Fonix Mobile (LON:FNX) was pitched to the Stockopedia Investment Club on the 25th of February 2021 as a promising growth company generating exceptionally high returns on capital. At that point, shares traded at 166p.

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Fonix floated on AIM in October 2020 and has a clear growth strategy that involves increasing the amount of transactions made by existing customers on its mobile payments platform, and using this customer network to expand into new territories.

This is a particularly profitable and cash generative company that has an eye-catching return on capital of some 187.5% - that’s the second highest return on capital metric in the UK & Ireland market. But IPOs get a bad rap and are often perceived as a case of canny insiders cashing out at the top of the market. Private investors are sometimes left footing the bill.

Fonix’s net profit compound annual rate of growth (CAGR) rate over the past three years is some 60.3%. But earnings growth is forecast to moderate sharply over the next couple of years to between 12-15%.

So is this a case of forecasts underestimating Fonix’s prospects, or has the company floated just as growth slows?


Profile

About the Stock:

Fonix Mobile (LON:FNX) is a UK focused mobile payments and messaging company that enables businesses to charge users’ mobile bills and send users SMSs via their Carrier. Its platform is used to engage with and monetise consumers, with millions of pounds processed every month for leading brands.

Fonix in the Telecoms sector and is a constituent of the Telecommunication Services industry group. It is classified as a Speculative Small Cap, and the mix of high Quality and Momentum Ranks makes it a High Flyer.

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This is a recent stock market listing with some remarkably high profitability metrics, a dominant market position, and promising domestic and international growth opportunities. Given its strong operating margins, high returns on capital, forecast PE ratio of 23.6x, and forecast dividend yield of 3.18%, Fonix can be pitched as a QARP (quality at a reasonable price) stock.

The 2.5% spread is manageable although an EMS of just 1,500 means building a larger position might be tricky.

Of the 100m shares in issue, some 50m came from selling shareholders in the float (50% of share capital), so…

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