MWR - Getting to a valuation, page-115

Covered already

• The buy thesis
• Where we are now and what's priced in
• What to look for in the 1H20 results

Can be covered now

• Product deep dive - new verticals and new markets
• What to look for in the FY2020 results

To be covered off once full year results are announced

• Financials deep dive
• Forecasting
• Downside and key risks
• Valuation - the bull and bear case
• Key catalysts

With results out next Thursday (based on the investor calendar) here's a bit of a guide on what to expect and what to look for. As I've said consistently, this result will not be good. In fact it will be their worst loss in their history. It should also (hopefully) be the last bit of bad news before the company has some clean air and blue sky ahead. That may be the reason why a few savvy investors have bid up the stock in recent weeks from very low levels. Remember the market is forward looking and this bad result is more than priced in - all IMO of course.

Before I jump in it's worth having a recap on FY2020 from a financial perspective. While YoY growth will still look ok, there's been a significant difference between guidance and performance, which has been why the SP got to where it did.

Here's a timeline:

Nov 2019 - Reaffirmed guidance of 90k units at the AGM. At roughly $230 per unit that's $20.7m in sales. Add the app in at $1.5m and Schools at roughly $2.3m and that's ~$24.5m in sales. That would have been ~4x vs 2019 and if achieved would have led to many bags for investors. Happy days.

Late Jan 2020 - The downgrade without the downgrade. Poor execution in the UK led to a compressed Christmas period and the run-rate was no where near where it needed to be to get to 90k sales. Investors realised this and bailed but guidance wasn't revised. Things got ugly very quickly.

Late Feb 2020 - The official downgrade came but the damage was done. The company thought they'd be clever and move the goal posts and go from a unit sales guidance to a revenue one and get away with it but it didn't work. To be fair, revenue is probably a better way of doing it but I don't like when management try to sneak in downgrades by comparing apples with oranges (that is also a classic red flag to watch out for btw). New revenue guidance of $12m to $13m vs ~$24.5 in Nov

Early April - Guidance withdrawn due to covid, which is fair. Clearly this was outside their control. We also got a business update. Q3 revenue of $1.9m and YTD revenue of $9.5m. That was close to guidance but you need to take into account that Q4 is seasonally weak for the Group, so taking a run-rate on the YTD figure probably doesn't work. At that stage FY2020 was looking like $11.5m to $12m

Late June - We got a business update and it wasn't pretty. Revenue of $10m by the end of May. So another way to look at that is the business made $500k in sales in two months given they said they were at $9.5m to March. Breaking it down further it looks worse. Given app sales are recurring they're easier to predict. There's high confidence that at that stage it's roughly $100k per month or $200k of that $500k total. That leaves $300k. Schools will do ~$2.3m in 2020 or higher due to covid and higher volumes. So say $200k per month but the consistency of billing means that we don't know when it will be recognised. Even if we take just a little bit of that amount and add in the app there is literally nothing left over implying that very few watch sales occurred April to May, which isn't great



So where does that leave us and what should you look out for in the FY2020 results...

1. Sales: FY2020 sales should be $10.5m to $11m. App sales should be good, schools will likely outperform but that's immaterial and the rest is watch sales. The geographic mix is probably more important so we can get a read on the UK

2. Watch volumes: They will likely report unit sales, which is important as then we can work out the average price. This enables us to work out if there has been discounting. Basically this should be around $230. A few dollars either way is not important but it needs to be around this number
3. GP margin: I'll cover this off in the next installment when I deep dive into the financials but this is what you call 'dirty GP.' The FY2019 GP margin was 73%. Expect FY2020 to be less than 68% though.
4. Costs: This is the big one. In the covid announcement in April Mark said that wages would fall 20% in the 6 months to Sep. Getting a read on costs and cost savings will be a very useful insight. Some of you that have owned MWR for a while mentioned to me a while back that MWR can be very diligent with costs and scrape by so I'd like to see costs get pulled right back especially general overheads and admin costs. The other item to look for is option expense. Given where the SP has been it should be lower. Don't get fooled by any statements saying this is non-cash. This is an expense!!! It's hard to get a read on this line item but in FY2019 options expense was a not insignificant $3.4m!!!!

5. Life: Getting a better understanding of presales, the strategy and distribution will be very useful. Other than the product and price we don't know too much about what to expect sales wise on this

6. Distribution/Agreements/New Markets: Will Mark provide any information on future sales growth beyond our present markets? It's highly likely that guidance WILL NOT be provided for FY2021 given the disaster of this financial year and unpredictability of Life sales but anything would be great if you're reading this Mark - especially new markets

7. Balance sheet: Unfortunately the CR was completed in July meaning that at the balance date, cash will look low. This is not great as fund managers will run screens when reporting season concludes and cash holdings in microcap land is important. While basic research will show that the balance sheet is fixed, if the screen knocks out MWR, then they won't do the research and may not come across this business. Remember we need more insto ownership to reach a +$100m market cap

Anyway, that's what I'm looking out for in the results. As a reminder, it's all about Christmas sales and we want a nice uninterrupted lead into that key selling season. GLTAH

I might combine some of the other parts into one as they're all linked and then we'll finally get to a valuation. Yes, finally!