With the Malaysian Ringgit rising is it now time to invest in Malaysian small-caps?

I've always fancied MobilityOne (MBO) ever since that fateful week in January 2015 when the stock bounced off it's 52 week low, ending the month more than 100% higher. What follows is a breakdown of the key indicators.

REVENUE

The long term trend looks positive, demonstrating consecutive revenue growth every six months in all but three of the fifteen HY periods assessed. The company explored new avenues in the wake of the financial crisis and managed to mitigate the slowdown in the global economy.

GROSS PROFIT
MobilityOne's revenue stream has been growing from strength to strength but what of it's profits? Are the company products and the way in which it trades generating profits if any? I've compiled the figures for revenue and the gross profits during each of the 6 month period since 2008. What the chart shows is a parallel correlation between the revenue and the gross profit booked. The chart figures are in (GBP) millions, with the left-side measuring revenue and the right-side gross profit. As revenue has increased so has gross profits.

We should also take into account that the value of the MYR against the GBP (in which the accounts are reported) increased from 2008 up until 2010 rather quickly and remained stable until around mid 2013 before it began to lose value. Gross profits appeared stronger perhaps in part to the stronger currency exchange. More recently the MYR has lost purchasing power against the GBP and we saw that reflected in weaker gross profits despite record revenues in the first half of 2015. The second half results may suffer as a result of the extreme currency fluctuation during the latter half of the year. However since the start of the year the MYR has strengthened and regained some its losses which should reflect well in the first half 2016 results to be released in September.

NET PROFIT
The company have had a mixed performance in recent years, struggling to keep above water in some periods, but now appear to be on a stable growth platform. The loss booked in H213 was particularly bad due to the write-down of loss-making assets the company disposed of following a policy shift towards domestic trade. They also suffered from impairments in the first half of 2014 which impacted profits. During slower periods MBO have accessed loan facilities and received the support from Directors through in-house loans providing cheap access to finance. They have had no problems in paying down these facilities as will be illustrated a little later.


Operating profits are often squeezed due to the high cost of sales involved, continuing product research & development and previous expansion into emerging markets. The latter factor in particular has drained positive net cash-flow in an effort to expand into new territories, specifically Indonesia, Cambodia and the Philippines. The company have now disposed of their loss-making ventures and written down assets, stripping out excessive waste and are beginning to gain traction in the domestic market with operating profits booked in the past three periods.

ASSETS & LIABILITIES
The assets & liabilities make very interesting reading and I would encourage those interested to check out the FY 2013 accounts in order to understand the reasons why Net Assets fell considerably in the second half of 2013. The charts below show Net Assets fell considerably and have held around the same level for two years. Net Current Assets held have occasionally dipped into negative territory however more recently appear to be strengthening towards levels last seen in 2008-09.

This chart better illustrates the Net Current Asset position. The value of net current assets is often the preferred indicator of company health as it deals with working capital and other measures that affect the company's short-term financial health. Whilst net assets have suffered in the past due to writedowns the company has boosted it's short term net capacity. More on this later.

Here's the growing Net Current Asset value over the Net Asset position which appears to have bottomed. Fundamentally, Net Assets shouldn't suffer another shock as the value attributed to such has been much reduced. Add to this the company recently sunk £330k into purchasing new headquarters in Kuala Lumpar which is a hard asset. The Net Asset position doesn't reflect the impressive growth the company has experienced nor the increasing current asset position away from non-current assets. In June 2008 current assets were worth just £1.55m and by June 2015 they were worth almost £4.0m!

NET CASH / DEBT
Cash held on the balance sheet at the end of each 6 month period has increased steadily for the most part besides H113. A steady trend upwards. The amount of debt held fluctuates as the company draws down on short-term loans and repays when it is due. Net debt peaked in the second half of 2011 at more than twice the total cash held. Since then Net debt fell to £442k in the first half of 2014. It shot higher in the second half of the year owing to a property purchase, increasing receivables and short term loans to cover the cash-flow. Crucially we saw a huge reduction in net debt over 6 months from £1,443,112 at H2 2014 to £734,128 today!

The chart suggests the BoD have a 'cash-retention' policy where possible to increase the amount held at every half year interval. This has it's benefits, providing easy means of cash-flow and shoring up current accounts. It also looks healthy on the balance sheets. We can also deduce that the company prefer to use free cash-flow to reduce loans rather than significantly increase the sums of cash held. The company has a large trading account surplus and inventories to boot which fluctuate according to demand and are partly responsible for the net debt swings.

INVENTORIES & TRADE RECEIVABLES (ITOR) vs TRADE & OTHER PAYABLES (TOP)
If we focus on the non-cash current assets it's clear again that the scale of the company operations have increased significantly over the past 7 years. Inventories made up a greater proportion of ITOR in 2008 but due to lack of trade the company had relatively little Trade & Other Receivables due. But the trend began to improve in 2010 about the time loans increased and Net Debt also. ITOR peaked in H1 2011 whilst Net Debt peaked in the second half of the year. Inventories have since then been depleted whilst cash has continued to increase on the balance sheet. We saw one anomaly in H214 as loans increased and Net Debt also reversed it's falling trend. At this time the company took out a loan for the new headquarters in Kuala Lumpar. It also appears that Trade & Other Receivables spiked up at the same time which was unfortunate, most probably a series of late or due payments resulting from the company changing it's growth policy to domestic markets. Results in H1 2015 showed this to be an anomaly as Net Debt fell at the fastest pace on record helped by a strong operational performance and the collection of Trade and Other Receivables.

This chart shows a clear correlation between the Inventories & Trade Receivables less the Trade and Other Payables (we will call this Net ITOR) in comparison with the Net Debt position over the past 7 years. What we see are clear parallels between a rising Net ITOR and a rising Net Debt position. We know that because the greater proportion of ITOR has been receivables due rather than stocking up on inventory, the company has financed cash-flow through short term loans (expanding Net Debt). What the chart doesn't illustrate is that as both Net ITOR and Net Debt have fallen in tandem, the balance sheet has actually expanded. The company are moving towards Net cash and an even ITOR/TOP balance. I would hope to see a Net Cash position in the coming years.

NET OPERATING CASH-FLOW
Net Operating Cash-Flow is what the company generates from it's operations after interest among other things. Crucially it does not included Finance and Investing cash-flow, such income and expenditure like the purchase of property and the draw-down of a loan. This is purely an operational performance indicator. It is normal for it to fluctuate between each half. What the figures show is that operations were loss making for about 4 years but have since performed well aside from in 2014. Net Current Assets and Net cash-flow from operations were at their highest point since 2009.

The chart below better illustrates the trend. You would expect Net Current Assets and Net Debt to show similar correlations and they do. However we can also see a similar trend with the Net Operating cash-flow and Net Debt. If cash-flow from operations is strong in the period Net Debt falls. When the company are short of cash the Net Debt increases. What's exciting is that the company are headed towards another strong finish (H2 2015) which should see Current Assets increase, strong Net Operating cash-flow reducing the company's reliance on short term loans. In other words a reduction in Net Debt. All this will help reduce financing costs (interest).

INVESTMENT CASE
I'm keen to reiterate this company are valued at £2.5 million on AIM. The markets should in theory forward value the company earnings and trading outlook. Instead this stock has been left largely ignored since June-July 2015. There was a large bounce on increased trading in January 2015 but otherwise volumes in general have been poor ever since November 2013.

If you take the operating profit figures it correlates well with the falling share-price over this period. More recently we have seen a return to profits but as yet this hasn't been reflected in the market value. The ringgits devaluation and general market weakening since the Autumn 2015 has kept investors at bay. Small-caps have suffered greatly. High growth countries such as Malaysia and its neigbours should do well in the coming decade compared to the ailing US whose economy is plagued with all manner of social and economic issues. Europe is an even greater concern.

More to the point, I would choose long established companies such as MBO that are largely ignored by investors, have only recently begun to report significant amounts of profit (in comparison to their market value) and are cash positive or are moving quickly towards it. Whilst MBO has seen it's net asset position (in particular non-current assets) fall as a result of failed ventures abroad it has responded well looking to capitalise on domestic share and expand its business through profitable trade. As a result, operating profits are improving, free cash is reducing the net debt position very quickly and the company are in a position to boost revenues through existing market places. I expect this trend to continue and will gain market recognition in the coming years.

MobilityOne looks set for further growth

If you have followed my posts on the LSE forum you'll have witnessed my enthusiasm for this stock throughout 2015. Being a small-cap with only occasional updates it doesn't appear an exciting stock and the often ridiculous spread no doubt puts people off investing here. I would argue that it is still largely unnoticed (Final Results issued after trading hours didn't help matter). However as a recovery play it has proven to be a fine choice.

Since the February breakdown of MBO's Interim Results the stock is trading around 30% up and the general trend has been like this since bottoming in December 2014. There has been opportunities to buy stock as low as 2.4p in the past couple of months and recently the intra-day bid jumped to 3.5

Here are the reasons why I continue to hold MobilityOne and remain confident of further gains in the coming months.

1) MBO turned revenue of £52.96m during 2014, up 3.7% since 2013. This growth comes even after the sale of subsidy holdings in the Cambodia and Indonesia operations during March 2014 to mitigate further losses.

2) As expected MBO turned an operating profit this year of £420,825. This was a substantial improvement on the operating loss recorded in 2013 of (£1,583,642)

3) The Group reported a profit after tax of £44,472 compared to a loss after tax of £2,018,562 in 2013

4) More than 1,000 new agent banking points introduced by one of the Group's banking partner recently in Malaysia is expected to contribute positively to the performance of the Group in 2015

5) Cash position is up by £288,262 during the year to £1,608,255 (2013: £1,319,993)

6) Crucial to understanding performance and outlook there appears to be a significant amount due in in trade and other receivables at the end of the period compared to the previous year. According to the accounts the difference in inventories + trade and other receivables vs trade and other payables has risen to £1,510,008 (2013: £490,307). That's an increase of £1,019,701 during the year and will become cash on the balance sheet during the coming year

7) The net debt position has risen by £711,817 however appears manageable. According to the Final Results cash at year end stood at £1,608,255 (2013:1,319,993) and secured loans and borrowings were £2,977,944 (2013: 1,977,865) for net debt of £1,369,689 (2013: £657,872). This is not a cause for concern however as the company note this increase was due to a slight increase of bank borrowings for working capital purposes and a property loan which was used to purchase the Group's new office in Kuala Lumpur, Malaysia. We know the property loan amounted to approximately £300,000. 

Now add the positive growth in trade receivables due combined with the increasing cash position and add the increase in net debt position it appears liquid assets were up £596,146. If you strip out the £300,000 property acquisition cost because it is non-recurring and won't feature in 2015 cash-flow statements then it appears the company's profitable trade amounted to around £900,000 (although of course the vast majority of this is due).

Headline figures often hide the extent of trends as was the case at the last set of Interim Results. The company's operations were profitable but due to writedowns on balance sheet (non-cash impairments) the company booked a loss. It is not clear just how profitable MBO's operations really are currently given how much it already invests back into the company's research development and losses accumulated from the now disposed of subsidiaries. We should get a clearer picture in September once 2015 Interim Results are announced. Expect a balance sheet with net debt significantly reduced and much of the receivables due at the end of the 2014 realised into cash.

Much like the previous article I have assessed the FY results and broken them down into their respective half year trading periods for ease of charting and analysis.  As you can see in the final six months of the year operating profits were £379,688. Owing to the management decisions to dispose of the loss-making international remittance services and consolidating income streams long established through its organic growth over the past 7 years MBO appear in better shape than ever.

Mobility One (MBO) trading back in profit

MobilityOne Limited (MBO) is the holding company of a group of companies based in Malaysia, which is in the business of providing e-commerce infrastructure payment solutions and platforms through their technology solutions, marketed under the brands MoCS and ABOSSE. The Company has developed an end-to-end, e-commerce solutions, which connect various service providers across several industries, such as banking, telecommunication and transportation through multiple distribution devices, such as electronic data capture (EDC) terminals, short messaging services (SMS), automated teller machine (ATM) and Internet banking. The Company’s technology platform has been designed to facilitate cash, debit card and credit card transactions (according to the device) from multiple devices while controlling and monitoring the distribution of different products and services.

Full Year Results in the year ending 31st December 2013 stated revenues of £51.06 million but given the nature of high cost operations, they booked a loss after tax of £2.02 million. Still the company managed to reduce loans and borrowings in the year to £1.98 million (down from £2.39 million YE2012). The cash and cash equivalents stood at £1.32 million.

So a low margin, loss making outfit. Ignore it you might say. Well, if you read between the lines the company has been proactive in tackling the weaker outfits in its business group.

The reason for the loss as stated - "the Group recorded a higher loss after tax in 2013 mainly as a result of

1) a write down in value of certain assets

2) losses incurred in the Group's overseas operations in Cambodia, Indonesia and the Philippines

Write-downs are a standard accounting 'trick'. They can mask company profitability assuming they are not recurring. In MBO's case the non-cash loss on assets to offset net profits reduces tax obligations. More on the disposal of assets later. The second point is significant as the company note

- "In view of the continued losses from the operations in Cambodia and Indonesia ... the Company discontinued these operations in March 2014 in order to mitigate further losses in the future from these operations and to generate cost savings for the Group."

So at the end of the first half (HY14) they had disposed of Cambodia and Indonesia operations. This was set to impact second half figures, with reduced revenue for the group but crucially improved margins and cash growth.

Skip forward to August 2014, MBO released an update announcing the purchase of real estate in Kuala Lumpur, Malaysia - their original base of operations. The cost of the office space was a cool £333,550 payment and funded through cash in the bank. The company were intending to refinance the property by effectively remortgaging the majority of equity in it for c£300,000 in order to free up some additional cash.

The market has overlooked this development. Considering MBO were renting previously, they have taken the leap in securing an asset with existing cash which may appreciate in value over time. At the very least, high rental costs have been stripped and will be a forward saving. The loan was expected to be completed by September and the company intend to operate from their new office in early 2015. They will still rent one of the two existing office premises in Kuala Lumpur. The company have assessed their growth market (Malaysia) and are utilising free cash to secure permanent residence (assets) in order to reduce expenses and increase company stability.

Half Year results for 2014 were in line with expectations. Revenues of £23.5 million generated a loss after tax of £30k. To put this into perspective the loss listed in H113 was £120k. An improvement on the same time last year, but still loss making...

However these results include trading figures for Cambodia and Indonesia for the first 3 months which were loss making and as a result MBO expect

- "an improved trading performance in the second half of 2014"

The company also took a non cash write-down (impairment) on disposal of the Indonesian operations in March 2014. If you look at the figures at face value there's not much to get excited about. However MBO made closer to £180k profit in the first half, and here's why...

- "The disposal of the subsidiary in Indonesia in March 2014 had resulted the impairment loss on the amount due to the holding company of £0.56 million. However, the amount is partially mitigated by the gain on disposal of the subsidiary of £0.35 million."

In simple English they booked a £560k NON-CASH impairment, partially offset by a non-cash balance gain on the disposal of a subsidiary for £350k. The difference of £210k is a non cash impairment, effectively a one off write-down included as a loss masking company profitability in order to reduce tax obligations. The impairments were part of the re-organisation away from riskier growth markets and focusing more towards Malaysian demand.

MBO recorded a loss of £30k in the period, so the difference is approximately £180k gain (cash or equivalent). The cash profit of £180k in the first half is impressive as Indonesia and Cambodia were loss making during the first three month. Focus on the cash and cash equivalents and this confirms the picture more or less. Cash increased to £1.46 million (£140k increase in 6 months) aided by  the effect of foreign exchange rate changes, whilst loans and borrowings of £1.89 million reduced by £90k. That's a £230k reduction in net debt during the interim period! This whilst the Cambodian and Indonesian operations where loss making. So what is recorded as a loss on the balance sheet isn't always reflective of the full picture.

 
The second half performance is expected to yield better results. The purchase of the property will see intangible assets up by £300k and assuming the loan has been processed then this will push up the borrowing total. It's impossible to say if any of the net cash profit will be used to repay existing loans or rather be kept as cash in the bank but we can say with some confidence the net debt position of £430k will have improved in the final six months of 2014.

MBO will likely reduce the net debt position although much will depend on whether they have refinanced the recently purchased property. What is clear is the balance sheet is healthier than six months earlier and the continuing trend of growth through stream-lining operations and generating cash will be recognised at some point by the markets

Current market capitalisation of £2.5 million seems very cheap considering the growth potential in this part of the world. Anyone unsure of Malaysian economic activity should note the country relies to an extent on its domestic oil production and lower revenues may impact growth prospects in 2015. However the price of Brent Oil appears to have bottomed now, trading 20% higher since mid January.

The market has yet to factor in improvements made to the balance sheet since the disposals of certain loss making assets and I'm confident the trading update in March 2015 will spark some interest.