I don’t know when, but SyQic shares could sharply re-rate

Driven by increased penetration of broadband, along with higher adoption of smartphones and tablets, it is no secret that the market for online video streaming is growing strongly. Market leader Netflix for example grew its global subscriber numbers from 20 million in 2010 to 65.55 million by July 2015. For the third quarter of this year analysts are looking for the firm to post revenues of around $1.75 billion, a figure which beats the $1.67 billion posted for the whole of 2009.

A study from Deloitte released earlier this year found that streaming services are used by over 42% of the US population and that consumers are now more likely to turn to an internet service than switch on the TV. Streaming on mobile devices is also growing strongly, with the study finding that younger people especially are increasingly turning towards their smartphones and tablets for entertainment.

One small cap company which is looking to take advantage of these growth trends is Malaysia based SyQic.

The Business

Listing on AIM in December 2013, raising £3.2 million, SyQic is a Malaysia based provider of paid video content across mobile and internet devices. Focussing on the South-East Asian market, the company was founded by CEO Jamal Hassim in 2004 and he retains a 32.9% stake in the business.

SyQic’s flagship product is Yoomob, a subscription based mobile pay TV service which is provided through strategic partnerships with large telecoms providers (telcos) in South-East Asia. The service offers affordable, live and on-demand entertainment, such as comedy, music, sport and news, for as little as 10p a day or 90p a month. Subscribers pay through their mobile phone bills and SyQic then receives the money from the telecom operators (more on that later), with the telcos and content owners also receiving a cut.

The company’s platforms are fully compatible with all Android and iOS devices, thus providing access to around 80% of the global mobile market. Following the first half of the current financial year the Yoomob service now has over 2.5 million subscribers and delivers monthly revenues of over £1 million.

SyQic’s second product line is Cool2vu. This a Korean focussed video service, launched in Malaysia, Indonesia and Singapore earlier in the year in order to take advantage of the growth in interest in Korean popular culture. The service offers on-demand streaming of Korean drama, entertainment and music and (in contrast to Yoomob) has an advertising based monetisation model. The service has been further expanded into Europe, South America, Central America, India and the Philippines and is translated into seven languages.

Growth figures so far have been impressive. Between launch in January and the end of June the service attracted 134,000 users. This accelerated markedly after the half year end, with Cool2vu being accessed by more than 427,000 users across 198 countries by 27^th September. Encouragingly for growing advertising revenues, the average session time was 26 minutes. SyQic is also looking at subscription and e-commerce avenues to further monetise the product.

Numbers

Interims just released for the six months to June were good overall, showing revenues up by 30% at £6 million. While gross margins slipped from 47% to 41% pre-tax profits were up by a more pronounced 43% as the firm reduced administrative expenses against the first half of 2014. Earnings only grew by 23% to 5.09p per share however due to a higher number of shares being in issue.

Risks

As we will see in the valuation section below shares in SyQic are currently being given a very low rating by the market. This is because of three main reasons:

Currency exposure – SyQic’s main areas of business are Indonesia and Malaysia. The firm invoices in Malaysian ringgit in these regions but its reporting currency is sterling. With sterling having strengthened significantly against the ringgit since the start of the year results for the half to June saw the company book in £0.7 million of translation losses.

SyQic has also flagged that it expects to show further forex translation losses in the second half. With an overall 8.3% strengthening of sterling since the end of June this looks likely, although there has been a 6% fall in the past 2 weeks. These issues are offset to some extent by ringgit based revenues being matched with costs and SyQic having expanded its international presence during 2015.

Sterling/Malaysian ringgit 1 year chart. Source: xe.com

High reliance on 2 clients – in the first half of the current financial year the company’s top 2 customers accounted for 98% of revenues.

Which leads on to the elephant in the room…

Debtor issues – SyQic’s relationships with the South-East Asian telcos provide access to a huge potential customer base. In fact the telcos also drive the marketing – add-on services such as SyQic’s help them to increase average revenues per user.

However, the major downside to the business model is that it takes a long time to collect the cash. Under the model the telcos pay SyQic’s fees to a third party. For example, major customer PT Nextnation Prisma (PTNP), a firm which operates SyQic’s licence agreement with key telcos PT Telkomsel and XI in Indonesia, collects the money and then passes it on to SyQic. But debtor days for the last financial year were 234 days, meaning that it took the company around seven and a half months to be paid. PTNP even owes money from 2012 and 2013, payments being delayed by a regulatory investigation into added services to mobile phone users in Indonesia.

Despite the debtors issue SyQic does seem to be on top of it. A formal payment plan lasting until mid-2016 is in place with PTNP for the 2012/13 income. Payments to date have been on track and no bad debt provisions have been made (a weakening ringgit does reduce the value of these payments however). Also encouraging is that debtor days fell from 295 days in 2013 to 234 days in 2014 and that the company managed to post a £1.07 million net cash inflow from operations in the first half of 2015, with net cash up from £0.45 million to £0.58 million. Should cash collection become more of an issue the company has access to a £3 million working capital facility, at a rate of 5.5%.

Valuation

SyQic shares have fallen from their all time high of 124.5p and the IPO price of 62p to currently trade at a mid-price of just 21p. That capitalises the business at £5.5 million.

Market forecasts for the current year are for earnings of 8.5p per share – revised down following the interim results due to the currency issues. Given the debtors issue the prospect of a dividend does not seem likely in the short-term. Nevertheless, the shares trade on a rock bottom multiple of just 2.5 times forecasts. Dare I say that AIM’s “Asian discount” is also being applied to some extent despite the firm’s head office and key staff being based in the UK.

These issues aside there is a lot to like about SyQic. Revenues are growing quickly in a booming industry; the firm is expanding into new markets with new products; development costs are fully expensed; and there is strong operational gearing in the business. The catalyst for a re-rating will clearly be improved cash collection, something which we could see in the full year results.

Again, the shares are not for widows or orphans but I do see the potential for significant gains in the medium term.