https://alphainvesting.net/2016/11/...into-trouble-is-it-time-to-run-for-the-hills/
After
Mobile Embrace Limited’s (ASX: MBE) update yesterday we saw a sell off of around 50% since Tuesday. While the share price reaction is disappointing, we’ve digested the information and spoken to company management to gain clarity around the somewhat vague commentary around the operational change required to address telco compliance issues. Simply put, for compliance purposes the checkout process for payments now require a two-step acknowledgement before a customer can commit to making a mobile payment, vs. one-step.
What this means is that customer conversion rates have come down, and MBE will require adjustments in how they market to these customers as well as assess the cost of acquiring a customer. From what I understand, this is not an unfamiliar challenge for MBE, which faces compliance changes from time to time, and currently have found ways to adjust their operations and rebuild their ability to acquire customers at attractive returns.
Furthermore, due to a range of supplier system issues, MBE have seen weaker leads in their customer acquisitions, coincidentally occurring at the same time as the aforementioned compliance changes, which has accentuated the financial impact over the first half of 2017. From what I can gather, these issues do appear to be temporary in nature, however the company will need to grow their earnings from a lower guided base ($8M EBITDA for FY17 vs. our estimates of ~$10.5M).
While this is disappointing, the market reaction of a
50%+ share price decline for a 25% decline in EBTIDA is what we would consider to be irrational (the enterprise value is now only $50M and the business remains cash flow positive). With the prospects of international expansion (diversification away from idiosyncratic issues with regulators/suppliers) remaining bright, and we expect this to become an increasingly important part of the thesis,
the current sell off makes the valuation look ripe for an opportunistic buy.
