast in new financial year.
Founded in 2006, Fonix Mobile (FNX:150p) has been one of the fastest growing technology companies in recent years - operating profit has trebloed to £8.3m since 2018 - a performance that prompted some shrewd fund managers (Slater Investments, Blackrock, Kestrel Partners and Axa) to back last autumn's IPO. It’s easy to understand why.
Fonix’s main business is a mobile payments service that enables merchants to charge customers' mobile phone bills for products or services. This segment accounted for 84 per cent of gross profit of £11.3m in the 12 months to 30 June 2021. The group’s other two operating segments are mobile messaging (9 per cent), which allows Fonix’s customers to communicate, notify and market to consumers, and managed services which represent fees charged and non-transactional revenue (7 per cent).
Effectively, Fonix enables its clients access to the customer base of mobile carriers while enabling mobile carriers to provide additional services in the form of carrier billing, SMS billing, messaging and voice short codes. Fonix’s offering is proving incredibly popular. In the financial year, the group added 34 new customers, increased its active user base by 13 per cent and processed 628m transactions for 18m mobile users. Fonix’s clients are loyal which is why the business boasts a 100 per cent retention rate. In fact, the top 10 clients have been customers for over seven years and accounted for 82 per cent of total payment volumes of £233m in the financial year.
Importantly, Fonix offers sound prospects of continuing to grow organically in the UK and entering overseas territories. That’s because the carrier billing transactions Fonix facilitates are mainly one-off purchases, recurring subscriptions and in-app payments which allow mobile carriers to directly bill consumers, or by enable ‘text to buy’ and ‘click to buy’ purchases such as payments for car parking, cinema tickets and pay-and-go gyms. It is ideally suited for small deposits such as top-ups for utilities or deposits for online gamers and sports bets – the typical spend is between £1.50 to £10 per transaction. Effectively, carrier billing turns the mobile device into a cash register while offering convenience for consumers.
Fonix is exploiting the boom in mobile payment processing by targeting multi-billion pound sectors, the largest market being media – ITV, Bauer Media, BT, Global Radio are all clients. The aim is to improve upon its position in the SMS billing market, increase market share by focusing on carrier billing into TV, print and radio paywalls, and support clients moving into international markets. The group is also targeting the charity sector by driving its market leading 'text to donate' and 'click to donate' products in the UK. New client wins in the past year include Cancer Research and BBC Children in Need.
Furthermore, Fonix’s asset light and scaleable proprietary cloud based business model that can process up to 2,000 transactions per second is highly cash generative. Underlying annual free cash flow of £7.3m in the past 12 months equates to 4.9 per cent of its £150m market capitalisation and supports an attractive 75 per cent pay-out ratio. The new financial year has started strongly, so much so that the current run-rate more than supports house broker finnCap’s expectations of EPS rising to 7.6p and a raised pay-out of 5.7p. On this basis, the shares trade on a forward PE ratio of 20 – a 33 per cent discount to the rating of finnCap Tech 40 peers even though their free cash flow yield is only 2.1 per cent and Fonix's shares offer a 50 per cent higher prospective dividend yield of 3.8 per cent.
Fonix’s share price has risen 10 per cent since I initiated coverage (Alpha Report: Bargain opportunity to play the mobile payments boom’, 5 August 2021), and I see material upside to my 190p target. Buy.
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