initiation of coverage

INITIATION - Moko Social Media (MKB.ASX, $0.21/sh, Mkt Cap $141m) – Exposure to the booming mobile advertising market – SPEC BUY (PT $0.40/sh)

Event:
• We initiate coverage on MKB with a Buy recommendation and a price target of $0.40/sh

Investment Highlights:
• Exposure to the booming mobile advertising market. Moko provides exposure to the booming mobile advertising thematic which is growing at phenomenal rates driven by the proliferation and use of smart phones. Marketers have seen a drastic change in where dollars are spent when it comes to online advertising and likewise investors are seeking exposure to companies that will grow quickly in expanding markets. Moko is well positioned to take advantage of these trends.
• Focus on mobile social networks: Moko is focused on delivering mobile social networking services for large interest groups in the USA and monetizing the user base through mobile advertising. The initial focus is on US colleges were Moko is targeting to roll-out its REC.IT mobile application. REC.IT is a mobile application which allows student and staff to manage their non-curricular activities.
• Exclusive access to 10 million highly marketable US college students: The primary driver in the share price rerating over the past 6 months is due to the signing of exclusive mobile-rights agreements providing Moko access to 600 of the top tier colleges in the US providing an audience of ~10m students. To put this in context this provides MKB access to about half the US college population. Given the extremely attractive demographic we believe there will be great demand for advertisers to utilise the REC.IT application when it is rolled out in 2HCY14.
• Business model provides significant ‘blue-sky’ potential. We anticipate revenues should start to climb in the back half of CY2014 when the rollout to 600 colleges has been completed. Under our ‘base case’ scenario we forecast profitability in CY14 with NPAT growing from revenue growing from $1.4m in FY14 to $75m by FY17.
• Scalable platform to be expanded beyond colleges. Beyond REC.IT there are other opportunities which MKB can leverage their platform and use it towards other high volume specialty audiences such as running groups, cycling groups etc. This represents significant upside beyond US college application.
• Nasdaq listing to provide re-rating. The company will seek a full listing on Nasdaq, which is scheduled for Q1CY14. We believe a Nasdaq listing could provide a re-rating in the stock given the valuation precedence being set by the larger players in this space. The impressive listing of Twitter which on its debut traded at over 100% premium to its listing price highlights investor demand and interest in the social media/mobile advertising space.

Catalysts
• Nasdaq listing: Q1CY14
• Pilot program: Q1CY14
• Roll-out of application: Q3CY14

Recommendation:
• We initiate on MKB with a SPEC BUY recommendation and a price target of $0.40/sh.