My top pick for 2021 - MXO

What looked like the worst year for investing back in March has now turned into prime hunting ground for small and microcap stocks.

The conditions for this sector of the market look positive and as money continues to move down the market cap spectrum there’s a reasonable argument to suggest microcaps will continue to perform well, assuming you pick the right ones.

We’ve built positions in a number of new stocks over the last 6 months, but I want to share my thoughts on what I view as the company with the most potential upside. It is one for your watch list.

Below is my pick for the best performing microcap stock for 2021.

Motio Ltd (ASX:MXO) – Market Cap $14m

Motio used to be called XTD and was founded on their legacy Xtrack assets – digital display screens in train stations in Brisbane and Melbourne. The previous management team had grand plans for international expansion but it simply didn’t work.

Driven primarily by current director Jason Byrne, there was a push to refresh the company with a new team and strategy. That was successful and the new management have now been in there for around 18 months working on setting the platform for the growth that I think is coming.

What is impressive in that turnaround phase is that they didn’t raise any additional capital until very recently and only for growth purposes. They kept it lean and survived off the cashflows brought in by the Xtrack business. That has allowed the share count to stay low and the register tight, providing a perfect structure for a classic turnaround, refresh, growth story and share price re-rating.

The new strategy is exciting, they’ve already built strong market positions in their target sectors, the rebrand is complete and the new team is refreshed and focused.

They have plenty of capital, a cash flow positive business and a long list of organic and acquisitive growth opportunities ahead.

Where We Are Today

MXO is run by Adam Cadwallader (ex Ooh! Media) and Michael Johnstone, two highly experienced media execs. The company operates in the place-based media sector, specifically in the health (MotioHealth), leisure (MotioPlay) and convenience/on-the-go (MotioGo) verticals.

Their integrated offering is unique in this market as they own the media assets, sell advertising space and create their own content (Enormity). They also have a burgeoning AdTech and SportTech business which will start to come into its own over the next 12-18 months.

In MotioHealth, from the perspective of a large medical centre network owner, their digital display network is both a revenue generator and (arguably more importantly) a means of communication with their patients.

The importance of this was highlighted by COVID where regular (Government directed) messages needed to be delivered to patients effectively and safely. This all needs to be done with effective targeting while still protecting patient data – a delicate balance.

The network operators have the option to either in-house it (difficult, expensive, non-core and generally a distraction) or choose a provider like MXO. The other players in this vertical generally either don’t provide the entire suite of services (e.g another large player in Medical Media outsources their media representation to MXO) or don’t view this market as core.

Motio Play is a bit different because almost all of the growth will be organic. It’s an open playing field with no incumbents and a market MXO can build from the ground up.

Beyond just the opportunity to roll out more screens across Motio Play there is also the opportunity to capture more of the dollars being spent across their client base by providing more products and services.

For example, their SPAWTZ software for which they are the exclusive reseller in ANZ or payment products for their indoor leisure centre clients. They disclosed at the AGM that their existing client base generates $60m of revenue per annum – this is the immediate opportunity to go after with that number likely to grow over time.

New product launches will be a theme of 2021. An example of new product development is the recent release of CLIX, or Customer Location Intelligence Experience, focused on the commercial property sector. The opportunity for this product will likely be further communicated over the next few months, but MXO describe it as a ‘smart city’ concept localized for commercial property owners.

 

MotioGo is currently focused on petro-convenience stores and has the exclusive media sales rights to the Caltex in-store digital screen network, consisting of over 1,000 digital displays across more than 500 locations. I expect we will see further growth in this vertical over 2021.

When COVID hit the OOH advertising sector was completely smashed. It lives and breathes off the movement of people. Ooh! Media for example ran discounts of up to 90% on some of their billboards because, well, what’s an advertisement worth if no one will see it?

While MXO’s niche markets were not hit as badly as things like billboards, there was still a lot of pain across the sector. That created the opportunity to build a war chest of cash and a list of M&A targets.

That list is extensive and I think it is highly likely we’ll see more acquisitions over the next 12-18 months. They have $4m of net cash, a cash flow positive business and a rising share price with which to use scrip to complete deals.

Capital H led the placement and now owns 20% of the company, with the intention being to back a high quality team at the bottom of the cycle and ride the recovery/growth story as we emerge from COVID-19.

Ooh! Media released a trading update this morning that suggests this industry recovery is underway.

A Tech Stock In Hiding

MXO looks like a media business and that is certainly their core. But this is a technology, software and data intelligence company in disguise.

If you were building an OOH/place-based media business from scratch today you wouldn’t build it the way the larger players currently operate. Some of those businesses are hamstrung by their legacy way of doing things and are unable to introduce newer technologies as it would risk their pricing structures and revenues at a time where many of them are already suffering from COVID.

Today’s modern media business should be able to target specific demographics at the desired time, click and drag media into ad space/screens at the location of choice, pay only for the times their target market is watching, give local businesses the flexibility that the larger businesses are provided and do all of this cost effectively.

Over 2021 the market will start to realise that MXO is a tech stock in hiding. They’ll beat out competitors in the health space because their technology and data is better than peers. They’ll release new software and payments products in the Health and Play sectors. They’ll build out their AdTech and SportTech divisions organically and by acquisition, and leverage these businesses across their growing media ownership base.

Media will always be the core of the business, but they’ll differentiate with technology and data and they can do that because they’re able to build today’s media business from the ground up without restrictions that come from legacy business models.

As the market realises this we expect it will drive a re-rate, recognizing the quality of the revenues and the opportunity at large. If and when this occurs and the market compares MXO to tech peers, I expect the market cap to be a lot higher than the current $14m.

2021 Guidance & Outlook

The company gave guidance at their AGM of being operationally cash flow positive in FY21. This is rare for a sub $20m microcap company at the early stages of a growth story.

From our experience, they are generally the type to under promise and over deliver.

Keep in mind that the 2020 results were impacted by COVID as was the whole industry. The existing assets, in a normal market, we think can generate $1-$2m of EBITDA. 2021 is highly likely to see a resumption of normality and OML’s trading update suggests this is on track.

From there it will be all about growth – organic and acquired.

The Xtrack assets may not be a part of the long-term future, but we think they have a good chance to restructure or renegotiate a favourable outcome here.

The market backs quality management teams with ambitious but achievable visions and incentives aligned to achieve them. MXO’s vision, outlined at the AGM, fits this definition:

“Our vision is to be the global leaders in Place Based Media and Customer Location Intelligence Experience.”

This set up reminds me of the early days in Tesserent (ASX:TNT). They had a clear and bold vision from the start to become the leading cybersecurity player in Australia through aggressive acquisitions and organic growth.

It was easy to be skeptical with the stock flailing between 4-5c twelve months ago. But once they completed a couple of deals the market took notice and priced in further success, with the rising share price allowing more and more accretive acquisitions.

The stock reached 40c earlier this year, a 10 bagger in a year, and they can now make larger acquisitions to solidify their position as the leading cybersecurity player in Australia.

I think MXO can do the same in the media space. As the stock goes from under the radar to better known there is a clear re-rating waiting to happen. If and when the stock approaches 20c, they will then have the ability to go after much larger, company-making deals. These assets are out there and on the radar of management. I would note it’s a team accustomed to running much bigger businesses.

That’s why we’ve taken a large position in the stock and intend to be actively involved, holding it through all the ups and downs that come with a growth story likes this.

Like TNT, it won’t happen in a straight line and there are risks relating to execution, as is always the case. They need to do good deals and stay focused on their strategy.

But we think we are getting in on the bottom floor here. $14m is too cheap for what they already have, and we’re getting the growth outlook and exciting new product developments for free.

For those who do their own research and decide to build a position, it is worth noting there seems to be some sharehodlers in there from the old XTD days that have been selling stock slowly at these levels. My expectation (and it is guesswork) is that once this is worked through, the stock will be very tight and well positioned to re-rate quickly on good news.

MXO is my pick for the best performing microcap in 2021. We’ve acquired 20%, will be actively involved and plan to hold on for the ride.

Add it to your watchlist.

P.S. There’s also the listed options, MXOOA, with a strike price of 8c and a 3 year expiry. We think there is a lot of leverage in owning the options if you are bullish on MXO over the next 2-3 years.

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Capital H owns MXO and MXOOA.