How To Make Money on Losers, and the Monitise Bid

After the takeover bid was announced yesterday for Monitise (MONI) at 2.9p per share (valuing the business at £70m when it was once worth £1 billion, I thought I would look at my past holdings in this company. Surprisingly my total return over the years according to Sharescope was a positive 8.8% per annum compound in this company’s shares. That may annoy many past holders because it’s quite likely that many people lost their shirts on this stock.

Monitise developed on-line banking apps and other e-payment products. Revenues bounded ahead up to £95 million in 2014, but losses increased in line. Pre-tax losses were £63 million in that year and £243 million two years later after the bubble collapsed when customers decided to build their own apps and a partnership with Visa was cancelled. Major write-offs resulted.

More latterly the company has been promoting a development kit for banking applications, but have had difficulty in selling it apparently. I was sceptical about the prospects for this because selling “tools” rather than ready make applications is always difficult and I have a holding in a private company that has faced the same difficulties. There may be some value in it though because the bidder, Fiserv, are knowledgeable in this area and may be a more credible seller of the new product.

I first bought a few shares in January 2012 at 29p and more later. But I sold that initial tranche in 2016 at around 60p. Why? I did not like the continual fund raising, the persistent losses, the excessive pay of the CEO, general profligacy and unkept promises of future profitability. That was combined with poor cash flows plus general over-optimistic noises emanating from the business.

But I did buy back some shares in early 2016 at less than 2.00p which I am still holding when I considered the “legacy” revenue and future prospects justified, and after the CEO was changed. At the time I wrote an article for the ShareSoc newsletter about this and two other companies which I called “real dogs” and questioned whether they could recover (Feb 2016 Informer Newsletter). Incidentally I did declare my interest in the shares for those who worry about such matters.

So what are the morals of this story:

  1. Be wary of companies which never show they have a profitable business model. Sales are not enough! Monitise eventually had to change that and combined with technology and market changes, these combined to undermine the business.
  2. Are the management conservative or consistently too bullish about the prospects for the business?
  3. Avoid companies that need to keep raising cash rather than generate it themselves.
  4. But there comes a point sometimes in technology businesses where after a change of management the business may be worth reconsidering when all the speculators have long gone and it’s one of those unloved stories that many would prefer to forget about.
  5. Investors in this stock would also have found it useful to read the reports of the company’s AGMs in 2012,2013 and 2016 written by me, Alex Lawson and Mark Bentley that are available on the ShareSoc Members Network.

Roger Lawson

Monitise and Scancell AGMs, and the Wonders of the Nominee System

Monitise (MONI) was one of those stocks for speculators in the past. One of those technology shooting stars that got to a ridiculous valuation under former CEO and founder Alastair Lukes. But despite numerous fund raisings it never managed to reach profitability. The business model chosen never turned out to be of value and the market needs also changed. So he has departed, a new management team is in place, and substantial restructurings have been implemented. The company has also revised its product and sales offerings with more focus on repeat revenue rather than license sales. But it is really betting on a new product called FINKit to revitalise sales in the future. Revenue had been falling rapidly but has now stabilised according to the Annual Report and it also reported a half-year EBITDA profit for the second half and perhaps more importantly, positive cash flow.

The AGM took place on the 19th October 2016 in the City of London at 10.00 am. I bought a very few shares recently as I have an interest in the financial technology sector. A full report of the meeting is on the ShareSoc Members Network but I will just highlight one issue that arose and give a summary.

The voting was undertaken on a poll (far from my ideal way of doing things), but the proxy counts were displayed. I questioned the votes cast against the share buy-back resolution. These were actually reported as less than the votes I had submitted against that resolution (both directly as a personal crest member, and indirectly via two nominee accounts). It later transpired that there were no votes from the nominee operator – just one more bit of evidence of the wonders of the nominee system!

One simply cannot rely on nominee operators to collect or submit votes and there is no clear audit trail when votes do not appear to arrive. This is one good reason (there are lots of others) why this system needs to be reformed so all shareholders (including “beneficial owners”) are on the register.

The results of the votes were declared later in the day – all resolutions passed by over 99%, but only about 10% of shareholders actually voting which is a very low number in comparison with most companies. Perhaps shareholders have totally lost interest in their investment after the dramatic fall in the share price over the last two years (down from a peak of about 80p to 2.5p recently). Or perhaps a lot are in nominee accounts and either find it difficult to vote or their votes did not arrive.

Summary and comments: A useful AGM in terms of learning more about the business. Clearly though it depends on the future sales of FINKit and progress there seems to be slow. Investing in the shares now would clearly be a bet on the future success of that product and although I do not doubt that there is a need for such technology, selling a new solution is always difficult. Until they get some “satisfied customer” stories under their belt, it is not likely to take off. In the meantime they are reliant on their legacy businesses and revenue from pilots and consultancy work. The market is therefore unlikely to change its view on the business rapidly. However its market cap is only about 1 times revenue at present which is a lowly valuation for such businesses.

There is also a very good report on the Scancell AGM on the ShareSoc Members Network by Tim Grattan.

Roger Lawson

Monitise crashes to earth

Monitise made an announcement yesterday (22/1/2015) that prompted the share price to crash. It’s 14p at the time of writing when it had been over 60p earlier in the year, and had been declining steadily over recent months. Questor in the Daily Telegraph said on the following morning that “A buyer may come out of the woodwork but we recommend taking what you can – Sell”. One cannot be blunter than that.

The company announcement indicated that revenue growth will be flat or falling this year when it was expected to rise substantially. They also indicated that they were undertaking a “strategic review” and declared they were in an “offer period” under Takeover Panel rules. It is clear the business is being put up for sale.

This company has never made a profit in the years it has been listed, but still expects to achieve “EBTIDA profitability in FY2016”. The market cap is still £320m and revenue is key when valuing this kind of company if profits are yet to appear.

ShareSoc Members might have been aware of some issues at this company because there were two reports from their past Annual General Meetings on the ShareSoc Members Network. In addition this writer made some comments in an article on share tips in October 2014. I said that I had “become disillusioned with the business strategy, the continual fund raising required to support it, and the management approach” of the company and had sold by holding in the company in April. I was also never happy with the remuneration levels of the executives including share options which they cashed in at an early opportunity rather than retained the shares.

It will be interesting to see whether they find a buyer for the business and at what price. But with the growth of competition in mobile banking solutions, it is not at all clear that they have any unique technology or unique market position that justifies even the current valuation (about 3 times revenue).

In summary, Monitise is yet another AIM shooting star that has crashed to earth. A great “concept” stock promoted by a persuasive CEO, but where it was never really clear that the business model would enable them to generate real profits. Even the business model changed recently to concentrate on subscriptions rather than licensing. It is a good example of the danger of investing in technology stocks unless you really understand what’s under the bonnet and the market environment.

Roger Lawson

The dangers of share tips – Naibu (NBU) and Monitise (MONI)

Well respected stock picker Simon Thompson had to admit defeat with Naibu in the Investors Chronicle on Friday (19/9/2014). This Chinese maker of sportswear has, on an earnings basis, been ridiculously cheap for a long time, but some investors liked the high dividend yield. Simon picked the company for his share pick of 2014 in the Investors Chronicle – he tipped it at 58p in February with these words: “It’s not often you have the chance to buy shares in a company trading below cash on its balance sheet and at a third of its book value. It’s even rarer to find a company offering a near 10 per cent dividend yield and where net earnings for just one financial year equate to almost all of its market value. However, this is the tantalising investment opportunity in the shares of Naibu Global International (NBU), a Chinese maker and supplier of branded sportswear and shoes“.

There were glowing mentions of how cheap this company was in subsequent editions of Investors Chronicle since then, but on the 12th September in its Interim Results the company declared it was passing its dividend. Simon has noted how odd this is bearing in mind the stated cash position of the company and the profits it is generating. He said in the latest edition that this “makes it an even greater outrage that the company should treat minority shareholders in this way“. More followed in the same vein. There is clearly nothing like a share tipster defeated in his analysis, particularly after he had “averaged down” at 45p when the share price is at the time of writing 26p. He now recommends investors sell.

What can be learned from this debacle? One that share tips are dangerous both for tipsters and investors. That is particularly the case when one is making investment decisions primarily using financial analysis in a business in far away country and where it is not easy to talk to the management. Dangers were not difficult to spot – the company has an Executive Chairman, Mr Lin, who holds 52% of the shares – so in essence he can pretty well do what he wants. With a short track record as a public company, this is the kind of company this writer avoids. It would also undoubtedly score lowly on the “AIM Scorecard” we published last year (available on our web site).

Another lesson to be learned is surely that one should not “average down”, or go against the share price trend. To do so, as happened in this case, is surely a mistake. You have to be absolutely, absolutely sure there is nothing that other investors know that you do not before doing so.

Incidentally Simon Thompson also tipped Avation in his latest column. This company is presenting at our ShareSoc Growth Company Seminar on November 26th so it will be interesting to see whether what they have to say backs up his analysis (it’s not yet listed in our Events page – check in late October for details).

Another tip in the edition of Investors Chronicle issued last Friday was Monitise. This payments company was noted as “growing fast” – revenue is but losses are also growing – as much as £51.8m “adjusted” losses this year are forecast. The writer signed off with the words “Now’s not the time to back out” after noting recent share price declines.

Unfortunately the day before that edition of the magazine was on the streets (and hence too late to incorporate), the company announced that Visa (who are both a business partner and significant investor with a representative on the board) were assessing their stake in the business. There were hints that Visa, a key partner, want out. The share price promptly collapsed 33% on the day.

Now this writer has that well known German feeling of “Schadenfreude” – the pleasure that one has avoided damage while others have not. I sold my holdings in this company in April having become disillusioned with the business strategy, the continual fund raising required to support it, and the management approach. Dilution of investors share stakes can seriously damage your wealth, and the date when profitability was forecast continually moved forward. One might say that the management lost this investor’s confidence over a period of some months.

But my experience of running software companies also told me that it is possible to grow revenues by spending large amounts of money because some of our competitors used to do that. But whether you can ever turn those revenues into a profitable business is doubtful. The other problem with Monitise is that it is operating in a rapidly evolving sector. The landscape for payment systems is changing as new entrants move in (such as Apple), and although it is a growing market some of the valuations are plain daft (typically 10 times revenue, regardless of profits). By the time a business has conquered the market with heavy expenditure, it might simply find the battle has moved on to another country so it never achieves profitability.

Now Simon Thompson, and no doubt the writer of the article on Monitise, have had their past successes with share tips. But the moral for readers of any publication that tips shares is that you should never follow them blindly. You should do your own research to discover whether the story is credible or not, and be willing to change your mind as you learn more about the business.

Also this year’s wonder stock can be next year’s dog. When the valuation depends on future sales growth and earnings (as is certainly the case with Monitise), the share price can collapse at the slightest change in their prospects. High multiples of revenue, or earnings, in companies are ones to avoid because they are very sensitive to changing circumstances unless the business model is strong and they are generating cash rather than consuming it!

Note that I am not trying to deter folks from reading Investors Chronicle or looking at their share tips. It’s a very informative and educational publication in all respects. But one can certainly learn lessons from their occasional mistakes.

Roger Lawson