The holiday season may be starting, but this week held little cheer for investors in Boku (BOKU). News that the direct carrier billing specialist will buy Danal, a US-based provider of mobile identity services, sent its shares plunging more than a fifth in one day. Danal is lossmaking, and the deal is predominantly share-based – rendering it earnings dilutive in 2019.
Danal generated revenues of $5.1m (£4m) and cash losses of $5.2m in 2017, while Boku’s house broker Peel Hunt expects cash losses of $5m next year. The deal will be funded with 26.7m Boku shares, $3m Boku warrants (priced at 141p each) and $1m in cash – along with a deferred consideration of up to $64m in shares and warrants, subject to Danal’s performance.
Investor concerns may have been exacerbated by recent equity market volatility and questions over whether Boku is buying at the top of the market. Still, purchasing Danal may prove highly beneficial; it is expected to become earnings accretive in 2021, and the delayed earn-out implies confidence in Danal’s ability to meet challenging targets. What's more, Boku had already been developing its identity services and can enhance its US presence, while expanding Danal’s footprint overseas. Nevertheless, Peel Hunt has reduced pre-tax profit estimates from $7.2m to $1.2m for 2019 and from $16.6m to $15.6m for 2020, but lifted revenue forecasts for both years.
We had highlighted Boku’s strong forecast free cash flow yield in our recent tip and Peel Hunt notes that “Boku has turbo-charged its identity opportunity, without impacting its 2020 free cash flow outlook and beyond”. Based on the brokerage's 2020 free cash flow forecast of $21.5m, this would imply a forecast yield of 11 per cent.
