- Recurring revenue set to grow 79 per cent in the second half
- Super Bundling contracts signed with major US telecom operators
- Docomo acquisition primed to deliver major profit uplift
Aim-traded Bango (BGO:188p), a provider of a state-of-the-art mobile payment platform, is building a lucrative income stream as the preferred technology partner for bundling subscription services.
In the first half, the group signed up two telecom operators in the US for its Digital Vending Machine Super Bundling Software-as-a-Service (SaaS), meaning it now has agreements in place with three of the top five telecom operators in the country (Verizon, T Mobile and one other undisclosed). Bango’s technology platform enables their customers to manage and pay for all their subscriptions in a single place and one bill, access discounts and special offers and try to discover new services, too. For instance, Verizon has been offering its customers NFL Premium subscriptions through its Verizon+ play product, something that would have been impossible and expensive to do if it had to purchase the wholesale content rights and bundle through a set-top box.
Moreover, with an increasing number of direct-to-consumer streaming services now offering original content, such as Netflix, Prime Video and Disney+, telecom operators can earn a margin from the subscription, reduce their own churn rates and boost their customer base. It’s a win-win situation for content providers, too. That’s because they benefit from the bundler marketing their subscription services to a new customer base, as well as increasing subscribers who have a lower churn than those paying with a credit card.
Bango earns an annual licence fee for its part. For a large telco, it starts at $1mn and scales up rapidly as the business enters the “capacity growth” phase. Analysts at joint house broker Stifel believe that the platform will be the main driver of organic growth in the coming years and could ultimately be a business generating $100mn of annual recurring income (ARR). The segment accounted for all the $5.6mn ARR reported by Bango in the first half. Furthermore, with the benefit of contracts already signed, ARR is expected to hit $10mn by the year-end, according to chief executive Paul Larbey. It’s a high-margin activity that generates a gross profit margin of 90 to 96 per cent, too.
Benefits from acquisition to boost profitability
In the first half, Bango reported a group cash loss of $0.2mn on revenue of $20.3mn, a reflection of the ongoing costs of integrating last year’s transformational acquisition of the global payments business of NTT Docomo, a Japanese mobile network operator with 85mn subscribers. Bango signed a long-term platform deal with that group to provide payment services in Japan for the world’s largest merchants.
Docomo was loss-making at the time of the acquisition, and to date Bango has realised 90 per cent of the planned $21mn of cost savings. Part of the $8mn cost savings made in the first half of 2023 will be seen in the seasonally strong second half when Stifel predicts group cash profit of $12.1mn on revenue of $26.9mn. However, the real upside should be seen in 2024 when Stifel forecasts a more than doubling of annual cash profit from $11.9mn to $27.3mn on 16 per cent higher revenue of $57.2mn.
On this basis, 2024 adjusted pre-tax profit and earnings per share (EPS) more than quadruple to $14.3mn and 18.2c (14.7p), respectively, implying the shares are rated on a miserly forward price/earnings (PE) ratio of 12.8. They also offer a prospective free cash yield of almost 6 per cent.
Exploit a glaring valuation anomaly
The bottom line is that there is a glaring disconnect between the expectations of both analysts and Bango’s directors for next year’s earnings and the rating that investors are currently ascribing to the shares. I feel it will correct itself and drive a material re-rating to Stifel’s 315p share price target.
So, although Bango’s share price has fallen 12 per cent from the 215p level when I covered the annual results six months ago (‘Bango profits set to soar after game-changing acquisition’, 28 March 2023), albeit it is still double my entry point ('Bang on the money', 26 September 2016), the operational progress and maintained guidance fully support an overdue re-rating. Buy.
■ 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 P&P of £3.75, or £25 plus P&P of £5.75 for both books.
