Welcome to 2020. The first profit warning of the year covered is a small one, from the AIM-listed Mobile Tornado (LON:MBT). At a market cap of £14m and a Stockopedia rank of 7 this is one of the smaller ones covered so far. And even the warning itself is of small magnitude: a trading statement today pushed the shares just 5% lower: small for warnings standards:
Given the heavy illiquidity of this share it isn’t beyond the realms that this could actually end the day in positive territory as even a small amount of trading can drastically affect the price. In any case this still sits above the 52-week low of 2.92p.
Many investors will not have come across Mobile Tornado before, which specialises in ‘Professional PTT Solutions’. PTT in this case being ‘Push to Talk’. My only recollection of this is as a function on older Nokia phones, to provide an ersatz walkie-talkie function to phones but this never took off: no doubt this would have been unpopular with the networks which charged people when they did make calls or texts.
Whilst PTT may have died out in a consumer sense there are many applications for business where this sort of messaging may prove to be beneficial, and additional advances in technology have given this much greater scope than the initial iteration: for instance the provision of images or GPS data.
Unfortunately Mobile Tornado has not been a good investment for longer-term holders. It has been listed a long time, since 2004 and despite trading between 30-40p initially, slumped to 5.5p by 2006. 2013 saw the share wake up and there was a 1-year window where it traded again highly at almost 30p. This too was short-lived and since 2015 it has not been over 10p. There have been no dividends and plenty of dilution.
What’s gone wrong at Mobile Tornado?
The bad news comes in a Full Year Trading update RNS, and we get straight to the bad news:
The Directors currently expect revenues for the six months to 31 December 2019 to be approximately £1.8m with an approximate EBITDA breakeven position for the period. As a result, based on unaudited management accounts and subject to audit, the full year revenues for 2019 are expected to be approximately £3.3m with an EBITDA* loss of approximately £0.3m, which is below current market expectations.
It is unsure what the expectations were: Stockopedia has a full-year turnover of £4.2m, but this may not have been updated in a while. Here are the reasons:
The shortfall in revenue has been driven largely by a delay to the full deployment of the Company’s solution with a government agency and a major public utility in Israel. Although the commercial terms for these deals have been agreed, and significant development work completed for each customer during the period, full deployment of devices to their field teams has been delayed until the early part of 2020. These two customers represent major strategic wins for the Company during 2019 and the Directors of the Company are confident that the commercial value of both deals will grow significantly during 2020 and beyond.
On this basis this represents some good news and probably explains the muted fall in share price, although some investors may be nervous of being dependent on Israelli companies for profits.
Mobile Tornado: Jam Tomorrow, not today
Looking through the recent history there does not appear to be much to like about the company. It has really struggled in previous years to make any type of meaningful growth, with 2018 revenues around 10% higher than they were in 2013:
We may be able to understand some of the markets enthusiasm in that the majority (£2m) of its latest revenues are recurring ones, and the rest associated with ongoing support and setup. These type of revenues are good to have as it provides a good amount of certainty. However, the figures indicate that either there is plenty of customer churn, it has been difficult to capture new contracts, or new contracts are not worth very much.
There is also some understandable excitement as the firm has strategically targeted security as a base for development of further products. This is a field which may become more relevant in later years with trust seemingly on the decline.
The other notable thing is that research and development costs are not capitalised on the balance sheet (which they are in other companies). Perhaps this may be a different interpretation of the accounting code but the effect is they are booked in as expenses, thus affecting profits. At over £1m this is material for revenues of this level and may change the outlook completely depending on how they are treated.
Despite being listed on AIM, there is very little business carried out in the UK with revenues coming from North/South America, Asia and Israel. There is also large customer concentration with one major customer accounting for almost a third in revenues.
Balance sheet woes
The balance sheet here looks weak, to the point that something has to be done. In July of this year £750,000 was raised, but this hardly seems like enough. At the half-way stage last year total assets stood at £2.2m while total liabilities were £13.61m – a huge discrepancy. The current ratio was no better either: current assets of £1.95m vs current liabilities of £6.165m. The firm appears technically insolvent.
This might be a problem if the company was not held by a much larger parent. Intechnology holds over half of the shares of Mobile Tornado and bears the brunt of much of the debt:
Not having external debt is a good thing, but the the shares have a real cost: they yield 10% per annum and cost the company just over £600,000 in finance charges in the last accounts.
Checking the parent company its financials appear to be run much the same way: a large debt balance which is not external, yielding a high amount of interest (10%).
Are Mobile Tornado shares good value?
The setup strikes me as one run for directors and employees rather than shareholders. The products offered seem to have some merit, but the financial figures so far do not appear to support this theory as revenues have remained too flat for our liking. There is being plenty spent on research and development but unless I have missed something there is nothing ground-breaking.
My own opinion is that these types of services could be replicated quite easily by one of the larger firms (and probably already are). Security is a real concern for the future, but many of the potential users may be large enough to invest in their own solutions rather than have to pay royalties every year to a tiny third party such as Mobile Tornado.
The weak balance sheet set up means that even though there may be no immediate danger, those holding the debts have a real power over the firm. 1/5.