Company Maker: MGM Signs JB Hi Fi Trade Agreement
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Yesterday MGM Wireless (MWR) – my number one favourite stock – announced a Trade Agreement with JB Hi Fi for the distribution of their all-in-one kid’s smartwatch called SPACETALK. For those following my column and the stock, this is a huge win and certainly what I believe catapults MWR into the big leagues of true growth stories! This deal adds to the collection of Leading Edge group regional stores that will stock SPACETALK announced last month. The retail footprint is clearly growing.
It has been an expectation of mine that MWR would sign such a deal for a few reasons:
- The SPACETALK watch is quite literally the global best-of-breed kids smartwatch and MWR’s business/pricing model means it is likely to be the only brand (against cheap unreliable Chinese alternatives) to be distributed via bricks and mortar retailers
- If retailers want exposure to the booming kids smartwatch and wearables market they will need stock such devices - which refers back to point 1.
- Retailers are always looking for new products and especially new product categories as they desperately try to fuel sales growth.
In my thorough research report on the industry that I highlighted in my last column on the Company (downloaded here), bricks and mortar retailing is key to accelerating sales. I use ASX-listed wireless ear bud manufacturer Nuheara (NUH) as an example of what impact such a distribution deal can do to overall sales. NUH’s IQbuds retail for a similar price to the SPACETALK watch and the chart below is from a NUH announcement where they highlight the break-up of sales between online and physical stores. We can clearly see in blue that bricks and mortar retail distribution is responsible for more than half of overall sales. I think is proof that even for a tech product like IQbuds aimed at tech savvy consumers, buyers still rely on physical stores to test, look and feel the product before purchase. So a deal with JB Hi Fi is extremely significant in accelerating sales considering their 200+ stores (including Good Guys).
While the announcement did use the word trial, almost every product brought into any retailer is done so on a trial basis. Retailers never commit huge funds to inventory without knowing whether the product will sell. So will it sell? Well MWR have told us that their initial product run of 3,000 smartwatches has sold out and they have ordered an increase production run to supply the increasing bricks and mortar footprint. Given the watch for the past 8 months has only be sold on the Company’s owned allmytibe.com website for $297, this equates to almost $ 1 million of revenue (when including monthly app revenue) or an average of 375 watches per month. Given that sales would be accelerating as the months have passed the current run rate would be 400+ per month. So clearly yes, it will sell. And yes it will be rolled out to all 193 JB Hi Fi Australia and NZ stores.
Getting back to the first production run sell-out generating $1 million in revenue, this is a near 50% increase on the $2 million revenue MWR earns from its schools messaging business. Take into account as well that MWR will be profitable after just 5,000 unit sales we are not far away from seeing this division contribute to the bottom line as well – and that’s before JB Hi Fi has sold a single watch! Therefore, given the current run rate of 400+ watches MWR sells online from its own website (5000 annually), means revenue from these other distribution deals like JB Hi Fi should largely be pure profit.
MWR is actually ahead of my forecasted sales growth (2,000 by end of June) with almost 1,000 more watches sold at June-end. Moreover I only assumed the company would be selling at a rate of around 225 watches per month. So my valuation of $4.33 does look severely conservative.
Given this great announcement with JB Hi Fi, I think it will be a mere formality for a rollout to stores to begin shortly. Moreover, now that the end of financial year period is complete, big retailers now turn their focus to Christmas sales and product strategy. I would not be surprised to see an order come through from JB Hi Fi to begin stocking stores in preparation for a nationwide rollout, advertising campaign to build excitement for Christmas. This would create a share price jump on “news” and not a gradual rally over time leading to one of my favourite sayings, “it’s better to buy a month too early rather than a minute too late”. After the event will be too late.
In my last note on MWR I focused on the chart pattern and the momentum that is clearly behind the story. However, I am the only one currently highlighting this opportunity and with such a low market cap – still just $25 million (remember NUH reached $80 million off just a $1 million in sales) – there is still an exceptional amount of room to run to reflect the current sales success, increasing retail footprint and appreciation by the wider investment community. I plan to visit several small-cap fund managers later this month to present this incredible opportunity. One of the my main messages is that this is the only listed company in the world where you can gain exposure to what is forecasted to be a US$5 billion industry in less than 3 years (Gartner Research).
In my June 15th column I noted that MWR was trading in an accumulation zone of between $2.30/1.95 which it remain within until yesterday’s announcement which triggered a breakout as visible in the chart below. More encouragingly the overall trend and build-up to this breakout has importantly been respecting the 21 and 30 day moving averages. This to me shows consistent buying interest on dips and the overall steady re-rating process the market is applying to MWR.
On a monthly chart the trend out of a decade long base continues as it did in 2006/07 when it reached over $6. Even at a share price of $6, MWR is just over a $60 million market cap and for a company where the forecasted annual sales rate is over 100,000 smart watches per annum in Australia there is still significant upside to be seen. Recall my valuation currently sits at $4.33.
Now that this agreement has been signed with JBH – the first major deal is always the hardest – expect to see other major retailers look to be more proactive in stocking the watch too. It’s amazing how closely competitor pricing and product lists are reviewed by major retailers – both domestically and abroad. Harvey Norman, Bing Lee, Target as well as the telcos will all have also moved a step closer to stocking SPACETALK. Don’t forget the MWR continues to highlight discussions with international distributors too. JB Hi Fi is just the start and again reminds me of when Structural Monitoring Systems (SMN) obtained approval from the FAA in December 2015. Although the share price had doubled in the lead up to that announcement – it still tripled over the next nine months. MWR has doubled since I first highlighted it publicly on Share Café but that’s the joy of being early, the upside potential just keeps coming.
Greg is the Head of Proprietary Trading at Gleneagle Securities and has over 20 years of experience as proprietary trader and high level strategist for the major investment banks including Citigroup, Bankers Trust and Macquarie Bank. He has been involved across all asset classes including commodities, bonds, currencies and equities right across the globe.
After a 10-year career within the comforts of the large investment banks and research firms he branched out on his own to form his own proprietary trading firm successfully building the business into a multi-million dollar trading operation that turned over a billion dollars a year. This same team now runs the proprietary trading desk at Global Prime, risking their own money in line with the firm's and client's capital.
Greg has appeared on CNBC, Channel 9 - Business Sunday programme, a guest columnist for the Australian Financial Review, a regular author for Personal Investor, Wealth Creator and Shares magazine and is the former Treasurer of the Australian Technical Analysts Association.