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Targeting lowly rated technology shares

A provider of a state-of-the-art mobile payment platform has made a transformational acquisition, while a lowly rated provider of alternative broadband products is set to deliver strong profit growth.
August 30, 2022
  • Acquires global payments business of NTT Docomo, a large Japanese mobile network operator
  • Signs multi-year platform deal with NTT Docomo to provide payment services in Japan

Aim-traded technology group Bango  (BGO:185p) has acquired the global payments business of NTT Docomo, a Japanese mobile network operator with 85mn subscribers, and signed a long-term platform deal with that group to provide payment services in Japan for the world's largest merchants. Bango is 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.

The acquisition accelerates Bango’s growth strategy by expanding its global partnerships with major customers, doubling the number of Google Play and Amazon routes; adds new telecom partners including Telefónica, América Móvil and Deutsche Telecom, and extends relationships with Vodafone, Singtel, Softbank and Airtel India; and consolidates Bango's position as a leading payments platform for global merchants such as Netflix, Britbox and Youtube.

The smart looking acquisition also adds new merchants (Tidal, Discovery, Paramount+ and Jetstar to name but a few), expands Bango's footprint in carrier billing for physical goods, adding Shopify to the Bango ecosystem, and scales up the merchant user base for upselling Bango Audience insights and data analytics services.

The directors estimate that the acquisition will add $5mn of revenue in 2022, rising to $16mn in both 2023 and 2024. Routes migrated from Docomo to Bango will earn the group a typical 95 per cent platform gross margin on revenue. Of the $3.5bn annual end user spend (EUS) that is being transferred to Bango, house broker Liberum estimate that 60 per cent relates to the new multi-year agreement with NTT Docomo to provide payment processing.

The directors expect to realise annualised cost savings of $21mn by the end of 2023, and for the acquisition to contribute over $10mn of cash profit in 2024, albeit cash profit this year will be impacted by $4mn due to the costs inherited. The modest net consideration of €0.9mn being paid reflects the high level of integration costs as restructuring, transactions costs, asset write-offs and provisions which will reduce Bango’s net profitability by $30mn to $35mn in 2022.

Importantly, majority of these exceptional costs are non-cash charges as Liberum forecasts only $8.7mn of actual cash restructuring costs in 2022 and 2023. Bango’s strategic partner and shareholder, NHN Corporation, has offered Bango a $10mn three-year loan on commercial terms to accelerate the restructuring and migration process if required, so the integration costs are fully covered.

The impact on forecasts is dramatic. Analysts at Liberum are pencilling in 50 per cent higher revenue of $31.1mn in 2022 (19 per cent upgrade), revenue of $50.3mn in 2023 (46 per cent upgrade), rising to $60.4mn in 2024 (35 per cent upgrade). The upgrades to gross profit are identical with analysts forecasting $29.2mn (2022), $47mn (2023) and $56.1mn (2024).

On this basis, underlying cash profit will dip from $6.2mn to $4.2mn (2022), rising to $12.3mn (2023) and $29.7mn (2024) when the full benefit of the acquisition is realised. Liberum also upgraded their 2024 pre-tax profit estimate by $10mn to $24.5mn which produces earnings per share (EPS) of 26.2¢ (22.4p), or three times higher than the 9.3¢ (7.9p) estimate for 2023. Forecast net cash of $2.1mn at the 2022 year-end could rise to $15.2mn (17p) by the end of 2024 if forecasts are achieved. This implies the shares are priced on price/earnings ratios of 23 (2023) and eight (2024).

Although Bango’s share price rallied 18 per cent to 185p following the announcements, is 13 per cent up on my last buy call (‘A smart way to profit from Apple’s growth’, 29 June 2022) and has doubled in value since I initiated coverage ('Bang on the money', 26 September 2016), Liberum’s raised target price of 346p (from 260p) highlights the scale of the further upside. Sterling’s ongoing weakness against the US dollar is also creating a tailwind given that the vast majority of Bango’s revenue is derived overseas. Strong buy.

On the technology beat

  • First half like-for-like revenue up 11.5 per cent to £14.6mn
  • 95 per cent of revenue recurring
  • Analysts expect second half operating profit to rise from £1.9mn to £2.5mn on 21 per cent higher revenue of £17mn

Aim-traded BigBlu Broadband (BBB: 51p), a provider of alternative superfast satellite, fixed wireless and 4G/5G broadband products, flagged its interim results in a pre-close update (‘Tap into a blue-sky opportunity’, 4 July 2022), so the trading outlook is of far greater importance. There’s good news to report.

In the six months to 31 May 2022, exactly half the group’s 3,200 net customer additions were lost due to exceptional churn at Viasat, the provider of BigBlu’s satellite capacity in the Nordics, which suffered a cyberattack (now resolved) and from dismounting loss-making masts. BigBlu Norge’s adjusted cash profit declined 39 per cent to £0.5mn on a fifth lower revenue of £1.9mn, the reason why group cash profit of £2mn was flat on 14 per cent higher group revenue of £14.9mn. 

However, following completion of an upgrade to enhance the service proposition and support next generation ultrafast broadband via wireless 5G fixed wireless access (FWA), management reports “real momentum and growing traction in the market”. Indeed, the early KPIs from the new FWA distribution agreement with Telenor are very encouraging, reaching 500 customers and boasting a retention rate of 93 per cent. Churn rates should fall further as more customers on one-month rolling contracts are converted to annual contracts.

House broker finnCap has taken note, predicting divisional second half revenue of £2.8mn, up from £2.2mn in the same period of 2021, and pencilling in 15 per cent organic revenue growth in the 2022/23 financial year. On this basis, expect the unit’s forecast annual cash profit of £1.6mn to rise 25 per cent to £2mn next year.

Removing the drag from the Nordics business is important as it has masked the ongoing strong performance from BigBlu’s other international business: SkyMesh, an Australian satellite broadband provider that targets customers in rural areas outside of the fibre footprint. In the first half, SkyMesh delivered 20 per cent growth in both revenue and cash profit to £12.6mn and £2.2mn, respectively, buoyed by 6.6 per cent year-on-year growth in the customer base (to 52,000 accounts) with higher average revenue per user (ARPU), and the contribution from a small acquisition.

Expanding into New Zealand has added further signs ups in the second half, adding weight to finnCap’s forecast that Skymesh should deliver second half revenue of £14.1mn, up from £11.3mn in the same period of 2021. On this basis, divisional full-year cash profit is set to rise by 10 per cent to £4.4mn, increasing to £4.9mn in the 2022/23 financial year.

So, with a much improved second half performance on the cards, finnCap forecasts growth in annual adjusted operating profit from £3.2mn to £3.4mn, reversing a £0.6mn first half decline, and pencils in £3.8mn for the year after. Strip out estimated net cash of £3.7mn (6.3p) at the year-end, and the £7.3mn (12.5p) value of the group’s 5.1 per cent stake in Quickline, a business that is building FWA networks to address the ‘digital divide’ in the UK, and BigBlu’s enterprise valuation of £21mn equates to only 5.5 times operating profit estimates for the 2022/23 financial year.

Moreover, embedding a realistic valuation of £45.6mn for the group’s Nordic and Australian businesses, equating to a multiple of 12 times forecast operating profit, my sum-of-the-parts valuation of 98p is materially above the current share price. Buy.

Simon Thompson was named Journalist of the Year at the 2022 Small Cap Awards.

■ Simon Thompson's latest book Successful Stock Picking Strategies and his previous book Stock Picking for Profit can be purchased online at www.ypdbooks.com at £16.95 each plus postage and packaging. Details of the content can be viewed on www.ypdbooks.com.

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