The Mind Gym share price (LON:MIND) fell over 30% in (admittedly volatile) trading today as the psychology-led seminar specialist warned about the effects of the ongoing virus which is blighting stocks all over the world. Today was probably the worst day to bring this news out. Due to the recent oil price tussle, shares have almost been indiscriminately sold off:
Mind Gym are a very interesting company. A recent IPO in 2018, they seek to specialise in the utilisation of psychology and behavioural science to improve the performance of employees. Aspects of this have been around for some time (ie. Maslow’s hierarchy), although its arguable whether companies really paid much attention to this in the past.
An increasing interest in mental health and tapering of improvements from technology has brought companies such as Mind Gym into vogue. The incredible success of many similar mobile phone applications in the app stores of Android and Apple is testament to this. As we can see on their website the potential applications of this are vast, offering Mind Gym a huge opportunity.
Today’s share price falls don’t take the price to new lows. The Mind Gym share price disappointed after IPO and sank to under 120p by April 2019. Things really began to pick up speed to the end of the year and the price was over 200p at the start of February. The collapse has been pretty spectacular, but it has been for many other companies.
What’s gone wrong at Mind Gym?
The warning comes in a trading update. We are straight into it:
Underlying trading remained strong between the half year-end (30 September 2019) and the end of January 2020, however, the Group has since experienced a material impact on revenues from the outbreak of the COVID-19 virus. As the virus has spread from region to region, we have observed an increased number of cancellations of booked sessions from clients and a material reduction in new bookings.
This is not surprising. Many companies have sent their staff home, others have cancelled conferences. And things could get worse on this front if the trend of the virus spreads. Mind Gym’s revenues are split almost equally between EMEA (Europe/Middle East/Africa) and the US so this is pretty ominous.
Fair play for them trying to quantify the impact:
Given the uncertainty about the extent and duration of the virus outbreak, it is difficult to forecast accurately the full year impact, but we currently anticipate revenues to be in the range of a 10-15% increase on the prior year (£46.5m to £48.5m), which is below our previous expectations of revenue growth for the year.
Accordingly, Adjusted PBT is now expected to be between £5.8m and £7.3m. The strong focus on cash continues, and the cash balance at 31 March 2020 is expected to remain in line or above market consensus of £14.0m.
Adjusted figures last year were in the region of £8.5m, although this included some hefty expenses related to the IPO and paying off shareholders. With these items not featuring this time around it does seem that profits will take a hit.
Mind Gym: Cash is King
One thing that would have made investors quite happy is the growth at the company. The IPO raised no money for the business, and instead was used to buy out existing shareholders. Yet growth has continued. Revenues (before today’s setback) were set to double since 2016:
This business looks rather straightforward: deliver the service and receive payment. There are very few expenses capitalised (the last year charge was £213,000 on development costs). There are also no external debts, just trade payables. With a dividend only commencing last year, much of the cash collected has gone straight into increasing the cash balance. The expected £14m balance is impressive considering that cash was under £4m in 2017.
We have seen cases where companies have expanded through many acquisitions, simply buying the contracts of others to gain exposure – Ricardo is a recent example. This hasn’t happened at Mind Gym and growth has been organic. Perhaps a reason for this is the firm is still owner-controlled. Co-founder Octavius Black still controls (in conjunction with his wife) over 50% of the shares.
Instead of acquisitions, Mind Gym appear to have diversified their income streams. Whilst the bulk of income is received from delivering advice, they also gain income streams from licensing, digital content and advisory services. Mind Gym have a big geographical reach: 276 coaches in 32 countries. The majority are freelance, allowing a great deal of flexibility both on the upside and downside. Clearly, not all coaches are deployed and neither are they cheap: staff costs in the past year were £19m for an average 208 employees. But this is a field where quality is essential.
Mind Gym: Solvency
Despite the profit warning today, there is no real question that Mind Gym may continue to thrive. The financial structure of the company means that these adjusted profits should still mean cash is generated for the company. In terms of liquidity current assets easily outweigh the current liabilities by over a factor of 2.
One concern may be that receivables have started to stack up. With a receivables day time of over 90 days, the time taken to receive payment has taken a large jump in the last year (£7.7m vs £11.6m). It may be the case that the bulk of these revenues are due from companies, or perhaps prospective coaches themselves.
Is the Mind Gym share price a bargain?
Mind Gym appear to have a lot of things going for it. The business model can be scaled according to demand with coaches being freelance. The virus effect may be smaller as at least sessions can be migrated to online (although companies may not choose to do so). The balance sheet is strong and they are conservatively managed by the co-founders.
However, a lot of this was already factored into the share price already. Today’s market cap after the drop is still around the £125m mark, and given the wide range of possible earnings this gives a wide range of variables. Personally, I believe that for many territories that Mind Gym operate in, restrictions are closer to the beginning rather than towards the end, and I would not be surprised if another trading update comes out further reducing expectations for the year.
Mind Gym may be in a good place but this does not mean it is free from competition. Notable other candidates include Headspace and Calm, both of whom have raised significant amounts of money in equity raises and may see themselves as equally qualified to take on some of the issues that Mind Gym deliver on. With deeper pockets, they may also be able to deliver a better product.
I would guess your judgement may depend on the perception on how quickly things may get back to normal. I don’t believe there is any rush to invest in anything at the moment, and given how crucial the virus may be to a company such as Mind Gym it seems too complicated to have a position either way. 3/5.