Regular readers of my column will know that this is not the first or second time I have discussed MGM Wireless (MWR) this year. I have several times. Regular readers will also recall being warned that I will be giving plenty of updates and commentary as it is one of the least known, but exceptional opportunities in the market today. One of my key trading rules is, “it is much easier to trade one great idea ten times than it is to find ten different great ideas”. Translated – when you are on a winner, stick with it.
MWR has certainly been a winner so far and their result today plus trading update highlights the rapid but controlled transition this company is going through. For new readers playing catch-up I suggest reading my original research introducing the industry, company, competitors and investment opportunity can still be viewed here.
Fast forward to today’s announcement and it can be clearly seen the transformation this company is experiencing and the momentum building for their SPACETALK children’s all-in-one smartwatch, phone and GPS tracker.
The trading update indicated that the first batch of 3,000 watches have been sold, a second batch of 3300 watches delivered this week and orders in excess of another 20,000 watches have been placed for delivery prior to the Christmas and back to school sales period. Recall this wearables division is profitable after sales of just 8,000 watches so there is enormous leverage to solid sales momentum and an increase in the retail footprint.
The JB Hi Fi online sales progress has been excellent and although only three weeks in, required several new orders. Online sales for JB Hi Fi account for about 5% of total sales, so any rollout to the physical stores would translate to an increase of at least 10 times in sales, in my view. I expect a rollout to all JB Hi Fi stores to occur before Christmas. MWR in their trading update also noted advanced talks with international distributors that potentially could stock before Christmas too.
In numbers terms, via MWR’s own website is on track to deliver to more than $1 million in sales per annum and the whole SPACETALK revenue for FY2019 is forecasted to exceed the $2.2 million in revenue the schools communication business delivers.
Clearly this is a huge transformation from what was a reliable but low growth business into a high growth one that is at the forefront of the fastest growing category amongst wearable devices. By 2021, Gartner Research predict kid’s smartwatches will generate over US$5 billion in sales globally.
While MWR’s loss for the year increased from $551K to $1.1 million (only $500K loss once you strip option issue and cap raising costs) this is miniscule in comparison to other wearable manufacturers like Nuheara (NUH) with their IQbuds that lost $7.4 million off revenue of $5 million ($4 million in sales, $1 million in grants and rebates) but still commands a market cap of $75 million and has been as high as $110 million!
In FY2019, MWR is forecasted to achieve revenues of near $5 million ($2 million+ from each of the schools communication and the wearables divisions) and be profitable, so what would be a fair market cap for a high growth company? Anything close to Nuheara’s market cap equates to over $6/share.
It’s no surprise then that after a ridiculous drop in July the share price has come roaring back testing new highs at $2.50. MWR has not only transitioned into a high growth business but it has also transitioned the SPACETALK watch from a development story into now a distribution story. Manufacturing risk comes with the former and sales risk comes with the latter, but given the success so far and that it is a product that every responsible parent and carer understands I think this risk is low.
MWR has less than 12 million shares on issue so each $1 rally in the share price only adds $12 million in market cap so when looking at the chart below, the record high of $6.18 equates to $73 million market cap – nothing outrageous – but it will seem that when looking at the gains in the stock. MWR just happened to be an unknown, unloved child. That makes the gains in the share price even greater as it moves from extremely undervalued and at some point in the future to fair value and hopefully even overvalue.
The monthly chart below shows how quickly share price rallies can occur when there is a re-rating off good news. It can take mere months to revalue companies that successfully capture market share of a booming industry and with little technical resistance ahead there is potential for a repeat of the 2007 rally. This is why I continue to be a buyer of the stock and will continue to do so as this story becomes well known and mainstream. To this day, I am still the only one discussing this opportunity and when I visit fund managers on roadshows the common question I get asked is “why haven’t I heard of this before?” “You have now” is invariably my reply.
