Merci Boku

These estimates are good news for direct carrier billing (DCB) specialist Boku (BOKU), which allows people to buy products and services via app stores on their mobiles, before charging these to their monthly phone bills. The service is particularly valued by customers including Spotify, Apple and Microsoft, because it facilitates one-tap registration, which improves subscriber recruitment.

Founded in 2008, Boku joined the Alternative Investment Market (Aim) in November 2017. Its publicly listed track record is limited, and prior to float the company resorted to factoring and costly borrowing to support the business as it waited for the DCB market to take off. However, IPO proceeds have helped overhaul the balance sheet and business has started to flood in, all of which is forecast to underpin substantial cash generation and growth in coming years.

Boku’s maiden half-year results to June revealed total payment volume (TPV) growth of 153 per cent to $1.5bn (£1.1bn). Monthly active users rose 117 per cent to 10.3m. And revenues soared 66 per cent to $16.9m. Moreover, thanks to broadly stable operating costs, Boku reported its first positive adjusted cash profits of $2.5m, against a $2.8m loss in the previous year. On a reported basis, pre-tax losses narrowed dramatically from $6.6m to $0.7m. Post-period-end, in August, TPV reached $2.2bn – 140 per cent ahead of a year earlier. Meanwhile, its average daily cash balance in June was $23.1m, up from $19.2m last December.

Normally such growth would be associated with substantial increases in costs and capital expenditure. However, with important parts of its transaction processing system in place, Boku’s first-half operating costs rose by only a tenth, while capital expenditure is forecast by house broker Peel Hunt to come in at just $500,000 this year and next. A key growth area the company has been spending on is ‘mobile identity’ – helping to prevent fraud, and identifying when people have set up multiple accounts to get free trials. Boku has also invested in its data processing capacity and thinks it could now cope with a threefold rise in transactions.

Low investment needs are helping cash generation. Working capital movements are the other factor behind Peel Hunt’s predictions that free cash flow (FCF) will rocket from minus $7.1m last year to $6.1m this year and on to $15.6m then $21.5m in 2020. Growth is expected to create large inflows from working capital due to the group’s settlement model, whereby it collects fees direct from transactions and only bills for work later. That said, a transaction billing model used with Apple sees money go direct to the client with payment received by Boku only after it has invoiced – the more work done under these terms, the less working capital benefit growth will bring. Still, for now Peel Hunt expects an $8.7m contribution from working capital in 2020, equivalent to 30 per cent of forecast cash from operations of $28.8m.

While the nature of the business means a lot of cash washes through the balance sheet, based on 2020 forecasts the shares are valued at a FCF yield of 5.7 per cent or, after adjusting for forecast net cash of $57.9m, 6.8 per cent. That looks enticing value even if the forecast price/earnings (PE) ratio of 24 for that year is more of a stretch.