LON:FNX | Fonix Mobile - A Deep Dive

3rd Feb '21 by gwilli68

10 comments 1318 reads

I recently decided that I want to do more detailed write ups of companies I'm interested in - really, in order to keep me "honest" and prevent me from skipping on the details and making investments without doing as much research as I really should! This is the first of those - the layout inspired by Jack's fantastic write ups on this site. Obviously all of this is just my own opinion, do your own research, etc. I certainly don't pretend to be an expert in this game, and am more than happy to hear feedback. For ease, much of the below has been lifted directly from the company's admission document or analyst research notes.

Profile

Fonix Mobile PLC ( Fonix Mobile (LON:FNX) ) is a small cap company recently listed on AIM in the Telecoms sector. It’s first day of dealings was 12 Oct 2020.

It is a UK based company that provides mobile payments and messaging services for clients across media, telecoms, entertainment, enterprise and commerce. The Company offers an application programming interface (API) for charging users directly to their phone bills through desktop, mobile and applications.

These solutions have enabled Fonix to leverage its proprietary, cloud-based platform to grow with blue chip clients including Bauer Media, the BBC, BT and ITV, across a range of sectors including media, charity, gaming, telecoms, and other digital services.

Listing

There are 100,000,000 shares in issue, and the market cap is £136m.

When it was listed in October 2020, 50,000,000 shares were issued at a price of 90p (current price 135.6p). This raised £45m for selling shareholders - i.e. no fresh money raised for the company itself. I don’t generally like to see that – it’s essentially a half exit / cash out for the directors, but everyone needs their payday I guess, and they do still have a good stake in the business.

Reasons given for listing were as follows:

- Raise Fonix’s trade profile;

- Enable Fonix to be better positioned to attract, recruit and retain key employees who may be further incentivised through share option schemes;

- Provide Fonix with more flexibility to fund growth;

- Enabling existing shareholders to participate in the future growth of the Company;

- Enable Fonix to issue new Ordinary Shares for relevant M&A opportunities; and

All fair enough though I…

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doug2500

3rd Feb '21

Nothing to add. Great write up, it's exactly what I should've done myself as it's my most recent purchase.

abtan

Fonix Mobile (LON:FNX)

Thanks for this analysis.

I usually don't look at IPOs, but this post made me curious so I decided to take a look.

A couple of thoughts:

1 - Cash on Balance Sheet

Note the £48m of Trade Payables.

Note 18 in the Admission Document shows that most of this is due to Merchants and charities - i.e. it's just passing through the balance sheet (I imagine on 30 day terms, but I can't be sure and I couldn't see this detail anywhere)

If you net the figures I have circled, the company therefore probably has very little of its own cash on its balance sheet.

A side point - I don't understand why a charity would ask for a 2 year delay to receive £3.9m (the admission document states that the charity requested the delay - very odd)

2 - Cash Generation

It doesn't look like the company actually generates any cash.

From the cash flow statement below the £18m net increase in cash can be explained by changes in receivables and payables (+£2.8m + £15.4m).

If you remove these potentially one-off favourable movements, then the underlying cash generation doesn't look too healthy for a company worth £150m.

----

Despite my cautious statements above, there is growth here so I'll probably take a look at the 2021 results when they're published later this year. Hopefully by then the cash position will also be a little clearer.

Cheers

gwilli68

Thanks for these comments, really useful, and yes I agree that the charity delay seems strange, but it doesnt seem as if they are trying to hide anything (atleast to me).

With the cash, one thing to remember is that they have been paying dividends - £6m last year, £5m the year before. So that increase in cash of £18m, would have been £24m if not for the divi payment.

4th Feb '21

Fair point on the dividend, though again note that cash only increased by £18m/£24m because of the favourable positive movements in Accounts Payable and Receivable.

These movements were negative in 2018 and 2019 (as per cash flow statements in my last post).

cmpeckham

5th Feb '21

Congrats on a well written piece. I have a dumb question (I know nothing about this area). You say:

"... some Mobile Network Operators (MNOs) have developed direct, contractual relationships with Merchants and have therefore obviated the need to contract with the Company to provide Carrier Billing services"

Would it be true to say that whoever is providing DCB services would need to have a relationship with each MNO, because transactions could originate on any network? In which case no single MNO has a competitive advantage over Fonix and its ilk? Or it the case in reality that there is some kind of structural competitive advantage that the MNO has over Fonix e.g. the customer only has to deal with one company instead of two, or the MNO can transact more cheaply? Just trying to get a feel of what the future holds and whether this industry structure will probably morph in to something else.

8th Feb '21

Good questions, and tbh Im not sure. Ill see if I can get an answer from the company on that (I have asked them something else and not had a reply - not a great sign - so we'll see!).

Over the last 2 years, movement in Payable / Receivable as been a positive £15.8m. Dividends paid out have been £11.1m. Total change in cash £14.7m. So cash generation over the 2 years has been about £10m (£5m per year). Am I thinking about that right??

I'd agree with your £5m true underlying cash generation per year over the last 2 years, though I'd prefer to split it out by year to see the underlying growth and the most recent FCF yield:

FY19 underlying cash generation = £3,871k
FY20 underlying cash generation = £5,892k

So as a very quick guide:

the underlying cash generation growth doesn't look bad (up c.50% YOY)
the company is valued at c £136m, so a FCF yield of 4.3%.

For me personally the above metrics aren't too bad. It's growing, it's not losing cash, but that yield looks quite low for my liking (I prefer something closer to 10%). Note also, that it is essentially giving away all the cash it generates as a dividend.

It's an IPO year as well so I'll remain wary of the pre-IPO accounts until I've seen another full set.

11th Feb '21

I have sort of answer to the question. I was aware that someone was having a short meeting with the CEO, so I passed the question on, and this was the answer...

"I found Rob very open and to my mind honest, so certainly warmed to him.He welcomed the question and thought it was a very good one! So, he said that some merchants may well strike a deal directly with a mobile operator.However he said historically it has only ever been a goliath that has done this, adding that you are looking at the likes of Amazon, Apple, Netflix.It is, he says, really only of appeal and worthwhile where there are massive brands with huge volumes. He didn't sound at all concerned from their perspective, citing that they are essentiallyoperating across the mid tier space eg, BT Sport, ITV, etc and their customers would be far less inclined to go down that route for a number of reasons. Within that context, he stressed the nicheness of where they sit and as an aggregator across that he feels very comfortable."

This was kindly provided by Martin Flitton - the write up of his meeting is here https://martinflitton1.wixsite...

12th Feb '21

Thanks for the answer. That's interesting.

Fonix Mobile - A Deep Dive

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