Bango profits set to soar after game-changing acquisition

Last summer, Aim-traded technology group Bango (BGO:215p) made the transformational acquisition of the global payments business of NTT Docomo, a Japanese mobile network operator with 85mn subscribers, and signed a long-term platform deal with that group to provide payment services in Japan for the world’s largest merchants.

The four-month contribution from Docomo was a key factor behind the record second-half performance from Bango, a provider of a state-of-the-art mobile payment platform that enables smartphone users to charge app store purchases to their mobile phone account.

 

A game-changing acquisition that’s delivering

Buoyed by 55 per cent growth in second-half EUS to $3.6bn, Bango’s second-half revenue was 63 per cent higher than the first half and gross profit of $16.5mn in the six-month period was almost two-thirds higher, too. Adding $3.6bn of EUS and $16mn of additional annual revenue in 2023, the acquisition is accelerating Bango’s growth strategy by expanding its global partnerships with major customers, doubling the number of Google Play and Amazon routes, adding new telecom partners (Telefónica, América Móvil and Deutsche Telecom) and extending relationships (Vodafone, Singtel, Softbank and Airtel India).

It is also enabling Bango to consolidate its position as a leading payments platform for global merchants (Netflix, Britbox and Youtube), has added new merchants (Tidal, Discovery, Paramount+ and Jetstar) and expanded Bango’s footprint in carrier billing for physical goods while scaling up the merchant user base for upselling Bango Audience insights and data analytics services.

There are significant costs involved in integrating the two businesses, primarily migrating services from the legacy Docomo digital system to the Bango platform. This explains why Bango’s cash profit fell from $6.2mn to $5mn in 2022, albeit that was a better result than analysts had forecast. However, there are significant benefits, too. So far, Bango has realised $11mn of the planned $21mn cost synergies from Docomo and is on track to deliver $10mn of incremental cash profit in 2024.

 

Strong underlying growth

Even without the benefit of Docomo, Bango would have delivered strong numbers. New house broker Singer Capital Markets estimates that the core payments business, accounting for 80 per cent of pro-forma revenue, delivered 15 to 20 per cent underlying growth in EUS, excluding the contribution from Docomo and adjusting for currency headwinds, buoyed by a record number (44) of merchants being added to Bango’s payment platform.

The other major take from the results was the 354 per cent surge in annual recurring revenue (ARR) to $5mn from Bango’s platform licensing business, driven by deals with industry telecom giants Verizon, Televisa, T-Mobile and Liberty Global. In fact, such is the momentum in this business segment that the directors have raised their 2023 exit ARR guidance from $7mn to $10mn.

 

Forecasts point to rapid profit growth

For the year ahead, analysts at Singer expect 72 per cent higher revenue of $49mn to drive cash profit up by 152 per cent to $12.6mn, although the integration of Docomo is likely to weigh on Bango’s net cash of $12.7mn.

However, the major upside should be seen in 2024 when the integration process is complete and Bango will benefit from the full $21mn of cost synergies, hence why Singer is forecasting another step change in annual revenue to $57mn. On this basis, expect 2024 cash profit to more than double to $26.1mn and both pre-tax profit and earnings per share (EPS) to quadruple to $16.4mn and 21.5¢ (17.5p), respectively.

These are the numbers investors should be focusing on right now as they highlight the potential for Bango to be earning a cash profit margin of around 45 per cent on annual revenue. Moreover, around 60 per cent of next year’s cash profit could be converted into free cash flow, implying the shares offer a thumping free cash flow yield of 7.7 per cent as well as an attractive forward price/earnings (PE) ratio of 12.3.

So, although Bango’s shares have succumbed to profit-taking in the past three weeks, having previously rallied 39 per cent after I rated them a buy, at 195p, at the interim results (‘On the money’, 29 September 2022), the upside potential could be material, as highlighted by Singer’s 385p target price. Buy.

 

■ Simon Thompson’s latest book Successful Stock Picking Strategies and his previous book Stock Picking for Profit can be purchased online at www.ypdbooks.com, or by telephoning YPDBooks on 01904 431 213 to place an order. The books are being sold through no other source and are priced at £16.95 each plus postage and packaging of £3.95 [UK].

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