After a seemingly disastrous set of results nearly three weeks ago, Monitise‘s (LSE: MONI) shares have taken a beating. The price fell from 5.8p to a low of 2.43p and then settled in the 2.6-2.8p trading range. However, given strong volume last week (following a number of major shareholders dumping its shares) with the stock spiking above 2.9p a few times, it would seem that there are some investors that see upside in the stock. Let me venture a guess what these contrarians are thinking.
Firstly, the departure of Elizabeth Buse from the CEO post could signal that Monitise is ready for sale. We know that back in March, Monitise said it will not consider a buyout offer, as the terms that were offered by interested parties were not adequate for the board. Although we do not know what actually went on during the meetings with potential suitors, we can reasonably assume that Ms Buse faced a number of less-than-optimistic assessments of her business and saw some low-ball offers. We know she turned them down, while possibly insisting that Monitise has a ‘brightish’ future on its own.
If Monitise is now going to be sold, I would imagine that Ms Buse would be very reluctant to sit in the meetings that engender this transaction, as the future of the business now looks quite dark and the terms of the sale are likely to be less generous than those presented in March. However, Lee Cameron seems like the strong candidate to manage the disposal. He knows the business well (being there from the very start), has a legal background and, most importantly, plenty of M&A experience. In summary, it seems that that this CEO reshuffle does dovetail nicely with a scenario where Monitise gets sold to a third party.
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Secondly, Monitise may have a future as a standalone business. Although we can argue about the credibility of Monitise’s CEOs past, present and future, we can agree that the CFO, Brad Petzer, did deliver on his promises. He reduced costs to a level where second-half FY15 EBITDA loss shrank to c.£11m from nearly £31m in the previous half. In addition, assuming (and this is a big ‘if’) that we do not see a sharp decline in revenues in fiscal 2016, Monitise could very well deliver a positive EBITDA next fiscal year. There is a 50-75p difference in gross margin between Development & integration (D&I) and other revenues streams. Thus substituting £10m-£20m of revenue away from D&I and keeping up cost control (assuming cost run rates were bit better at the end of fiscal 2015 than those seen over the whole of FY15) would be enough. Both trends can be moderately seen in the latest numbers. If they continue into fiscal 2017 and Monitise generates some cash, new financing could be available.
Lastly, the impairment of nearly £100m in goodwill and other intangibles is actually significantly too small for a ‘defunct’ company, as it still leaves about £200m of intangible assets on the balance sheet. (Monitise’s value after removing £45m in cash is less than £20m). Usually, impairment tests (even the unaudited ones) should have some relation to the true fair value. Of course, these numbers are not audited and we can distrust their valuation, but even a fair value of the IP (as calculated by a potential bidder) that is a fraction of what is on the books would imply good upside for the stock from its current price.
