MWR - Getting to a valuation, page-3

2. Where we are now and what's priced in

If we take the opening share price from Jan 29 of 28c (announcement came before the market opened) and take the closing share price from today, MWR's market cap has fallen by $12.7m or 32%. That's a mighty fall for a business that just recorded revenue growth of 86%! Note: the market cap as at today is just $26.9m




Before that announcement, management had guided to selling 90,000 units for FY2020 but announced sales for 1H20 of 25,000, which while a new record, was well below what the market was expecting, which was 30-35k. It also makes the gap to the 90,000 target (which has not been adjusted) more difficult - i.e. 65,000 in 2H20 without the key Christmas period. This is not possible in my view and I believe the market has come to the same conclusion and hence the weaker share price. (Any more context from management would be very useful)

I also think that management have lost some credibility. They reaffirmed the forecast at the AGM in late 2019 and have not announced what the new forecast should be or what FY2020 expectations are now. I'm expecting this to happen when they release 1H20 financials in ~2 weeks but communication has been poor and trust has been lost - this is now reflected in the SP and probably worse but often in times like these, extreme pessimism can represent excellent buying opportunities

But there is some evidence that MWR is oversold, not just from a technical perspective (i.e. RSI) but from a fundamental perspective. If we assume that at 28c (i.e. before the business update), the market was expecting 90,000 units, then as at today the market cap has fallen by 32% vs a sales miss of ~28% (i.e. 25k vs 35k roughly). But the real kicker is that I don't think the starting share price of 28c priced in 35,000 units. If they would have achieved 30k or more in 1H20 the share price would have likely reacted positively - so in effect, the starting price of 28c includes a discount that the 90k target would not be achieved, which makes sense for an unproven company but makes the 32% share price fall seem like a savage over reaction. In other words, the theoretical fall in the SP is more like 35-40%

If we use the SP change as a proxy for market expectations on unit sales (this is just a guide only for illustrative purposes) then a ~40% fall from 90k is equivalent to FY2020 sales of 50k or 25k for 2H20. Here's a table on one permutation on what 25k could look like, 12.5k in A/NZ and 12.5k in the UK.

For A/NZ, 12.5k would be a 37% reduction vs 1H20, which would be a larger percentage fall than 2H19 vs 1H19 (down 33.7%) noting that on a normal run-rate, the 1st half is generally a lot stronger because it has Christmas. But there is no normal run-rate because retail distribution is increasing at a rapid rate, so it's hard to accurately define what true seasonality looks like. However, to say that the decline will be larger in A/NZ in the second half of 2020 vs 2019 with a larger distribution network is difficult to imagine (excluding any supply issues of course). So, I think it's fair to assume that unit sales will be a lot higher than 12.5k in A/NZ - this is important in the valuation section

In the UK, while the growth rate is high, it's coming off a very low base. But for context, 12.5k is just 2.5k above the MINIMUM 15k (i.e. 5k + 12.5k) that Sky needs to maintain exclusivity, which would be pretty important given what they have and will continue to invest in marketing. It does look like the UK under performed during Christmas but I think they left their run a bit late. They will certainly get there as it's a bigger market with better demographics and there is a partnership with a very strong counterparty - all very positive. So like A/NZ, it could be fair to assume that the minimum volume for the UK of 10k should be more than achieved so exclusivity is maintained. BUT, these are just conservative minimums. Provided there are no stock/supply issues then the UK should do more - remember this is just an example. There are a range of permutations. I'll step through what I think will happen in another post

So to my mind, the market is pricing in a very weak unit outcome for 2H20 and beyond and/or overly penalising the company and management for the 'miss.' It also has totally discounted new agreements, new markets, new products etc. It's times like these that often represent excellent buying opportunities - more of this in the valuation section