Billing ServicesRecommendation: Spec BuyNo Shares: 58.6m Avg...

Billing Services
Recommendation: Spec Buy
No Shares: 58.6m Avg Monthly t/o: 1.3m
Mkt Cap: $5.6m Last Review: 29/10/03 (SCG326)
Rolling Year High: $0.12 Low: $0.05
FY NPAT EPS % Chg DPS %Fr YLD PER
6/02 (a) (1.4) (3.4) n/a 0.0 0.0 n/a n/a
6/03 (a) (0.6) (1.1) n/a 0.0 0 n/a n/a
6/04 (e) (0.1) (0.1) n/a 0.0 0 n/a n/a
6/05 (e) 0.6 1.0 n/a 0.0 0 0.0 9.5
Telling Situation
We now examine in closer
detail, the investment merits of STE. We still consider the
current market cap to significantly undervalue the company,
but also recognise the speculative nature of the investment
at this early stage of the company life cycle. Our forecasts,
which are highly speculative, are highly sensitive to core
drivers of the business, being the number of phones under
management and the average fee per phone. We believe we
have taken a conservative view as to the timing and fee
structure of coming growth. Even still, we put more
confidence in the fact that the business is heading in the
right direction and has a highly profitable business model,
than our ability to precisely forecast earnings two years out.
We maintain our speculative buy rating.
The Software
Stratatel's core billing services software, MOBILE FLEET ™ manages the use and billing of mobile phones.
The software checks that accounts have been calculated according to negotiated rates with the carrier. It is
particularly useful for companies which maintain lots of company owned mobiles, allowing calls which do
not fit a designated work profile to be separated from normal calls. The result is a more efficient and effective
process for controlling phone costs and recouping the costs of personal mobile use.
The software has been designed for mobiles but the same principal could be applied to fixed line phones,
corporate credit cards or even utilities such as gas and electricity. Indeed, STE operates a fixed line product,
Infratel, which was launched in October 2002 and had 1500 extensions under management as at 30 June.
Important elements of the software are that it was developed completely in-house and STE, in addition to the current
Trade Mark protection, is pursuing additional patents to consolidate their research. The software is carrier neutral and
will operate for all telco service providers in Australia. Offshore enquiries suggest larger markets would also be
available eventually. While there is some competition from telco carriers who provide a limited version of the same
service, customers are more willing to have an independent third party checking and helping to control mobile costs.
Strengthening market position
STE helped the NSW government write the policy for mobile phone monitoring and they have been admitted to
the Australian Technology Showcase. The client list is government heavy, but also has some serious corporate
presence on there. Clients include NSW State Rail Authority, NSW Roads and Traffic Aurthority, NSW Rail
Infrastructure Corporation and Patrick Corporation. Optus is marketing Mobile Fleet as a service to its corporate
customers and the initial results of the alliance are encouraging. The first two customers for Optus Mobile Fleet
were announced earlier this month and there are 20,000 mobiles currently under bid. Given STE currently manage
around 17,000 mobiles, the potential for this alliance is significant.
But that is not where the potential ends. Management estimates that there are between 1.5 and 2 million mobiles
in service for large companies and up to 3 million mobiles in the small to medium enterprise sector. Even a
SCG 327 ¥ November 12, 2003 Copyright ' Huntleys Investment Information Pty Ltd 2003 Page 16
small percentage of this market, which by our thinking should be encouraged by the STE offering, will have
tremendous leverage to profits. On back of the envelope numbers, 5% of the market will generate after tax profits
exceeding the current market cap. Scaling up to service this client base will require investment in implementation
and sales force, but the extra capital necessary would amount to little more than a few extra servers.
Financial Position
As we noted last issue, STE is in a reasonable financial position, with enough cash as security to last till cash flow
breakeven. Last year revenues increased by 50% and apart from $100k increase in employee expenses, other costs
were kept static. As at 30 June, there was $924,000 in cash and no debt. While STE reached a cash flow positive
position late last year, the helping hand of a government grant was included. We estimate a sustainable cash flow
positive position early in the new year.
Despite the recent price rise, we consider the current market capitalisation to significantly undervalue the
potential for the Mobile Fleet product. STE is quickly gaining credibility, customers and emerging profitability.
There are increased risks associated with the tight liquidity in share trading which can be overcome with
patient buying habits. At current prices, a takeover should not be ruled out. Spec Buy!