Seeking Alpha
Profile| Send Message|
( followers)  

Mandalay Digital Group (MNDLD.OB) is proving to be the content distribution rollup many investors have been looking for in the emerging mobile sector. The company's acquisition of MIA in Australia provides them with access to 800 live services and immediately makes them the second largest digital music retailer in Australia, second to Apple's iTunes (NASDAQ:AAPL). MIA has agreements with Australia's largest mobile phone carriers including Telstra (OTCPK:TLSYY), Optus, Vodafone (NASDAQ:VOD) and Virgin Mobil.

The company's acquisition announcement did not receive nearly as much fanfare as Facebook's (NASDAQ:FB) mobile announcement that day. Facebook launched Facebook Home on the Android platform for a limited number of devices. The user interface overlay includes a replacement home screen for viewing social-networking posts and notifications. The Facebook initiative is limited in scope to Facebook applications including Chat and News Feed, embedding them in the home screen experience. We believe that Mandalay has a more robust platform and comprehensive offering.

Last week Mandalay completed a 5 for 1 reverse split in preparation for a NASDAQ listing. While the company has applied for a NASDAQ listing, there is no assurance that this will transpire. The microcap market entails more risk due to lack of liquidity and general lack of participation of institutional investors and major brokerage firms providing research. This requires a deeper level of diligence for the investor.

Insiders have demonstrated their confidence in the stock through a recently completed $1 million financing. Peter Guber and Robert Ellin (through Trinad Capital Master Fund) each invested an incremental $500,000 for new equity into the Company.

Mandalay's recent acquisition of MIA will add approximately $13 million in revenue according to management. The company was acquired for only AUD$7 million, only AUD$1.2million of which was cash (5 million shares; AUD$2.3m note). The company's Logia acquisition in September added more than $10 million of revenue and was acquired for $5.5 million (including earn-outs), of which $3.75 million was cash. If management can continue to roll-up mobile acquisitions for significantly less than revenue, shareholders should benefit.

Based on these acquisitions and carrier roll-outs, the company (which reported revenue of only $2 million in its most recent quarter), is on a trajectory to reach revenue of $32 million in FY 14E (ending Mar 2014) and $60 million the following year, according to industry analysts. These analysts expect the company to reach net income break-even within three quarters and EPS of approximately $0.20 per pre-split share in FY 2015 (ending Mar 2015).

Valuation

The company should be valued as a full end-to-end platform alternative for carriers as well as an acquisition vehicle. With the closing of the MIA acquisition, the company provided increased revenue guidance of an incremental $13 million in the first 12 months. Current new media players such as Pandora (NYSE:P), LinkedIn (NYSE:LNKD), Yelp (NYSE:YELP) and Facebook trade at very high forward P/E multiples (see chart below) that average 78.8x. Based on the aforementioned $0.20 projected earnings per share and triple digit growth rate, a 15x P/E (20% of the industry leaders' P/E valuation) or $15.00 12-month target price is warranted. This would translate to a potential 3.3x return on investment for shareholders entering at current levels.

Company

Ticker

Price (4/29/13)

Forward EPS

Forward P/E

Facebook

FB

$26.98

$0.78

34.6x

LinkedIn

LNKD

$188.39

$2.08

90.6x

Pandora

P

$13.82

$0.20

69.1x

Yelp

YELP

$26.62

$0.22

121.0x

AVERAGE

78.8x

Source: Mandalay Digital: An Alternative Revenue Source For The Wireless Carriers