Description

UMT trades at 1.4x (guided) 2020 EV/EBITDA, has no debt, is growing on average 100% p.a. since 2016 (from a low base) and insiders own >70%. For reasons I explain below, the share price has strongly lagged results. The company is reaching a level of earnings which cannot be ignored anymore for long. I expect the coming publication(s) of results to contain (much) more information which will further lead the shares to rerate.

As I’ll explain below, UMT operates in a fast-growing and fast-moving sector, with plenty of other players. Though I’ll discuss some long-term drivers of UMT’s growth, this thesis is not intended to discuss my view on the long-term outlook of UMT and its industry. Rather, it is an explanation of why I believe UMT’s share price is reaching an inflection point and is about to rerate.

Company overview

United Mobility Technology (UMT) is a German fintech that specializes in the development and implementation of customized mobile payment and loyalty solutions. The company developed and operates its own mobile payment and loyalty platform and offers its products and services to customers on a white label basis. UMT’s technology is compatible with every transaction (payment) technology (NCF, QR/Barcode, etc.), is highly scalable and easy to integrate.

UMT’s mobile payment platform offers functionalities that can be easily combined with individual loyalty programs. In 2015, the company won its largest customers to date, Payback. Payback is a large loyalty and bonus program owned by American Express. Payback has over 30 million users in Germany half of which have downloaded the Payback app. In 2016, UMT integrated its payment functionalities into the Payback-app introducing Payback Pay. Since mid-2016, UMT has been expanding its Payback relationship to all Payback partner merchants such as Rewe, dm, Aral, Real and Penny. According to the company, the Payback roll-out has been completed in 2019. Over the past few years UMT has been able to win various other customers though none as large as Payback. According to the company and including clients other than Payback, UMT currently covers a very large part of the German retail sector (over 16,000 merchant locations and more than 70,000 cash desks connected) making UMT the German mobile-payment leader in terms of number of users (though still small in overall transaction value).

Over the past few years, UMT has worked to win new clients in Germany and other countries such as Spain and Turkey on the back of the successful integration with Payback. It even acquired some smaller local players in order to gain access to new markets. Nevertheless, UMT has not been able to replicate its success with Payback and new client wins have initially been less than hoped. One reason has been competition; the mobile payment space is crowded with much larger competitors and UMT is still a small, relatively unknown player. However, the main reason is attributable to Payback. When UMT signed Payback, it also gave Payback exclusivity of its technology (partly specifically developed for Payback). Consequently, UMT has not been able to license-out this technology. To be specific, UMT had to continuously rebuild the system at the clients’ site while incurring large initial investments, both monetary (R&D) and capacity. UMT lost several large client tenders to larger competitors because it was unable to make these necessary initial investments. UMT was however able to renegotiate its contract with Payback in early 2019 and the company now has the opportunity to offer its solutions and (consulting) services on a white label basis. Clients can license UMT’s technology and pay UMT a consulting fee to help them implement and customize their offering. According to management, a large portion of 2019’s growth has been due to new licenses and consulting services.

Another early disappointment has been the relatively slow ramp up of mobile payment penetration in Germany. UMT hoped mobile payments would grow as fast as in the Netherlands or some Scandinavian countries, however this was much slower than expected/hoped. Germany has always been known for its love of hard currency and this time is no exception. Nevertheless, even Germany is steadily moving toward a more cash-less economy. With the efforts of Visa and Mastercard to equip all of their terminals in Germany with NFC functionality over the next few years the acceptance of the smartphone as a means of payment should grow significantly among the population. In addition, UMT management always mentioned the entry of Apple Pay and Google Pay as a strong tailwind (rather than a risk) as this should also drive mobile payment acceptance and increase the incentive for retailers to develop their own (loyalty) solutions.

UMT recognized that over the next years German consumers will have the choice between various (mobile) payment technologies and countless merchant loyalty solutions/programs. In order to participate in this trend and to further expand its offering, UMT developed its Loyal app. Loyal was launched in mid-2019 and is a ‘meta’ or ‘aggregator’ app; it aggregates (third-party) payment solutions and loyalty programs. This enable consumers, similar to a wallet in different retail chains, to pay with one and the same app (choosing their preferred payment methods) and at the same time benefit from loyalty programs. Consumers can thus use one app (Loyal) to pay and collect points. Loyal seems a very interesting offering, though given the very recent release and the current retail crisis I don’t expect it to contribute much to UMT’s bottom line in the short term.

A word on the impact of the recent Covid crisis. According to UMT management, the recent Covid crisis has been a net positive. Even though merchants are having a difficult time, management indicated that mobile payment usage has strongly increased as many German consumers are now reluctant to touch hard cash. This has led to a jump in cash-less payments (a.o. mobile payments) and a jump in revenue and earnings for UMT (more on this later). It is reasonable to assume this trend will continue to accelerate once consumers get used and become aware of the many advantages of cash-less payments.

What happened (to the share price) since 2016

Since the implementation and roll-out of Payback Pay in mid-2016, UMT has strongly increased revenues and earnings each year:

Given the above growth trend, one might be surprised to see the share price action during this period:

During 2015 and 2016 UMT was mainly developing and launching its Payback Pay functionality. This led to some set-up fees in 2015 and 2016 and some transaction fees in 2016. In 2017 Payback Pay was further rolled-out, transaction fees increased and UMT earned some set-up fees for new small clients. Now revenues were (finally) starting to grow as became visible in H1 2017.

During H2 2017 UMT experienced a rather peculiar period. As some might remember, Q4 2017 marked the top of the crypto-hype. During 2017, UMT expanded its mobile payment offering to (potentially) include mobile payments with crypto currencies. Management explained that their goal has always been to offer its clients a platform which was able to handle all kinds of mobile payments, including with crypto-currencies (in case clients would be interested). Following several company news releases, UMT’s share price got caught up in the crypto-hype. As the crypto bubble burst starting 2018, the share price reverted back to its old trading range EUR 10-15, even though 2018 was yet another year of revenue and earnings growth.

Then Q4 2018 arrived. As you might remember, stock markets were severely hit during this period. This was particularly the case for German small- and micro-cap stocks. Even though fundamentally UMT was healthy and growing during this period, as can be inferred from the graph the share price collapsed from EUR 12 to EUR 5. However, these are the share prices after the 10-1 reverse split. Currently there are 2.3533 million shares outstanding; prior to October 2019, this amount was 23.533 million. UMT’s share price collapsed from EUR 1.20 to EUR 0.50 during Q4 2018. This was a major blow as several large institutional investors were forced to fully unwind their positions as they were not allowed to hold penny stocks. Given the low liquidity (micro-cap stock and insiders own >70%, institutional investors another ca 15%) the share price was continually under pressure. According to the company, management attempted to stem the bleeding by acquiring the stake of some investors, though were often advised from their lawyers not to acquire shares as the company was continuously in the final stages of closing some new client. Management finally decided to implement a 10-1 reverse stock split, though by the time the AGM was held and the reverse split was implemented (October 2019) the share price was down to EUR 0.25. Needless to say the share price didn’t recover.

This was a very frustrating period for the company, particularly the CEO (who owns ca 60% via his investment vehicle). It is reasonable to assume that this company would not have this valuation if it were a private company. It was therefore no surprise to see the company’s November 2019 announcement:

“UMT United Mobility Technology AG … announces a new strategic partnership with London-based private equity fund Kingsbridge Capital Advisors Ltd. to accelerate future business development for consulting and services in existing markets. Kingsbridge Capital Advisors Ltd. is an FCA (Financial Conduct Authority) regulated investment house and value accelerator with a focus on European small- and mid-cap companies.”

The company did not elaborate much / was vague about the exact extent of the partnership. I assumed management was exploring strategic options. Management only indicated that they intended to use Kingsbridge’s network to expand and enhance its offering.

Recent company update and catalysts

2020 was a relatively quiet year with respect to company news. UMT indicated it would delay the publication of its 2019 annual report (the company does not report quarterly results) and publish it only in Q3 2020. H1 2020 results are to be expected in September.

Recently, the company pre-announced 2019 results which showed that 2019 was yet another year of strong growth and margin expansion. However, the main surprise was the 2020 guidance:

“In the course of its strategic reorientation, the UMT Group is assuming continued strong growth for fiscal year 2020, with a significant increase in revenues and earnings in the three-digit percentage range. As part of the further development of its business model, the company expects to generate income from the technology consulting segment in particular. In addition, the UMT management is forecasting strong medium- and long-term growth in commission income from Assets under Management (AuM), both for its own account and on behalf of customers.”

A “three-digit percentage” growth in earnings implies UMT generating at least EUR 25 million revenue and ca EUR 9 million EBITDA. As such, UMT is currently trading at an EV/EBITDA of 1.4x even though it is growing >100% yoy. The company did not (yet) elaborate on the fundamentals behind this growth. I can only explain this by a very large increase in mobile payments and, mainly, by new client wins (‘income from technology consulting segment’).

Another interesting item is the last sentence of the pre-release:

“In addition, the UMT management is forecasting strong medium- and long-term growth in commission income from Assets under Management (AuM), both for its own account and on behalf of customers.”

This is new. The company never mentioned pivoting toward (some kind of) an asset management business. It is to be assumed that this is the result of ‘using Kingsbridge’s network to expand and enhance its offering’.

Given that this was only a pre-release and that 2019 results and H1 2020 results are due before/in September, I expect the company to announce further details in the very short term which will have a beneficial impact on the share price.

Estimates and valuation

UMT’s revenues consist of set-up fees (which include consulting fees), license fees (licensing of software, support and maintenance) and transaction fees (fixed or percentage fee).

The further development of the software, extensions of the functionality as well as (security) updates remain in the hands of UMT and are invoiced via license fees. UMT also handles the transactions. Once a base amount of transactions has been reached, the company also participates in the sales on the platform via a transaction fee.

As mentioned, this fee model puts the company in the position of not having to make advance payments (anymore) during the roll-out phase. In addition, UMT benefits from predictable, recurring sales through the license fees and can participate in the growth of its solutions via the transaction fee.

In the future, UMT intends to start monetizing the data it receives. This is still very early stage, but is nonetheless interesting as its customer base grows and expands.

I present the revenue calculations below for informational purposes only. This model includes plenty of guesstimates; I have used it to see if I could make sense of the revenue progression based on what the company was telling me as well as the company’s results. I decided to include it in case someone might want to (also) closely follow UMT’s progress as well as to show UMT’s the growth potential if mobile payments do indeed take off.

Based on the low end of the guided growth range (“three-digit percentage”), UMT will be generating ca EUR 9 million EBITDA in 2020. This puts the company at an 2020 EV/EBITDA of ca 1.4x. Needless to say a small normalization of the valuation can drive the share price to multiples of the current price. A 6x EV/EBITDA is 4x the current price (the company has no debt); a 10x EV/EBITDA is ca 7x the current price.

The company has a clean balance sheet. There is no debt; the CEO converted a loan last year. As such, SO are 2.3533 million (BB shows another number). I ignored some smaller items such as NWC and TLCFs as I deem them immaterial in the overall valuation/pricing. Please note that the company partially capitalized its R&D on Loyal; as Loyal has been introduced in 2019, amortization is expected to increase as well.

Also, as previously mentioned, insiders own >70% of shares (of which the CEO ca 60%) and are dying to get the shares price out of its misery.

Conclusion

UMT has been growing rapidly since 2016 and due to various reasons the share price has strongly lagged fundamentals. The company is reaching a level of earnings which cannot be ignored anymore for long. UMT has a clean balance sheet, no debt, and is trading at 1.4x (guided) 2020 EV/EBITDA. I expect the coming publication of results to contain (much) more information and be the/a catalyst for the rerating of the share price.

Catalyst

Publication of results (due before October) with additional color on 2020 guidance