MSL Solutions Limited

Company Overview: MSL Solutions Limited (ASX: MSL) is one of the leading SaaS technology providers in the sports, leisure, and hospitality sectors. The company is engaged in developing and offering fully integrated and modular systems that bridge the gap between customers and venues via mobile and contactless entry. MSL Solutions has more than 8,000 customers with offices in Australia, the UK, and Denmark.

MSL Details

MSL Rides on Strategic Alliances & Buyout Synergies: Despite its customer base in Sydney and Melbourne, MSL’s hospitality and venue business sails through the pandemic and lockdowns with decent fundamental performance, driven by POS (point-of-sale) sales in its UK business and through the SwiftPOS business, acquired in November 2020. This has aided the company to report positive EBITDA and operating cash flow, thus delivering organic growth, exploring acquisition and partnership opportunities.

Delve into 1QFY22 Key Highlights:

• Rise in Revenues: In 1QFY22, the company’s unaudited revenue soared 40% on pcp and came in at $7.7 million, owing to a rebound in the company’s UK business post-COVID-19 period and synergies from SwiftPOS acquisition.
• Capital Raising Program: Recently, the company completed an oversubscribed issue of shares under its Share Purchase Plan (SPP) to Eligible Shareholders. Under the SPP, MSL raised $4.5 million by the issue of 21,655,773 shares in new capital at $0.2078 per share. The oversubscribed SPP indicates continued robust shareholder support for MSL’s growth strategy.
• Acquisition Synergies: The company completed the acquisition of OrderMate, a hospitality POS systems business, for a consideration of $7.5 million. The move will aid MSL to increase its footprint to more than 8,000 venues, and over $7 billion in annual transactional value. The company will also leverage growth opportunities via its UK direct and POS reseller channels and aims to expand its digital ordering solutions.
• Contract Wins: During the period, MSL Verteda in the UK received two SwiftPOS enterprise contracts, which will be reflected in future revenues. The first deal pertains to a three-year contract with the British Airways i360 and the second is a five-year contract with the Angus Steak House restaurant group.
• Liquidity Position: As at 30 September 2021, the company’s cash balance stood at $4.6 million Projected cash balance at the end of the period was more than $6 million, which comprises the SPP contribution, interest-bearing debt, and earnout payments pertaining to the SwiftPOS acquisition. During the quarter, the company generated positive operating cash flow of ~$500k, depicting its 5th quarter in a row of positive operating cash.

Key Findings from FY21 Results:

• Slight Decline in Revenues: In FY21, the company’s revenue declined marginally by 1.6% on pcp and came in at $24.7 million. The decline was due to COVID-19 led uncertainties in the UK and Europe.
• A Turnaround in Profits: Net profit after tax stood at ~$0.9 million, against a loss of $16.4 million reported in FY20. The FY21 figure includes an income tax benefit from the probable utilization of deferred tax assets in FY22.
• Higher EBITDA: In FY21, EBITDA stood at $3.1 million (exclusive of government subsidies), against a loss of $0.94 million reported in FY20. Including the impact of government subsidies, EBITDA came in at $4.2 million, indicating the first positive EBITDA year since 2018.
• SwiftPOS Acquisition: In November 2020, the company acquired SwiftPOS, resulting an increase of over 20% in FY21 revenue on a like-for-like basis and contributing positively to overall shareholder value.
• Other Key Developments: In FY21, the company expanded its blue-chip client base across various stadiums, racecourse, and arenas, both domestic and international locations. It also expanded the partnership network with the inclusion of OpenPay, thus adding exposure to buy now, pay later services.
• Healthy Balance Sheet: The company ended the period with a cash balance of $5.4 million and $1.2 million in undrawn loan facilities.

The below picture depicts Turnaround Strategy in MSL’s bottom-line in FY21.

Earnings Highlight; Analysis by Kalkine Group

Key Recent Update: Recently, the company inked a strategic alliance between its POS Solution OrderMate and Doshii. The integration will offer OrderMate venues the ability to connect even more of their hospitality apps and marks the second agreement between Doshii and MSL Solutions after the publication made in March 2021 between Doshii and MSL owned SwiftPOS.

Key Metrics: For FY21, the company reported a gross margin of 75.6%, higher than 73.6% reported in FY20. In FY21, the company reported ROE of 6%, compared to the industry median figure of 2.7%. The cash cycle days for the period stood at negative 26.7 days, compared to a negative 17.7 days in FY20.

Profitability Profile; Analysis by Kalkine Group  

Top 10 Shareholders: The top 10 shareholders together form around 42.32% of the total shareholdings, while the top 4 constitutes the maximum holding. Microequities Asset Management Pty Ltd. held the maximum number of shares with a percentage holding of 10.07%, followed by Forager Funds Management Pty Ltd holding 5.7%, as also highlighted in the chart below: 

Top 10 Shareholders; Analysis by Kalkine Group

Risk Analysis: The company is exposed to the prevailing global uncertainties related to COVID-19 and other geopolitical tensions. The company is exposed to stiff rivalry from competitors developing similar product lines and services. The company is also exposed to forex headwinds, integration risk, and the risk of losing key customers.

Outlook: The company entered FY22 on a strong note and remains on track to grow its international revenues boosted by a high-profile client base. The new contract aids the company to reinforce its prospects in the days ahead, especially within the UK market. In August 2021, the company inked a deal with Trafalgar Entertainment’s Sydney Royal Theatre, thus expanding its international presence in the UK theatre. Notably, MSL completed its first direct sale in the UK with SwiftPOS. The move is expected to benefit the company from the growing market for enterprise SaaS products among hospitality and venue businesses. MSL remains focused on delivering organic growth and leveraging acquisition and partnership opportunities to strengthen its technology platform and product mix, given a decent cash position and robust recurring revenues.

Stock Recommendation: The stock of the company went up by ~3.92% in the past week. Currently, the stock is trading above the average of its 52-week high and low levels of $0.285 and $0.105, respectively. On a TTM basis, the stock of MSL is trading at an EV/Sales multiple of 3.9x lower than the industry median (Software & IT Services) of 6x, thus seems undervalued. Considering the decent liquidity position, higher revenue base in 1QFY22, robust product pipeline, a turnaround in profits, strategic deal, acquisition synergies, positive outlook, technical levels mentioned below, current trading levels, valuation on TTM basis, and key risks associated with the business, we recommend a ‘Speculative Buy’ rating on the stock at the closing market price of $0.255, down by ~5.556% as on 26 November 2021.

Technical Commentary:

On a daily chart, MSL prices are trading above the horizontal trendline breakout level at AUD 0.245, indicating the possibility of an upside movement. The prices are sustaining above the trend following indicators 21-period SMA and 50-period SMA, indicating positive momentum. Moreover, the momentum oscillator RSI (14-period) is trading at (~53.02 level), indicating positive momentum in the stock. An immediate support level for the stock is at AUD 0.223, while immediate resistance level is AUD 0.290.

MSL Daily Technical Chart, Data Source: REFINITIV

Note: The purple color line at the bottom of the chart depicts RSI (14-period).

Note 1: The reference data in this report has been partly sourced from REFINITIV.  

Note 2: Investment decision should be made depending on the investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the Valuation has been achieved and subject to the factors discussed above.

Technical Indicators Defined:-

Support: A level where-in the stock prices tend to find support if they are falling, and downtrend may take a pause backed by demand or buying interest.

Resistance: A level where-in the stock prices tend to find resistance when they are rising, and uptrend may take a pause due to profit booking or selling interest.

Stop-loss: It is a level to protect further losses in case of unfavourable movement in the stock prices.

Disclaimer

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