Tapping into a fast-growing mobile payment play

Fonix Mobile’s (FNX:154p) main business is a mobile payments service that enables merchants to charge customers' mobile phone bills for products or services. Effectively, carrier billing turns the mobile device into a cash register while offering convenience for consumers.

The latest half-year results highlight that Fonix’s payment platform is not only highly scalable (it can process up to 2,000 transactions per second), but is an important customer acquisition tool for clients. By offering an alternative payment method to consumers who may otherwise forgo purchasing, Fonix’s payment platform differentiates itself from traditional payment methods, such as credit cards or ApplePay. For example, the group’s new partnership with Venntro, a company that operates 2,500 white labelled dating sites, has driven an eye-catching 28 per cent increase in new same-day subscribers (users that upgrade on the day they join a dating site) within the first few weeks of launching carrier billing.

The payment platform is also proving attractive to corporate clients – 12 new customers were added in the latest six-month period – seeking an alternative to traditional cash transactions which have a high cash processing cost. Moreover, by focusing on more profitable verticals such as payments for car parking, cinema tickets, pay-and-go gyms, gaming and even public transport, the group is driving its owns profitability higher, too. Fonix’s gross profit increased from 4.7 to 5.1 per cent as a proportion of total transaction value (up from £123mn to £138mn), thus driving gross profit 20 per cent higher to a record £7mn.

Fonix’s payment solutions are proving popular with charities, too. For example, the group’s market-leading 'text to donate' and 'click to donate' products formed a central part of ITV’s Soccer Aid Campaign, and The Ruth Straus Foundation at last summer’s Lord’s Test match between England and India. The £10bn charity donation market is still a greenfield opportunity for Fonix, as is client-led international expansion into neighbouring western European markets. A near 100 per cent customer retention rate highlights high levels of client satisfaction.

House broker FinnCap is maintaining its annual revenue and gross profit estimates of £53mn and £13mn based on 11 and 15 per cent growth, respectively. On this basis, expect annual pre-tax profit of £9.6mn and earnings per share (EPS) of 7.9p to support a 15 per cent hike to 6p in the dividend per share paid from free cash flow of 7.5p a share.

However, FinnCap views its estimates as conservative as the directors say that the underlying run-rate is robust, so much so that the second half will only be slightly weaker than the seasonally strong first half (gross profit of £7mn). An earnings beat is highly likely, while the ongoing outperformance looks set to continue into the 2022/23 financial year, a factor not embedded in a 12-month forward price/earnings (PE) ratio of 17.5.

Fonix’s 5 per cent plus free cash flow yield, 4.3 per cent prospective dividend yield for the 22/23 financial year, and strong organic growth prospects, offer defensive qualities, too. This explains why the shares have edged up since my last buy call (‘Profiting from the mobile payment boom’, 23 September 2021), and produced a 15 per cent total return since I initiated coverage (Alpha Research: Bargain opportunity to play the mobile payments boom’, 5 August 2021) during which time the FTSE Aim All-Share Total Return index has shed 20 per cent of its value. I see material upside to my 190p target. Buy.

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