Always on the lookout for something new, Fonix Mobile, which joined AIM back in October, recently came to my attention and has since seen my buying in with an initial stake.
When it comes to success stories, Fonix has to date something of seriously impressive credentials, so it was perhaps no surprise that the placing raising £45m was oversubscribed and saw respected names such as Slater Investments, Kestrel, Blackrock and AXA emerging on the shareholder list.
As for its business, Fonix, which only came into being back in 2006 is a mobile payments and messaging platform provider whose services are used extensively across UK mobile networks.
It operates in a highly regulated market where it is focused on high quality revenues in what are already mature, but yet expanding market sectors.
Having partnerships cemented with Vodafone, EE, Telefonica UK and Hutchison, the company also has some big hitting names as clients including ITV, BT, Bauer and Global Radio to name but a few and currently has over 100 in total.
In terms of its revenue model, when consumers make payments these are subsequently charged to their mobile phone which is where the the Fonix platform comes in. This serves areas such as media, gaming and charities where Children In Need and Comic Relief are amongst numerous others clients.
Typically, Fonix will generate a commission from an end merchant that is then recognized as revenue alongside a carrier commission.
In return, Fonix itself pays the carrier a commission which it then subsequently recognises as the cost of sales.
Numbers delivered by Fonix to date have been impressive to say the least as can be seen by a spike in the figures over the last three years, which has seen gross profit moving from £3.7m to £10m as payment value has increased to £212m.
Importantly, the ability to retain clients has been equally impressive with a churn rate of just 1% (although none from majors) and the company is now extremely well placed to expand further and deliver on increasing its footprint and thus profits.
Other areas that have been identified to add to the revenue stream include parking, dietary and leisure, all of which should be ripe for growth as we emerge from the pandemic.
For now, in its initiation note, broker FinnCap is forecasting full year 2021 revenues of £45m with EBITDA of £8.6m, adjusted pre-tax profits of £8.2m and EPS of 6.8p.
In addition, the expectations are for a dividend payment of 5.1p which at the current price of £1.09p provides for a decent yield in addition to the attractive growth prospects on offer and a solid balance sheet.
Whilst it is perhaps understandably tempting to make a direct comparison to the likes of Bango, the reality is that Fonix does not operate in the app stores segment that both Bango and Boku are associated with. Rather, it is concentrated on core sectors and is, as a result not in direct competition with the former mentioned.
As far as the UK industry trends go that directly concern Fonix, the 2019-2020 phone paid services numbers saw consumer spend at £630.9m which represented a 2.4% increase on the prior year.
Although that might not appear to signal exciting growth, Fonix achieved a 21% jump in end user spend, which suggests that the company is clearly getting it right.
Importantly, from an investment perspective, the market in which Fonix operates is still largely in its infancy and the expectations of changes in habits post-Covid should further enhance the opportunity for the company going forward. In particular, the gaming market could provide for considerable future upside being currently underserved.
Despite estimated to being worth some £5.5bn, only £43m million is associated with carrier billing, so there would appear to be plenty to go for there.
Overall, carrier billing is likely to present further opportunities across the board with more and more people making one-off purchases via their phone which has most likely been further fueled through the result of the pandemic.
SMS billing is equally attractive for Fonix with consumers buying SMS content and services that are then billed directly to their phone, whilst Voice shortcodes are also of increasing importance.
This sees the consumer dialing set numbers and being connected to voice services and these are already used by the likes of TV shows involved in voting procedures such as The X Factor and Strictly which are powered by Fonix client BT.
As would be expected, the company has developed the platform in-house and owns the IP outright and in conjunction with its products is highly scalable to target expansion into new and growing markets.
Although it is an as yet UK focused business, as part of coming to market Fonix is now eyeing international expansion in what will be carefully selected territories, so alongside continued growth at home this should be supplemented by a wider geographical footprint in time.
There is, according to industry watchers and trend analysis significant growth to come across the whole carrier billing spectrum which is expected to hit $70bn by 2027.
Looking ahead to next year FinnCap is currently forecasting revenue increasing to £49.6m with adjusted pre-tax profits of £9.1m and EPS of 7.6p which puts the stock on a forward PER of 14.
That, given the future prospects coupled with a strong cash position and what appears to be a progressive dividend policy suggests to me the shares are very good value and clearly look cheap in comparison to peers.
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