Here are some snippets taken from my equity research paper posted on ***.
Growth Drivers Under normalised conditions I expect to see significant organic growth in EBITDA & free cash flow’s moving forwards. For starters, the hospitality venues, pubs, clubs and stadiums that MSL services have all been massively impacted through covid and most likely completely shut for some period of time. Given the vaccine mandates soon to be precedented on western society, it is inevitable that economies will begin to open if they haven’t already.
Pat referenced the UK as a particular vehicle of growth when it comes to FY22. Currently it represents 20% of the business that MSL does but this is “expected to widen as we enter FY22”. The deal with City Football Group (CFG) was only signed back in July and has not contributed to any public results yet. The CFG is important not just in the current sense, but the group controls stadiums across the globe (Aus, US etc) and gives big up-selling potential.
Valuation MSL are guiding for EBITDA of $3.5m in FY21 implying a ~19x EV to EBITDA multiple which again is cognisant of a maturing company. We need to consider that using trailing EV/EBITDA measures for companies in undergoing significant growth is not going to paint an accurate picture of valuation. FY22 will see a full twelve-month contribution of SwiftPOS, which management have also claimed have seen a 20% rise in revenues.
Stripping out the government contributions & normalising for a full year SwiftPOS accretion to EBITDA leaves the company running at a rate closer of $3.5m under sub-normal conditions (COVID). Again, linking this back to a market valuation of some ~18x EV/EBITDA multiple implies that growth will stagnate as the company approaches its mature stage. This implies that the various new contracts – ASM Global, Doshii Partnership, RAC Arena and City Football Group will result in immaterial EBITDA growth in FY22 and onwards. Highly unlikely. I believe that an initial forecast of some $5m in EBITDA is fair given the above placing the stock on a undemanding 13.2x before adjusting for the new cash.
Also not yet mentioned is the monetisation of the $5bn worth of transaction that MSL facilities. The growth avenues seem endless.
MSL is a company that I believe has a higher than likely chance of reaching $10m in FCF some time in the next 2-4 years. (This implies some $12m in operating cash flow and allowing for $2m in investing cash outflows).
I believe a 20x Free cash flow multiple is a reasonable price the market would pay for a business with a long runway for growth and attractive economics. Applying this to FY23 results of “10m in FCF” implies a ~140m market cap and a share price of $0.61 cents. If we discount this back 2 years at a 10% discount rate and then allow for a further 15% margin of safety we end up at a fair value of $0.44 cents.
