Join our community of smart investors

Small-cap value buys

Two small-cap companies are generating cash flow and profits, factors that investors are undervaluing
September 15, 2020

Aim-traded Bango (BGO:168p), 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, has issued record interim results.

Buoyed by 60 per cent higher end user spend (EUS) of £740m, platform revenue surged by half to £4.8m to more than cover operating costs (up 11 per cent to £3.6m) and deliver cash profit of £1.1m, or more than double the cash profit of £450,000 for the whole of last year. The company is generating positive cash flow, too.

A raft of new contract wins include a three-year award, worth £1.5m, with a global telecoms’ group, a direct carrier billing agreement with global technology giant SoftBank ( TSE: SOBKY) whereby Japanese customers of Amazon (NASDAQ: AMZN) can now charge the cost of goods and services to their mobile phone bill, and the launch of new google play routes across three continents. The full benefit from these deals will be seen next year which means that we are almost guaranteed another year of strong growth.

The same is true of the lucrative revenue stream the company is creating by monetising customer data insights through its Bango Marketplace. The number of app developers has risen eightfold to 1,600 plus this year and the company has just entered partnership agreements across five countries in Asia to promote Bango’s audiences to online e-commerce clients and app developers. Bango Marketplace is expected to become cash profitable in 2020. That’s important because analysts estimate that the payment platform would have made cash profit in excess of £2m in the first half, another reason why Bango’s profits should rise sharply as Bango Marketplace scales up.

After factoring in the traditionally stronger second half, house broker finnCap is pencilling in annual EUS of £2bn, the fees from which should drive annual cash profits to £3.4m on annual revenue up 29 per cent to £12m. Bango’s cash profit margin is set to rise sharply given the operational leverage of the business, adding weight to my view that it should be making cash profit in the order of £10m on a 40 per cent plus margin within two years (‘Targeting value plays’, 3 August 2020). It also warrants a target price of 225p to value the company on an enterprise valuation of £160m after taking account of forecast year-end net cash of £5.2m, up from £2.7m in 2019. Buy.

 

Trinity’s cash flow undervalued

Trinity Exploration & Production (TRIN: 8p), an independent oil and gas explorer and producer focused on Trinidad and Tobago, is one of the lowest cost producers in the sector.

The company is also cash generative and profitable (first half operating profit of US$1.85m) even with the price of West Texas Intermediate (WTI) oil down 40 per cent to US$37.50 a barrel this year. Indeed, analysts believe Trinity should report full-year pre-tax profit of around US$4m (£3.1m) in 2020.

Robust production – first half output rose 9 per cent to 3,282 barrels of oil per day fuelled by low-cost work overs and recompletions of wells – and strict cost controls lowered Trinity’s average operating break-even (inclusive of US$2.40 a barrel of hedging income) by 15 per cent to US$22.60 a barrel. It improved even further to US$19.80 a barrel in June (inclusive of US1.80 a barrel hedging income), adding weight to management’s 2020 target of achieving average operating break-even of US$20.50 (inclusive of hedging).

That’s well below Trinity’s average realised oil price of US$36.30 a barrel, hence why the company generated US$6.1m of operating cash flow and increased net cash by 23 per cent to US$17m. It also helps that the realised oil price is below US$50 a barrel, the level when Supplemental Petroleum Taxes become payable. The government will vote next month on a proposal to lift the threshold to US$75 a barrel. Sensibly, hedging arrangements are in place to protect cash flows if WTI falls below $30 a barrel in 2021.

Cenkos Securities are forecasting year-end net cash of US$19.5m (4.3p a share), a sum equating to more than half of Trinity’s market capitalisation of £30.7m. This means that its 2P (proven) reserves of 20.9m barrels are in the price for just 95 cents a barrel even though a third are located onshore (operating break-even of US$16.50 a barrel pre-hedging arrangements) and 54 per cent are on the east coast (operating break-even of US$22.50 a barrel pre-hedging arrangements). It also means that 20.1m barrels of 2C (contingent) resources are in the price for free.

Frankly, that’s an absurd valuation and one doesn’t attribute any value either to Trinity’s new business initiative (with heavy weight and cash rich oil group Cairn Energy) on the west coast Jubilee Prospect. News on that opportunity could provide a share price catalyst before the year-end.

Trinity’s share price is up from the 6p level when I upgraded my view from hold to buy (‘Hunting down undervalued small-cap buys’, 14 May 2020), and offers material upside to my conservative 12p target price. In a more benign oil price environment, Cenkos’ fair value estimate of 36p a share could come into play, too. Buy.

My next column will be published at 12pm on Wednesday, 16 September.

 

■ 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, or by telephoning YPDBooks on 01904 431 213 to place an order. The books are being sold through no other source and are priced at £16.95 each plus postage and packaging of £3.25 [UK].

Special offer: Both books can be purchased for the special price of £25 plus discounted postage and packaging of only £3.95. The books include case studies of Simon Thompson’s market beating Bargain Share Portfolio companies outlining the investment characteristics that made them successful investments. Simon also highlights many other investment approaches and stock screens he uses to identify small-cap companies with investment potential, too. Details of the content of both books can be viewed on www.ypdbooks.com.

Simon Thompson was named 2019 Small Cap Journalist of the year at the 2019 Small Cap Awards.