Monday, 15 August 2016

Platinum Sector Developments

Two developments have caught my eye today.

Firstly news that Miner Anglo American has come under pressure by its largest investor to sell its platinum mines to a state-backed vehicle. This has pushed the share price higher in early trading and it's no surprise given their open intentions to buy back platinum operations in the national interest. South Africa's pension fund the Public Investment Corporation (PIC) will likely not relent on this course given the delicate balance of platinum supply in the country. The PIC is reportedly looking to roll its other platinum interests into a new national mining company to rival the other majors in the country and this acquisition would fit the bill. Whether or not this deal ever comes to fruition it shows the appetite for platinum by national backed vehicles like the PIC. Given our profitable operations and low market valuation we may one day be the focus of a hostile takeover although more likely we will see institutional buying in the lead up to talks I would think. Despite being a small operation with limited future expansion prospects we are very profitable and would be a sensible addition to PIC's portfolio of assets given they are looking to sweep up platinum operations.

The second item for discussion is news that Zimbabwe are tightening regulations in the mining industry which will potentially impact platinum mine investment in the country. Zimbabwe produces around 8.5% of the world's platinum, the world's third largest producer and in terms of palladium is ranked fourth largest.

"A report by Reuters over the weekend says the draft bill, which has been more than a decade in the making, includes a provision that authorities will only issue mining rights to companies listed on the Zimbabwe stock exchange."

The majors operating in Zimbabwe are primarily platinum group metals companies such as Anglo American Platinum, Impala Platinum through its Zimplats subsidiary and Aquarius Platinum but none are currently listed on the Zimbabwe stock exchange. Foreign companies must also sell a majority stake (51%) to local investors under the country's indigenization laws. Recent developments suggest a deepening protectionist trend emerging in the country.

The Zimbabwe government earlier this year revoked the licences of all diamond mining companies operating inside the country. They consolidated diamond mining in the country's rich Marange fields under a state-owned entity. Foreign miners have also been ordered to return mineral leases which the state says is not being developed at 'a fast enough pace'. In January last year the country introduced a platinum export tax but suspended it once majors Amplats, Implats and Aquarius agreed to support local metal processing prior to export. Such government backed moves to control the industry will likely push investment into neighbouring South Africa which itself is looking to become a significant player in the PGM market.

Friday, 18 March 2016

With the Malaysian Ringgit rising is it now time to invest in Malaysian small-caps?

I've always fancied MobilityOne (MBO) ever since that fateful week in January 2015 when the stock bounced off it's 52 week low, ending the month more than 100% higher. What follows is a breakdown of the key indicators.

The long term trend looks positive, demonstrating consecutive revenue growth every six months in all but three of the fifteen HY periods assessed. The company explored new avenues in the wake of the financial crisis and managed to mitigate the slowdown in the global economy.

MobilityOne's revenue stream has been growing from strength to strength but what of it's profits? Are the company products and the way in which it trades generating profits if any? I've compiled the figures for revenue and the gross profits during each of the 6 month period since 2008. What the chart shows is a parallel correlation between the revenue and the gross profit booked. The chart figures are in (GBP) millions, with the left-side measuring revenue and the right-side gross profit. As revenue has increased so has gross profits.

We should also take into account that the value of the MYR against the GBP (in which the accounts are reported) increased from 2008 up until 2010 rather quickly and remained stable until around mid 2013 before it began to lose value. Gross profits appeared stronger perhaps in part to the stronger currency exchange. More recently the MYR has lost purchasing power against the GBP and we saw that reflected in weaker gross profits despite record revenues in the first half of 2015. The second half results may suffer as a result of the extreme currency fluctuation during the latter half of the year. However since the start of the year the MYR has strengthened and regained some its losses which should reflect well in the first half 2016 results to be released in September.

The company have had a mixed performance in recent years, struggling to keep above water in some periods, but now appear to be on a stable growth platform. The loss booked in H213 was particularly bad due to the write-down of loss-making assets the company disposed of following a policy shift towards domestic trade. They also suffered from impairments in the first half of 2014 which impacted profits. During slower periods MBO have accessed loan facilities and received the support from Directors through in-house loans providing cheap access to finance. They have had no problems in paying down these facilities as will be illustrated a little later.

Operating profits are often squeezed due to the high cost of sales involved, continuing product research & development and previous expansion into emerging markets. The latter factor in particular has drained positive net cash-flow in an effort to expand into new territories, specifically Indonesia, Cambodia and the Philippines. The company have now disposed of their loss-making ventures and written down assets, stripping out excessive waste and are beginning to gain traction in the domestic market with operating profits booked in the past three periods.

The assets & liabilities make very interesting reading and I would encourage those interested to check out the FY 2013 accounts in order to understand the reasons why Net Assets fell considerably in the second half of 2013. The charts below show Net Assets fell considerably and have held around the same level for two years. Net Current Assets held have occasionally dipped into negative territory however more recently appear to be strengthening towards levels last seen in 2008-09.

This chart better illustrates the Net Current Asset position. The value of net current assets is often the preferred indicator of company health as it deals with working capital and other measures that affect the company's short-term financial health. Whilst net assets have suffered in the past due to writedowns the company has boosted it's short term net capacity. More on this later.

Here's the growing Net Current Asset value over the Net Asset position which appears to have bottomed. Fundamentally, Net Assets shouldn't suffer another shock as the value attributed to such has been much reduced. Add to this the company recently sunk £330k into purchasing new headquarters in Kuala Lumpar which is a hard asset. The Net Asset position doesn't reflect the impressive growth the company has experienced nor the increasing current asset position away from non-current assets. In June 2008 current assets were worth just £1.55m and by June 2015 they were worth almost £4.0m!

Cash held on the balance sheet at the end of each 6 month period has increased steadily for the most part besides H113. A steady trend upwards. The amount of debt held fluctuates as the company draws down on short-term loans and repays when it is due. Net debt peaked in the second half of 2011 at more than twice the total cash held. Since then Net debt fell to £442k in the first half of 2014. It shot higher in the second half of the year owing to a property purchase, increasing receivables and short term loans to cover the cash-flow. Crucially we saw a huge reduction in net debt over 6 months from £1,443,112 at H2 2014 to £734,128 today!

The chart suggests the BoD have a 'cash-retention' policy where possible to increase the amount held at every half year interval. This has it's benefits, providing easy means of cash-flow and shoring up current accounts. It also looks healthy on the balance sheets. We can also deduce that the company prefer to use free cash-flow to reduce loans rather than significantly increase the sums of cash held. The company has a large trading account surplus and inventories to boot which fluctuate according to demand and are partly responsible for the net debt swings.

If we focus on the non-cash current assets it's clear again that the scale of the company operations have increased significantly over the past 7 years. Inventories made up a greater proportion of ITOR in 2008 but due to lack of trade the company had relatively little Trade & Other Receivables due. But the trend began to improve in 2010 about the time loans increased and Net Debt also. ITOR peaked in H1 2011 whilst Net Debt peaked in the second half of the year. Inventories have since then been depleted whilst cash has continued to increase on the balance sheet. We saw one anomaly in H214 as loans increased and Net Debt also reversed it's falling trend. At this time the company took out a loan for the new headquarters in Kuala Lumpar. It also appears that Trade & Other Receivables spiked up at the same time which was unfortunate, most probably a series of late or due payments resulting from the company changing it's growth policy to domestic markets. Results in H1 2015 showed this to be an anomaly as Net Debt fell at the fastest pace on record helped by a strong operational performance and the collection of Trade and Other Receivables.

This chart shows a clear correlation between the Inventories & Trade Receivables less the Trade and Other Payables (we will call this Net ITOR) in comparison with the Net Debt position over the past 7 years. What we see are clear parallels between a rising Net ITOR and a rising Net Debt position. We know that because the greater proportion of ITOR has been receivables due rather than stocking up on inventory, the company has financed cash-flow through short term loans (expanding Net Debt). What the chart doesn't illustrate is that as both Net ITOR and Net Debt have fallen in tandem, the balance sheet has actually expanded. The company are moving towards Net cash and an even ITOR/TOP balance. I would hope to see a Net Cash position in the coming years.

Net Operating Cash-Flow is what the company generates from it's operations after interest among other things. Crucially it does not included Finance and Investing cash-flow, such income and expenditure like the purchase of property and the draw-down of a loan. This is purely an operational performance indicator. It is normal for it to fluctuate between each half. What the figures show is that operations were loss making for about 4 years but have since performed well aside from in 2014. Net Current Assets and Net cash-flow from operations were at their highest point since 2009.

The chart below better illustrates the trend. You would expect Net Current Assets and Net Debt to show similar correlations and they do. However we can also see a similar trend with the Net Operating cash-flow and Net Debt. If cash-flow from operations is strong in the period Net Debt falls. When the company are short of cash the Net Debt increases. What's exciting is that the company are headed towards another strong finish (H2 2015) which should see Current Assets increase, strong Net Operating cash-flow reducing the company's reliance on short term loans. In other words a reduction in Net Debt. All this will help reduce financing costs (interest).

I'm keen to reiterate this company are valued at £2.5 million on AIM. The markets should in theory forward value the company earnings and trading outlook. Instead this stock has been left largely ignored since June-July 2015. There was a large bounce on increased trading in January 2015 but otherwise volumes in general have been poor ever since November 2013.

If you take the operating profit figures it correlates well with the falling share-price over this period. More recently we have seen a return to profits but as yet this hasn't been reflected in the market value. The ringgits devaluation and general market weakening since the Autumn 2015 has kept investors at bay. Small-caps have suffered greatly. High growth countries such as Malaysia and its neigbours should do well in the coming decade compared to the ailing US whose economy is plagued with all manner of social and economic issues. Europe is an even greater concern.

More to the point, I would choose long established companies such as MBO that are largely ignored by investors, have only recently begun to report significant amounts of profit (in comparison to their market value) and are cash positive or are moving quickly towards it. Whilst MBO has seen it's net asset position (in particular non-current assets) fall as a result of failed ventures abroad it has responded well looking to capitalise on domestic share and expand its business through profitable trade. As a result, operating profits are improving, free cash is reducing the net debt position very quickly and the company are in a position to boost revenues through existing market places. I expect this trend to continue and will gain market recognition in the coming years.

Monday, 26 October 2015

MobilityOne’s Half Year performance boasts a post-tax profit for first time since 2012

The signs were here late last year. Management were proactive and enacted a disposal of loss-making and non-core assets. The share price bottomed following an improvement to the cash-flow figures however the balance sheet remained a little uncertain following the increase in net debt. First half 2015 results have revealed that was indeed a one-off increase, with the net debt position likely to fall as has been the trend previously and for the first time since 2012 the company has reported an interim post-tax profit.

It has been the case for a long time that most of the company’s revenue and profit is generated in the latter half of the year. So it’s encouraging to read MBO have generated record revenues in the six month period and solid operating profits of £218,664. This follows an impressive second half performance last year when the company booked £379,688 operating profit in the final 6 months of 2014. The news was poorly received however, the share price has barely moved all summer. The prime reason being liquidity here remains very low with over 78% of the share capital held by long term investors. It’s worth a quick reminder who holds what.
As at 23 June 2015, the Company had been notified of the following beneficial interests in 3% or more of the issued share capital pursuant to Part VI of Article 110 of the Companies (Jersey) Law 1991:

Total of 83,336,323 shares or 78.4% of the capital held by

1. Dato’ Hussian @ Rizal bin A. Rahman (‘Dato’ Hussian’) (53,465,724 shares = 50.29%)
2. Thornbeam Limited (16,048,922 shares = 15.10%
3. Dato’ Shamsir bin Omar (9,131,677 shares = 8.59%)
4. Perbadanan Nasional Berhad (4,690,000 shares = 4.41%)

The freefloat is currently 22,962,457 shares (21.6%). 

Infrequent updates makes for little excitement.  But things can change. As we saw last January the share price moved very quickly for no reason following some buying pressure. Perhaps it was a delayed market reaction, rumour or value traders as over 2.25 million shares exchanged hands.
The market capitalisation is currently less than £2.8 million and as a holder I’m fairly confident this will look cheap in the next 12 months. The question all investors will ask themselves is when will this return investment value.
So looking at the latest set of results MBO turned revenue of £31.3 million in the first half! That’s up over 33% on the same period last year (H114: £23.5 million). This is a huge increase for a small-cap company. What’s potentially more exciting is that second half trading is always higher! Even if we use conservative forecasts we are looking at more than £60 million revenue this year compared to £53 million in 2014. I think it will come in around £65 million assuming they can maintain this momentum. Revenue growth is a key driver and indicates product demand is on the rise. Factoring in the sale of subsidy holdings in the Cambodian and Indonesian operations during March 2014, it’s clear the Group's mobile phone prepaid airtime reload and bill payment business is therefore expanding at its quickest pace, even as the weakening Malaysian Ringgit impacts currency conversion.
The Group recorded an operating profit of £218,664 in H115 compared to £41,137 for H114, an improvement and by no means a paltry amount. The exchange rate has negatively impacted the value of profits in (£) Sterling. MBO’s international remittance services (IRS), of which they had 6 continued to ‘incur losses’ and was subsequently discontinued in the period. We can deduce that had they been disposed of earlier, the headline operating profit would be higher. Certainly in the second half the company results will benefit from the disposal of the IRS and in future trading periods.
For the first time since 2012 MobilityOne have booked a first half post-tax profit of £111,534. This followed a post-tax profit of £73,998 in the final 6 months of 2014 and compares favourably to a loss post-tax of £29,526 in the same period last year. Whilst this figure is less important for assessing cash-flow and growth trends, it’s exciting to see a genuine improvement in company profitability in what is normally the weaker of the two trading periods.
The cash position continued to rise and was up by £247,259 year on year to £1,705,062 (H1, 2014: £1,457,803). This compares to the year end 2014 cash position up by £288,262 during the year to £1,608,255 (H2, 2013: £1,319,993). In the past six months we know the cash position has risen by £96,807 which isn’t so significant. Cash generated and a lot of what was due in trade and other receivables at Year End has been reduced to repay approximately 20% of the debt. Loans (including those owed to Directors) amounted to £3,051,367 at H214 and has now fallen to £2,439,190. A very impressive net debt reduction in six months from £1,443,112 to just £734,128 today.

On a year-by-year comparison we need to keep in mind that loans are still higher by £539,556 (H1, 2014: £1,899,634) largely as a result of that £330,000 purchase of property to serve as company headquarters. The number of receivables due is also higher than the same period last year and balance sheet growth of this kind should ensure there are no liquidity issues. The net debt position continues to fall and that trend looks to be improving at a quicker pace.

The difference in inventories + trade and other receivables (ITOR) vs trade and other payables (TOP) is an interesting comparison for assessing trading performance. According to first half 2015 results ITOR fell to £2,294,609 and TOP rose to £1,397,576. That’s still an overall surplus of £897,033 but lower than 6 months previous (H2, 2014: £1,510,008). The surplus will likely repay loans or become cash on the balance sheet in the next trading period. As we have seen, cash rose by £96,807 and loans fell by £612,177 in the first 6 months of 2015.

Like I mentioned last time “Expect a balance sheet with net debt significantly reduced and much of the receivables due at the end of the 2014 realised into cash.” Net debt is now just £734,128 and with an overall trade surplus of £897,033 we could be looking at a net cash position by year end although more likely to fall in H116.

High revenue, low margins and profitability is due to MBO reinvesting funds back into the company's research & development departments. There could at any time be costs reductions and in fact we did see a fall in Administration costs over the prior period. Gross profits were up in the period but margins lower than the final 6 months of 2014. Much will depend on what the Ringgit does in the coming months but whilst MBO’s market cap is £2.8 million I won’t be swayed to sell if the Ringgit does continue its current trajectory lower.

The HY results are tabled alongside the previous half year trading periods for ease of analysis. I would expect second half operating profits somewhere in the £500-600k bracket. Margins are improving and will continue to do so according to company guidance. Disposing of loss making assets, reducing costs, increasing customer base should all contribute to a very profitable second half trading. The amount of cash/loans on balance can vary but I’m expecting net debt to fall to around £300-350k by the end of the year.