These are tough times for small cap stars, with some having fallen out of favour with investors in recent times following their stellar share price rallies.
One only needs to look at NetComm Wireless (NTC) and eServGlobal (ESV) to see examples of hot junior stocks that have come off the boil. But it is Mint Wireless (MNW) that is causing more consternation as the mobile credit card processing solutions company is retesting this month’s nine-month low of 20.5 cents.
While all three companies are still trading higher than when I first recommended them as Buys, Mint’s 45% plunge over the last five months would make even the most seasoned risk takers cringe.
|Mint is now considered a high-risk speculative buy, and is one of the riskiest stocks covered by the Eureka Report team. The loss-making company is close to a make or break point. What happens in the next 12- to 18 months will be critical in determining the longer-term survival of the business.|
The key factor depressing the share price is last month’s $10 million share sale to professional and sophisticated investors. That marked the company’s second capital raising this financial year, with management having already gone cap in hand to the market last September to raise $3 million.
Retail investors have missed out on both occasions, but you shouldn’t feel too sore about being bypassed in the second (bigger) round given that professional investors had to pay 25 cents for each new share. The stock closed at 20.5 cents on Tuesday.
Mint is still up 14% from when I first recommended it in October (Four new stocks for the Uncapped 100), and the dilemma facing retail investors now is whether to jump in with the professional investors or quit while you are still ahead.
However, I believe this isn’t the time to exit Mint and the question about whether to add to your current positions depends on your personal circumstances. Indeed, there is little doubt that the current share price correction should be seen as a buying opportunity for investors with a tolerance for risk.
My bullish take on Mint is driven by two factors. The first is valuation, with the stock trading under my price target of 35 cents. This is assuming that the company can achieve its goal of processing $1 billion in transactions and having just over 37,000 users/devices (some businesses will have more than one user) in 2014-15.
Mint generates income by taking a small percentage of each transaction’s value, charging a monthly access fee to merchants and selling the card reading hardware that allows merchants to use their mobile smart phones to process payments.
It is important that the company gains a foothold in the Australian market by 2016, when Australian banking regulators will lower the barriers to entry in a bid to encourage more companies to offer credit card processing solutions to merchants. Global giants, like PayPal and Square, are already lining up at the gates.
Mint is counting on its exclusive agreement with accounting software provider MYOB to drive market adoption of its technology in Australia. MYOB caters to small and medium-sized enterprises (SMEs) and is estimated to have around 700,000 active users.
One of the key competitive advantages Mint has over other potential rivals is the integration of its credit card solution to MYOB’s accounting system. Current point-of-sale (POS) systems, whether cash or card, typically requires merchants to manually reconcile receipts with their accounting software.
Mint also has launched a program that allows other ecommerce and POS software providers to offer its credit card solution to their clients. These providers can integrate the company’s service for free and Mint gives them a 10% rebate on revenue it collects as an incentive.
As credit card processing services are generally “sticky” due to high “switching costs” (merchants tend to stick to one provider as it is troublesome to change service providers), making the most of Mint’s first mover advantage to win market share is more important than profitability, at least for the interim.
The other important partnership is the company’s exclusive agreement with Bank of New Zealand (BNZ), which is that country’s biggest SME bank. BNZ has only ordered 4000 card units from Mint, and the take-up of the devices has been hampered by the switchover to “chip and PIN” (personal identification number) from “swipe and sign”.
In fact, Australia too will mandate the use of a chip reader and PIN for all credit card transactions later this year, and that could slow the take-up rate of Mint’s solution as merchants might prefer to wait.
Mint is close to launching a chip and PIN device, and MYOB is offering merchants a free upgrade to the new device in an attempt to drive adoption of the solution.
Nonetheless, this poses a risk to my forecast as I am expecting Mint to announce operating revenue of $11.6 million in 2014-15, the year management will announce a maiden profit of $1.8 million.
Revenue and earnings for that year also are supported by two smaller opportunities. It signed a deal with Electrolux that allows technicians to process credit card payments in the field, and has done a deal with leading UK budget airline Easy Jet to use Mint’s payment solution.
News flow is the second reason why I am reiterating my “Buy” recommendation on the stock. Management, under chief executive Robin Khuda – a former senior executive and current board member of cloud solutions company NextDC (NXT) – should provide further clarification on market adoption when the company hands in its 2013-14 full-year results in August.
But that’s not the only potential catalyst for the stock. I am also expecting Mint to announce new partnerships in the coming months, as some of the proceeds from the latest $10 million capital raising are to be used for business development.
Further, Mint is looking to offer “card not present” (online) payment solutions. The mobile “card present” market, which Mint currently operates in, is estimated to be worth $20 billion by 2017. Mint believes that the “card not present” market is twice as big.
However, the launch of this new offering is still nine to 12 months away, and my valuation doesn’t take this into account.
Talking about valuation, some might be unimpressed with the potential upside to what is essentially a high-risk play. This is the shortcoming for using cash flow calculations as a means of working out a price target for companies that are moving from a loss-making position to first profit.
The losses generated in the past and current financial years are a significant drag on valuation, and if I rolled over to the following year (meaning the start year moves from 2012-13 to 2013-14), my discounted cash flow (DCF) valuation jumps to 55 cents from 35 cents.
Some would argue that I should use the roll-forward valuation, given that the current financial year is about to end. But I feel that could be jumping the gun, and I would like to see the 2013-14 results before doing so because of the difficulty in forecasting market adoption rates for Mint. A small change in this assumption will have a big impact on valuation, not least because of Mint’s high operating leverage.
What this means is that Mint will enjoy big upgrades to its DCF price target for the next two years just by meeting expectations. Mint has the hallmarks of being a rewarding investment, as long as one can accept the great uncertainties that lie in its path.
Now, if only I can get my crystal ball to work.