Zamano PLC is an event-driven value opportunity, through excess capital distribution and significant cash earnings power in the short- to mid-term.
The company is an Ireland-based provider of messaging gateways, payment services and marketing campaigns for mobile phones. Zamano is offering its services in Ireland, UK and Australia. With its main revenues generated in UK, the company is currently facing challenges in its mobile payments services through a joint initiative of UK´s mobile network operators (the „payforit“ initiative).
Despite challenges in its business outlook, Zamano PLC is able to remain profitable for the forseeable future. With a massive share price decline in September 2016, the underlying investment case anticipates cash distributions to exceed current market capitalization within the next 3 years, providing a significant margin of satey on top of Zamano´s current market value.
Zamano PLC – Challenging environment in payment services
Besides providing mass communication services and mobile marketing, Zamano PLC is also operating a mobile payment solution. Zamano´s payment services enable businesses to charge their customers against individual phone bills for purchasing goods and services. Payment solutions are accompanied by several value-added features like data analytics, real-time performance monitoring and marketing campaign management.
Zamano PLC will face significant challenges from 2017 onwards due to a joint initiative from UK´s mobile network operators (MNO´s) to offer businesses a new infrastructure to sell digital content and services through mobile phones.
My business segments analysis is concentrated on Zamano´s payment solutions, since I consider it to be the company´s most important revenue driver. Furthermore, management emphasizes the significance of UK´s „payforit“ initiative (see company statements below) on Zamano´s future outlook, indicating the segment´s overall importance on revenues.
Zamano vs. „payforit“ – what´s the difference?
Compared to Zamano´s one-stop-shop service, “payforit” offers a stand-alone interface application. For additional value-added services, API´s exist to a defined list of several third-party providers, but contracts have to be negotiated and closed independently.
Another difference is the scope of goods and services which can be bought using both applications. While “payforit” features only digital content and services, Zamano´s payment solutions cover any kind of goods and services (only restricted by the billing policy – the maximum possible price charge against a phone bill – of the customer´s network operator).
Additionally, Zamano´s payment solution provides customers with an integrated solution covering all client needs around mobile payment solutions. Its products are concentrated on businesses with the need of analytical, technical and conceptional support within their mobile ecommerce activities. These clients are willing to pay a premium in exchange of receiving all services from one vendor. Budget-constrained businesses with less complex needs for sales services (majority of ecommerce shops) will probably opt for the lean and modular “payforit” solution. Nevertheless, alongside growing market fundamentals I believe that there is a viable (and at least stable) need for Zamano´s services short- to mid-term.
Before coming to a conclusion about the sustainability of Zamano´s revenues in payment services, we will have a look at management´s assessment of its future outlook.
What does Management think?
Zamano´s management is addressing the initiative („payforit“) in two regulatory announcements dated back to September and November 2016:
While the September announcement is addressing an anonymous threat with uncertain, negative outcomes, the message from November is more detailed in its future outlook. Major statement here is that Zamano PLC will have difficulties expanding its UK payment services business while it “may be able to gradually improve the current run rate” with its existing customers.
This statement corresponds with my assumption that the majority of untapped customers will opt for a simple and cost-saving solution in payment services. Nevertheless, customers with strong requirements for analytics, consulting and customer relationship management will most probably seek out for vendors like Zamano. While current contracts will fade out in the long-term, this will still provide ground for modest business opportunities.
Key finding: Short- to mid-term, Zamano PLC´s payment services business will be able to remain its current run rate.
Reading down the line of Zamano´s latest November regulatory announcement, we find out that the company is impelmenting necessery steps in the light of „payforit“:
As we have read, Zamano´s management team has recently decided to cease M&A activities and focus on increasing shareholder value. What does that mean?
In most cases, „increasing shareholder value“ is an empty phrase used to enrich a company´s statement about its strategy.
However, Zamano PLC has laid out a concrete strategy to enhance shareholder value in its 2015 Annual Report (released March 2016): Distributing excess capital to shareholders!
Share Capital Reduction Plan
Section „Business at the Annual General Meeting to be held on 4 August 2016“ contains a Special Business Resolution Nr.9, describing the plan to reduce share capital:
Still we have no value for shareholders to benefit, so we have to do the math ourselves:
First we need to calculate the maximum cash distribution based on the latest cash and equity figures (H1 2016). As we have read in the capital reduction plan, we have to adjust retained losses prior to distributions and find a reasonable value for minimum required cash.
To arrive at a feasible number of surplus cash, I have applied the 10-year average of expenses, unallocated to geographic business segments. These costs comprise central overhead, rents and payroll as well as research & development. With little volatility over time, these expenses provide the basis for fixed costs needed to faciliate operations.
Surplus cash has then to be adjusted for the amount of retained losses, providing a fair estimate of distributable cash.
The implied impact on the equity balance is shown here:
Since a capital distribution means a direct cash return to shareholders, we are able to calculate its yield based on current share price.
Key Finding: With a current share price at GBX 5.57 (30.12.2016), estimated capital distribution will return 45% on invested capital.
Zamano PLC – Profitable mid-term outlook!
As I have anticipated before, Zamano´s major revenue driver is (and has been) its payment services. Furthermore, there is strong reason to believe that Zamano´s capital reduction plan is taking into account the scenario of a significant decline in revenues This section´s goal ist to establish a conservative value for cash earnings power arising from payment services for the forseeable short-term future. We have to keep in mind that our investment case is build upon Zamano´s ability to distribute maximum cash to its owners before revenues from payment services diminish.
To derive cash earnings power, we will in a first step take a look at Zamano´s past performance to comprehend its financials with underlying business development. We will then use these findings to adjust financial positions and to model a likely scenario for future profitability and cash flows generated. In a last step, we will come up with a conservative assumption about the sustainable remaining lifetime and shareholder value which can be generated.
By taking a look at Zamano´s past revenues arising from geographic areas, we can see a significant decline in operations outside of the United Kingdom. Revenues from the Republic of Ireland (Zamano´s 2nd largest revenue driver) have declined from a total revenue share of 37% in 2012 to 12% in 2015.
Althoug management have stated (in its annual report 2015) that Irish-based revenues have stabilized, we can see a further decline in the current half-year report 2016 (minus 30% compared to last half-year figures). Management actively adresses issues in its Irish based business in its 2016 half-year report:
Being precautious in my business estimates, I assume revenues and contribution margins from Ireland to decrease further. The same applies for revenues from other locations. Based on annual reports, we can take a look at the geographic gross profit distribution, to make a more precise decision about Zamano´s future source of profitability.
With gross profit distribution developing simultaneously to revenues, we can assume with high probability that short- to mid-term profits will arise to most extent from Zamano´s UK business.
Key Finding: Short- to mid-term, Zamano PLC will rely on UK revenues solely.
Investment Case – 3 year cash distribution
As we have seen, Zamano is able to generate significant profits despite competitive challenges in its business environment. Although I can not assess the implication for Zamano´s business in the long-run, I believe that enough shareholder value can be generated within 3 years.
Zamano´s future basis of revenues and profits has to be translated into cash flows distributable to shareholders. Based on management´s assumption on Zamano´s ablility to remain its current run rate, we will establish a simplified estimate of free cash flow from adjusted revenues and expenses.
Based on the 2015 run-rate for revenues generated by Zamano´s UK business, gross profit amount to more than € 4.0 Mio. As we have estimated for the one-time special cash distribution the 10-year average for expenses needed to run the business independant of its scale of revenues amounts to € 2.7 Mio.
Zamano´s regulatory announcement dated back November 2016 reports management´s focus on maximizing distributable cash for shareholders. In there we find additional information for cost cutting measures. Staff expenses ammounting to € 330.000 will be cut and a non-executive director position (€ 48.000 p.a.) will not be replaced after resignation. These already implemented measures will be accompanied by additional cost savings currently evaluated by the company. I estimate additional measures to save not more than 10% of total unallocated expenses.
With no financial liabilities (H1 2016) on its balance sheet and current income taxes of 12,5% in Ireland, Zamano PLC has an adjusted 3-year earnings power of more than € 1.7 Mio. Based on earnings we can establish a simplified cash flow to equity statement. Changes in working capital will be neglected within my analysis. With management focusing on distributable cash, working capital management will probably have a positive effect on cash flows. Management will try to maximise its cash conversion cycle to decrease adverse effects in a possible fade out of UK business after 3 years. Nevertheless, there is too much uncertainty in scale and time of cash effects. Therefore I will neglect these cash items in my analysis.
To normalize seasonality and investment cycles, I ave taken 5- and 10-year average amounts for depreciation & amortization and capital expenditures. Applying a 10-year average for CAPEX reflects for larger cash outlays from 2006 until 2010. Since Zamano is exploring new opportunities to grow its business, we should assume CAPEX to surpass depreciation.
With no debt on hand (H1 2016) we arrive at a normalized mid-term cash distribution power of more than € 1,9 Mio.
Since we assume this cash generation to last for at least 3 years from now on, we can simply capitalize annual distribution power. By adding the one-time distribution based on the capital reduction plan, we get the total distributable cash to shareholders over 3 years.
By estimating total distributable cash to investors we can calculate the estimated total return on investment. Total return consists of the one-time cash distribution through the capital reduction plan plus 3 years of consecutive free cash distributions.
Based on Zamano´s depressed share price currently standing at GBX 5.57 (€ 6.53 cent) we can calculate return on investment. With 99.45 million shares outstanding, total cash distribution amount to € 8.75 cent per share, yielding a 134% return on investment.
Despite challenges in one of its major business segments, Zamano PLC will be able to remain its current run-rate in the UK for at least 3 years. As long as challenges in its business outlook remain, management will focus to distribute maximum amount of cash to its shareholders. Based on this investment scenario, estimated total cash distributions over the next 3 years exceed current market value by more than 34%.
With uncertain business outlook in the long-run, I belive that management have made a decision friendliest to its shareholders. Even in the case of going out of business, this step will guarantee that value inherent in the business will be distributed to its owners.
Since this poses the worst case scenario for the company, I believe that there is a significant probability that Zamano will remain profitable (on a smaller scale) in the long-run, being able to distribute even more value to its shareholders.
Overall, I believe that Zamano PLC offers a significant margin of safety on investment based on its current depressed share price.