Why MPW is undervalued

DISCLOSURE: THE FOLLOWING POST CONTAINS MY PERSONAL OPINIONS ONLY. THIS POST IS NOT FINANCIAL ADVICE, NOR A RECOMMENDATION TO BUY OR SELL SECURITIES IN ANY OF THE MENTIONED COMPANIES. PLEASE CONSULT A LICENSED FINANCIAL ADVISOR BEFORE MAKING ANY INVESTMENT OR TRADING DECISIONS.

STOCK CODE: MPW
Shares on Issue: 249m
Share Price: 26.5c
Market Capitalisation: $66m
Sector: IT
Recent Presentation: www.asx.com.au//asxpdf/20171127/pdf/43pmcss2946sh5.pdf
Why I think MPW is undervalued.

• They were listed in May 2017, raising $15m at 25c per share and the market has forgotten about it. In addition to raising capital, institutional con note holders converted their notes into equity at the time of IPO which has lead to an overhang of selling/profit taking in the stock by note holders.
• It is currently trading at just 10 x FY18 EBITDA, which management has forecast to be $6.5m.
• Management have also forecast FY18 NPATA of $5.9m.
• The market does not appear to understand the nature of the company’s use of NPATA instead of NPAT when demonstrating its profitability.
• The stock has a high quality register – Insiders and Institutions own most of the stock (refer to Appendix A).
• Insiders own approximately 17% of the company.
• According to the prospectus management have flagged that they intend to pay out 40% of earnings as dividends – personally I would prefer if they used that money for more acquisitions, but if they did pay out a 1c dividend in FY18; that would equate to around 4% yield.
• I believe MPW’s share price is in its current range , not only because the market doesn’t know about it; but there appears to be an overhang from Regal Funds and 8IP who appear to be exiting the stock. Regal Funds were one of the note holders that converted into equity at IPO, so it is assumed that they are taking profits.

Why MSL should be valued on NPATA metrics instead of NPAT metrics

• When MPW acquires another software business they are required to recognise the value of existing customer contracts as an intangible asset on their balance sheet under accounting rules.
• Because these existing contracts will eventually end, MPW must also amortise the value of those contracts over their useful life.
• Therefore NPAT is not the best reflection of the underlying operating business, rather NPATA is.
• The amortisation expense that is being excluded is a non-cash expense related to acquired customers assuming they won’t renew business with MPW.
• The company is generating strong operating cash flows

Thanks to @Wini for the above information on NPAT vs NPATA

Peer comparison:
OTW a similar company in the same sector with similar levels of revenue, profitability, & growth is trading at a market capitalisation of $125m. OTW is trading at approximately 20x FY18 NPATA. For MSL to reach a similar valuation as OTW, it would need to trade at approximately 50c a share.

Other Info

• Recently Forager Funds have significantly increased their holdings in the stock and are now the largest substantial shareholder.
• It appears that Forager Funds has used the liquidity from the overhang from Regal and 8IP to build a substantial position in the stock. I have also used the increased liquidity over the past month to build a large personal stake in the stock.

The information below was sourced from the Baillieu Holst Research Report:
Research Report by Baillieu Holst: https://www.baillieuholst.com.au/Se....aspx?Id=3067da66-28ed-4a59-9166-a77700be83c9

• Business & history: MPW was established in 2007 with the objective of becoming a scale player in the “Software as a Service” (SaaS) industry to provide hosted software solutions to clients in the sport, leisure and hospitality Since acquiring the full venue enterprise system Micropower in 2007, MSL has grown through a series of acquisitions that has extended the reach of the group into its current competencies of: 1) Golf Clubs & Associations; 2) Registered Clubs (non-golf); 3) Stadia & Arenas; and 4) Other Hospitality & Entertainment Venues (e.g. Theme Parks). In late 2016, MPW significantly expanded its offshore presence via the acquisitions of Verteda and GolfBox in Europe. MPW now has 2k+ clients in over 20 countries

• Business model: MPW provides hosted cloud-based software solutions to clients in the sport, leisure and hospitality industries. MPW employs an open architecture IT platform (MPower) to combine software applications, data and media channels to connect a customer’s IT from the back office through to member facing functions. The platform is structured along modular lines depending upon the client’s needs. The open architecture nature of the product also means that MPower can also accommodate third party software employed by the customer. MPower’s Business Intelligence product can then combine data from the MPower platform and third party software applications to provide historical, current and predictive views of business operations for the customer.
• Revenue model: MPW’s revenue is a mix of annuity subscriptions/support, licencing and installation, transactional and database media. On an FY18 basis, MPW expects that around 54% of its revenue will be recurring subscriptions/support related.
• Bull points: 1) well-established business with proven products in target industries; 2) high profile global clients such as the MCG, Wembley and Liverpool FC; 3) high level of recurring revenue (>50%) derived from subscription/service fees; 4) the golf business is supported by the endorsement of key governing bodies such as R&A and Golf Australia; 5) the modular product style lends itself to an open architecture IT environment at client level, which reduces the risk of the purchasing decision; 6) global reach of the group has been materially expanded following major European based acquisitions in late 2016; and 7) significant growth potential from both acquired and organic sources – a number of key contract wins have been announced post-IPO.
• Investment risks: 1) importance of responding to technological changes versus competitors; 2) loss of key customers; 3) threat of cyber security and privacy of data; and 4) retention of key personnel.

Appendix A: Top 20 Shareholders as at 28/09/17