Stock updates: NetComm, Mint Wireless and Nanosonics

These three technology-driven stocks have done well ... now they must execute their growth strategies.

If you thought the closing of the reporting season heralds a quiet period for considered reflection, you’d be wrong, because a number of small cap stocks will be bucking the trend.

These are technology innovators facing critical inflection points, which will decisively prove if their businesses will make it to the next big growth phase.

Profit figures aren’t as important to this group. What investors need is constant assurance that these emerging stars remain on track to mature into multi-million dollar money spinners, and this is why a lack of news can often send shareholders scrambling for the exit. As a result, all eyes will be on NetComm Wireless and Mint Wireless.

NetComm (NTC)

NetComm’s results were ahead of my expectations with sales surging 51% to $64.6 million and earnings before interest, tax, depreciation and amortisation (EBITDA) jumping 6.5 times to $5.2 million for the year ended June 30.

I was forecasting sales of $60.1 million and EBITDA that’s just under $5 million, but the market wasn’t paying much attention with the stock slipping around 6% since then to 67 cents. That isn’t too surprising given that the stock had tripled in value over the past 12 months and management couldn’t tell investors anything they didn’t already know about the outlook.

NetComm develops chips and modules for the machine-to-machine (M2M) industry. M2M enables a device to communicate to a network – such as contactless payment systems and smart meters. Management said it is too early to give full-year earnings guidance as they are waiting on a number of new orders and contracts.

We could see updates in by the end of this month or early next month from two key customers of NetComm that would give me a better sense of whether NetComm can meet my 2014-15 sales forecast of $80.1 million.

The first is an update from the company running the national broadband network, NBN Co. NetComm provides residential fixed wireless devices to the NBN and the company proposed in May this year to double the wireless footprint to cut costs.

The Vertigan Panel looking at the structural issues confronting the NBN will hand down a final report within the next few weeks. There is also talk that the NBN Co’s corporate plan will be released in the next month or two, which will give greater clarity on when new additional wireless devices will be ordered.

The second piece of news could come from utility company AusNet Services (AST), which used to be called SP AusNet. NetComm made $14 million last year selling communications modules for Ausnet’s smart meters. Ausnet also has another supplier for these modules but the non-NetComm equipment has been giving the company problems.

AusNet may turn to NetComm to upgrade the M2M modules and the utility is expected to make a decision in the coming weeks.

I’ve upgraded my sales forecast for the current financial year by around 7% but increased my depreciation and amortisation assumption due to the bigger-than-expected increase in technology development costs. The net result is a 17% decline in net profit to $3 million.

However, rolling forward my discounted cash flow (DCF) calculation (by using the 2013-14 as a base year instead of 2012-13) sees my price target increase to 90 cents from 86 cents. I reiterate my high-risk “buy” recommendation on the stock.

To see my forecasts and financial summary for NetComm, click here.

FY14 results vs. Eureka Report forecasts

FY14 Sales (Actual)

FY14 Sales (Est)

FY14 EBITDA (Actual)

FY14 EBITDA (Est)

NetComm Wireless (NTC)

$64.59m

$60.08m

$5.22m

$4.98m

Mint Wireless (MNW)

$2.15m

$1.75m

-$4.56m

-$3.64m

Nanosonics (NAN)

$25.61m

$23.89m

-$1.11m

-$2.00m

Source: Eureka Report, Company accounts

Mint Wireless (MNW)

Mobile credit card payment solutions provider Mint Wireless has tumbled 38% since its results on August 1 to around 15 cents, but it isn’t the profit numbers that have triggered the decline.

If anything, it’s probably the lack of details in its outlook statement and acknowledgement by the company that the sales cycle to secure large deals will take six to 12 months. That’s longer than some were expecting and there are perhaps worries that there will be less time for the company to secure a market lead before the payments market is opened to offshore competitors in 2016.

The thing is my valuation of 35 cents is not premised on Mint winning any new business but on growing adoption of its solutions sold through two key partners – Bank of New Zealand and accounting software firm MYOB.

Mint Wireless has not given an update in two months, but its chairman Alex Teoh is promising to release some news when the company files its quarterly report in early October. Shareholders will be hanging off every word.

The other interesting development is Apple’s intention to launch its “e-wallet” that would allow iPhones to be used like credit cards. The timing of the launch of the feature in Australia is still up in the air, but the success of the payment system could be a positive for Mint because its point of sale solution can be easily modified to accept iPhone payments.

Mint delivered a 3.5-fold surge in operating revenue to $1.3 million but a deeper adjusted net loss of $6.3 million compared with last year’s $2.1 million as management ramps up spending to drive the next phase of its growth.

I had been expecting sales of $1.1 million and a loss of $4.5 million. In light of the increased spend, I have lifted expenses for 2014-15 and 2015-16 by 8% and 5%, respectively. The roll forward of my DCF valuation sees my price target remain at 35 cents and I reiterate my “speculative buy” call on the stock.

To see my forecasts and financial summary for Mint Wireless, click here.

Nanosonics (NAN)

Meanwhile, innovator Nanosonics has bucked the trend and gone the other way with the stock jumping around 20% since its full-year results on August 21.

The stock is now trading at my price target with both its top and bottom lines meeting my expectations. Total sales jumped 45% to $25.6 million and normalised net loss came in at $4.3 million compared with the $7.3 million loss it delivered last year.

I have left my sales projections for its disinfection system for ultrasound probes intact, but have increased expenses, which is largely driven by hiring. This means its maiden net profit for the current financial year is now estimated at $257,000 instead of $1.3 million.

As I mentioned, the figures are not that significant. It’s confidence about market adoption for its disinfection device that will drive the stock and I am forecasting sales to hit $34 million for 2014-15, up from $21.5 million in the previous year. The recent fall in the Australian dollar (assuming the downtrend continues) could help Nanosonics beat expectations.

I have left my price target of $1.15 unchanged but have downgraded my recommendation to “hold” from “buy”.

To see my forecasts and financial summary for Nanosonics, click here.

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