MWR - Getting to a valuation, page-2

1. The buy thesis

So why should you start to look or get interested in MWR?

Firstly, by way of a very brief business background, MWR consists of two businesses (1) Wearables, which includes the SpaceTalk watch and the AllMyTribe app and (2) Schools.

• Schools is a mature business that generates around $2m in sales per year with good margins (according to management). While management have said they have a positive view on this part of the business, it's unlikely to contribute anything meaningful to growth. But it does create a good, consistent base that helps support cashflow and the wearables segment - this is very useful and is a positive for MWR
• Wearables is the growth part of the business and is why you should get interested. I'll touch on the product and growth in more detail in Section (4) but it's a well credentialed, highly rated, well built phone/watch that participates in a fast growing market segment - children 5-12

The reasons why I think MWR is a compelling buy

• It's the market leader in a fast growing product category
• Industry tailwinds are hugely positive - birth rates and the 5-12 year old cohort keeps growing + more children in this cohort own or use phones
• The valuation and market cap remain extremely low with bad news priced in - I'll explain this in later posts
• Despite the recent sales miss, there is huge and positive sales momentum and potential - the business should generate sales growth of +100% in FY2020
• The product is highly rated and regarded
• The opportunity to expand into new markets represents significant blue sky potential. They've just entered the UK, they're in NZ and obviously Aust
• The opportunity to expand into new verticals (eg elderly, disabled + field workers) provides further opportunity
• They've partnered with Sky in the UK who are paying for marketing costs to promote the product. This is supported by an exclusivity agreement with a minimum volume quote of 15,000 units in FY2020 (~5k done at 1H20)
• Product specifications can easily improve i.e. moving to 4G, which should create further sales momentum
• Management have significant skin in the game. Mark, the CEO, is the biggest shareholder
• There are limited institutional shareholders on the register - when this changes then this will re-rate
• There are a number of large + positive catalysts that should occur in 2020 (i.e. distribution agreements, enhanced product specs, new verticals, EBITDA and potentially NPAT profitability in FY2020 etc)
• The AllMyTrive app provides a consistent, highly margin accretive and scalable business/segment/service that compliments the business and ensures it's not just a 'product' business - having a SaaS component can also be very supportive in the valuation
• Finally, even in a downside case scenario the numbers in FY2021 and beyond look extremely compelling