Documentation

This valuation was done on the 2021-02-14

Fonix Mobile plc

FNX.LSE

- GBP
 Shares Outstanding
Business Description
Fonix Mobile Ltd provides mobile payments and messaging services for client in media, telecoms, entertainment, enterprise, and commerce. The company was founded in 2006 and is headquartered in London, the United States.

Fonix has partnered with some big names such as Vodafone, EE, Telefonica UK, Hutchison, ITV, BT, Bauer and Global Radio to name a few of them but has more than 100 partnerships in total. Its top 10 clients account for around 83% of gross profit and, once integrated with the company, they become very sticky clients. The average contract length of the top 10 clients is over 5 years.

The comforting thing about these partnerships is that Fonix hasn't lost a single one since it has partnered with them. This proves that they are offering a value product that it's partners really want. Their churn rate in total is just 1% which is very small.

The way Fonix creates revenue is when consumers make payments these are charged to their mobile phone using Fonix's platform. This serves areas such as media, gaming and charities etc.

They then generate a commission from the merchant that is then recognized as revenue alongside a carrier commission. Fonix will pay the carrier a commission which it then recognizes as the cost of sales.

To give an example of the huge potential here, the entire market for gaming is estimated to be around £4bn but carrier billing is only a tiny portion of this at £43m so there is plenty of room to grow.

Covid is likely to be a tailwind for Fonix too as more people are using their phones for payments now and not cash.

SMS billing is another area of interest for Fonix where consumer buy content directly from SMS and are then charged to their phone. Think prize entries for TV or Radio for example.

Competitors

Boku (BOK.LSE) and Bango (BGO.LSE) are the companies main competitors. These companies offer similar direct carrier billing processes between companies and MNO's. However these companies are trading at much higher relative multiples than Fonix is.

Boku Financials:

Bango Financials:

Fonix Financials:

Source: gurufocus.com

So you can see from the above that Fonix trades at many multiples cheaper on just about every ratio. The price to cash flow ratio's are deceptively small because Fonix currently has a lot of working capital on it's books however if we look at EV-EBIT it's at just 17 and considering that Fonix has been growing much higher than that YOY it's fair to say it looks undervalued. One other major thing to notice here it the operating margins. Fonix has substantially higher operating margins. This is due to them only operating in high ROIC environments. This also signifies a huge moat partly due to the regulated industry.

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Looking Forward

"We have been looking at international expansion and there are now plans to execute on that, so we expect over the course of this calendar year to start delivering with revenues. We have seen existing customers in other markets come to us for help, so the idea is to address key markets where there are decent people numbers, with high populace and high regulation." - Rob Weisz CEO

This international expansion should see further revenue growth as the business model should be directly applicable to other countries around the world and not just the UK. You can see in the quote that Rob mentions high regulation. This regulation is key because it provides a significant moat for Fonix to deter new market entries. In the UK, this regulation is under OFCOM where £40.00 a day is the limit for contactless transactions through the phone in shops.

FinnCap is currently forecasting revenue increasing to £49.6m with adjusted pre-tax profits of £9.1m and EPS of 7.6p which means the stock has a forward PE of 14.

Even though FinnCap said these estimates are conservative you should take them with a grain of salt because FinnCap has a conflict of interest as they are hired as advisers to the company.

Industry Averages (Global)

Software (Internet)

29.01% CAGR Past Five Years
5.13% Pre-tax Operating Margin (TTM)
8.35% ROIC (TTM)
1.46 Sales to Capital Ratio
9.06% Cost of Capital
1.22 Unlevered Beta
1.29 Levered Beta
The input values I chose for the DCF
CAGR in Years 1-5
17% - 

This is based on the COVID tailwind for contactless payments taking over cash and direct carrier payments benefits from this. I also based this off analyst projections and their past results. This should be a reasonable growth number to hit.

Operating Target Margin in Year 10
20% - 

They already have very high operating margins so I'm not expecting huge growth in margins from their current base but as it's a highly regulated industry I do think 20% should be reasonable here.

Year of Convergence
3yr - 

As the base margin and the year 10 margins are so close together, this number doesn't matter much.

Sales to Capital Ratio
1.8 - 

I'm not too sure on this number but Fonix has so far grown rapidly without much reinvestment into the business.Their biggest expense is SG&A, so as they grow I expect them to hire more employees. This is also likely the reason they are issuing dividends because they don't need to reinvest a lot into the business to grow it.

Hint: Have a play with the below inputs yourself and see how the valuation changes.

DCF Valuation

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in (millions), except per share amounts

Excel

Conclusion

I have estimated the shares to have a share price of - per share.

On the 14th Feb. 2021 they traded for - a share which gives a margin of safety of .

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