Monaker Group Transforms To NextPlay

Summary

• Monaker Group, decimated by Covid, has announced a series of acquisitions aimed at transforming their business offerings.
• Based on the breadth and depth of acquisitions, this special situation seems to have plenty of opportunity, and plenty of risk.
• Discerning investors will need to decide if they buy into the story being pitched by Management.

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When I'm looking for new opportunities in the market, sometimes I run across companies that do things I easily grasp. Other times, I have absolutely no idea what's going on. So to be clear up front, when I first reviewed the Monaker Group (MKGI) investor presentation, I had no idea what was going on. However, the business has just closed a transformative acquisition and the market didn't even blink. Now, investors need to determine what kind of value should be assigned to the combined businesses.

Background

A brief perusal of Monaker's historic financials will reveal nothing particularly interesting to a prospective investor:

(Source: TIKR.com)

Historically, Monaker has operated a travel booking business, which as you can see has not generated anything resembling meaningful income. Their only operating segment, NextTrip.com, boasts of over 70 years' experience, but hasn't been able to translate that experience into profits. On its own, this would not inspire me to invest in a $50m market cap business that just got decimated by Covid. But that's not the end of the story.

In 2020-2021, Monaker pivoted hard in the face of the Covid-19 pandemic, firing off acquisition announcements of HotPlay, Zappware, Longroot, and the International Digital Bank. The question remains, what value is in this for shareholders. The transactions have been disclosed as follows:

• 75% of Longroot was acquired for $2.5m
• 57.6% of IFEB was acquired for $6.4m
• 51% of Zappware was acquired for $10.8m and the remaining 49% can be "put" to the business for 15x EBITDA in future years (per filings)
• HotPlay was just acquired through issuing additional shares of the company, giving HotPlay owners ~67% pro-forma ownership of the combined entity.

Some of the acquisitions were funded through issuance of shares, and some through $15m advanced by HotPlay prior to the transaction close:

To date, HotPlay has loaned the Company $15 million pursuant to the terms of the HotPlay Exchange Agreement (collectively, the “HotPlay Loans”)

(source)

Valuation

Management has noted in their deck that Zappware, at least, is profitable. In their initial deck related to the MKGI transaction (almost a year ago), they provided the following pro-forma guidance:

(Source: Jul-20 MKGI Investor Deck)

They have dropped this from current decks, but at a high level this is where they saw the combined business going after the initial deal closed (Axion situation has changed while Longroot and IFEB were acquired). I'm very curious to see where they go with guidance now that the transaction has closed.

I am looking for public comps for the HotPlay and Zappware business, as those are the only ones that appear material to the company valuation. Maybe Management can squeeze something out of the travel business through cross selling, or ICOs in Thailand take off, but I don't think this will be material compared to the HotPlay/Zappware success or failure.

1. iClick Interactive (ICLK) is one of the best public comps for the core business and was used in the July-20 investor deck. Currently trading at about a $1B EV, iClick trades near 3x revenues and 40x EBITDA.
2. On the smaller side, Versus Systems (VS) trades at only a $70m market cap and generated less than $2m of revenue last year (and there's outstanding warrants). Their growth prospects are very interesting, and no guidance is available yet, but a >35x TTM revenue multiple is still pretty encouraging as it shows the market thinks there's a lot of demand for integrated ads into platforms.
3. On the larger side, Magnite (MGNI) trades at a $4.1B EV. There was a recent article on ValueInvestorsClub highlighting this idea, which had the following interesting points:

At the current price of $28.56/share, the market assumes two-thirds of the business is worthless and the CTV business (growth over 40% per annum, ~35% EBITDA margins) is valued at ~7.25x EV/Revenue or ~17x EV/EBITDA.

...

In the CTV space there are five SSPs (Magnite, Freewheel, Google, Xandr, and PubMatic) and only Magnite and PubMatic are independent.

...

Lastly, CTV ad spending should increase ~40% this year to ~$11.5B of which ~60% is conducted programmatically, according to eMarketer.

...

Last year, agencies/advertisers earmarked ~5% of their budgets for CTV as a hedge against linear. In ’21, the same agencies/advertisers plan to allocate 30%-40% of their budget to CTV.

Given these competitor valuations, and the outlook for the CTV industry, I would expect something in the range of 5x guided revenue or 40x EBITDA to be a multiple assigned to MKGI shares after the HotPlay acquisition closes and guidance becomes more apparent. This will be particularly sensitive to any color they can provide on the growth trajectory as the businesses scale (i.e. if they still see over $300m achievable in year 2). iClick has grown at about a 30% CAGR for the past five years, suggesting any momentum beyond that could warrant a higher multiple.

If they guide with something similar to the $100m revenue and $20m EBITDA from last year, this could suggest $500-800m for a comparable valuation as a starting point vs the current $200m cap post-close (assuming 86.6m FDSC and $2.30 share price).

Potential Catalysts

• The largest shareholders post-close will include individuals (Komson Kaewkham and Athid Nanthawaroon) tied into CP Group, a massive Thai conglomerate that owns all the 7-11s in Thailand, among many, many other things. Given they have such a large retail footprint in the region, and Management highlighted partnering with them in their July-20 presentation, this may significantly drive future growth.
• There are other significant names joining the management team, including the former CTO at Electronic Arts (EA). The presence of individuals with reputable track records lends support to the idea that this business has legitimate potential.
• Zappware was previously owned by the Belgium Sovereign Wealth Fund, which restricted some of their growth initiatives per the MKGI team. Management believes lifting this restriction will allow for easy market expansion. The ease and extent of this expansion will be tough to gauge until it becomes reality.
• Recent addition to Russell Microcap Index might get further investor interest in the stock.
• Any update to guidance previously issued in July-20.

Risks

• CEO has been mostly limited to the travel space up to this point in his career, and it remains to be seen if he can execute on the larger vision the company has forecasted.
• Merging 5 different business units together across multiple continents is very ambitious, and I expect will be more challenging than forecasted by management.
• Targets set by Management may be too aggressive and unrealistic, they seem rather promotional and have minimal track records to prove they can execute this plan.
• The Magnite article I quoted earlier doesn't view HotPlay or Zappware as competitors worthy of mention. I don't have enough expertise to say if they can grow to relevance, but I don't find this encouraging.

Conclusion

As I stated from the outset, MKGI is not in my lane. Having followed some complicated special situations recently (1847 Goedeker (GOED) and DAVIDsTEA (DTEA)), I can see there is tremendous value to understanding the deals prior to the rest of the market figuring them out. Is Monaker an opportunity like the others or will their reach exceed their grasp? Time will tell. Comparable valuations suggest this is an opportunity to get in on the ground floor, but experience in the market says the story may be better than the execution. I have taken a small, speculative long position in MKGI in connection with their closing of the transaction with HotPlay and broader awareness of the deal by the market.

Think you understand the technology better than I do? Please provide any insights into this situation in the comments!

Analyst’s Disclosure: I/we have a beneficial long position in the shares of DTEA, MKGI either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.