There’s one UK growth stock I own that I think is massively undervalued compared to the speed at which it’s growing.
It’s not particularly unusual for stocks in my portfolio, to be honest. If companies that aren’t household names, but may be in future, if their profits and cash are growing fast, or if they have a pretty flawless track record, I’m interested.
I didn’t see anything in September’s 2023 full-year results to discourage me from buying more shares in London-based Fonix Mobile (LSE:FNX).
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Revenue jumped 21%, gross profit was up 13.9% and there’s also the huge success of its international expansion.
The move into the Irish market was a masterstroke, it seems. New client wins including with RTE, Channel 4 and Wireless Radio Ireland “underpin our growth expectations”, CEO Rob Weisz said.
Its multi-year contracts also create a high barrier to entry for potential rivals. That’s a good example of Warren Buffett’s much-favoured economic moat.
So what does Fonix actually do?
How it works
When consumers make mobile payments, for example on ticketing, or to make donations, they’re charged via their mobile phone bill. Fonix takes a cut for providing the tech to support such payments.
For example, it was behind the SMS and mobile-paid donations for BBC’s Children in Need for the 10th year running. This kind of repeat business from media clients makes it a confident hold for me.
An expanding blue-chip client list including FTSE 250 firm ITV and the FTSE 100 giant BT adds weight to that conviction.
Fonix’s payment and messaging units are 15% more profitable than a year before too. I’d say this more than offsets the small fall in sales from charity-related mobile payments.
A general measure of the health of any business is its book value. That has quintupled since 2018. And to prove that not all of Fonix’s growth is already behind it? Book value jumped 20% to £9.39m in the last year.
What’s been happening…
Fonix went public on London’s AIM market in October 2020. Because it was a UK-registered business before that, I can dig into its inner workings.
If anyone has never done this before, it’s a fun little hobby to pick up. I can Google Companies House, and search profit and revenue to my heart’s content.
Fonix’s net profit has been rising at a compound annual growth rate of 30.3%. That’s a very healthy figure for a business of this size.
…And what comes next
A long and grinding recession could depress the levels of new business the firm could win, of course. That would certainly be a downer for the share price.
Also, as I’ve mentioned before, AIM shares tend to have fewer buyers and sellers than companies on the FTSE 250 or FTSE 100. So there’s a generally elevated risk that investors won’t be able to realise the market price when it comes to selling their shares.
Exploring new international markets can be an expensive business too. Overspending here would eat into Fonix’s £8.24m of working capital. On the other hand, it has quadrupled its operating cash between 2018 and today.
I don’t think it has put a foot wrong since its 2020 listing. To me, that means 2024 could be a breakout year.
