Edmond Jackson's Stockwatch: Monitise finds friends in high places

With nearly 9% of Monitise shares loaned to short-sellers, is this a warning to steer clear? Actually short sellers can be prone to crowd behaviour as bullish traders: recalling how I drew attention to Home Retail Group at 85p in June 2012, it was similarly among the most shorted stocks yet it then rose to 223p.

Certainly there have been grounds to question Monitise's market value of £1.5 billion after its shares soared to 80p, for a company yet to show profits and amid wider market exuberance. Yet this was a matter of pricing, not whether the company is built on sand - the key question where short-sellers gather. In a similar way that I suggested Home Retail's click-and-collect marketing was a winner, I take encouragement that Visa and Mastercard are backing Monitise which significantly improves its chances of global success.

Last March the company enlarged its share capital by 9.5%, placing 160.6 million new shares with Mastercard and institutional investors at 68p; and while there appears no evidence that Mastercard is a disclosed shareholder over 3%, Visa Europe owns about 7%.

Mind such announcements can be unclear: Visa Europe recently said it had crossed the 7% level yet held 6.6% before and after the transaction; while Company REFS cites Visa Europe owning 5.95% and Visa International 5.52%.

Twin-CEO role

More significantly a former Visa executive has become co-chief executive which looks like Visa bolstering professional management skills at the top. A twin-CEO role may appear like potentially creating conflicts, although the flair of an entrepreneurial founder can differ from the managerial needs of a rapid-growth international business.

The appointee had previously been a member of the Monitise board from July 2010 to October 2012 which should raise the chances of this arrangement working. To me it is the most significant aspect going forward. The new executive has been granted five million options with a 1p exercise price, vesting after three years if the shares trade at an average 68p over the three months prior to vesting.

Market volatility is likely to continue due to the nature of this company: when I drew attention at 36p in February 2013 I stated it was "as close to perfection as a growth story gets: progress towards a massive global opportunity, in a market-leading position." It is often the case, companies with the best growth prospects have the most volatile shares as events never pan out exactly to expectations, and the mood shifts. Also the low-growth, low interest rate environment intensifies public craving for what few growth stories exist, hence high ratings. But until Monitise proves an earnings track record I cautioned that "intrinsic value is like pinning a tail on an ass."

Establishing a support level

Some traders take heart that after falling to about 42p the stock has reached a support level on its five-year chart although I would mind, wider markets are still at record highs as they enter thin trading amid the summer holiday period. Key risks are whether second-quarter US corporate earnings meet expectations, also signs that Germany and China are challenged. With fresh money I would let Monitise establish a support level or at least average any buying. At about 42p the balance of trading currently suggests buyers to the fore although this is partly in response to a latest drop from 53p and there may not be much significant news until September prelims.

The 8 July trading update causing the drop, presented the company as opting for a subscription-based approach which reduces near-term revenue and defers profit, although it looks as if two clients have pursued their own prudent financial approach. Monitise's co-founder was reported saying two large companies had attempted to barter over payments: "We are bumping into some big ships and making sure we are giving investors maximum upside. We are not allowing ourselves to be squeezed into these deals." Reading between the lines the company has been pressured but this kind of negotiation is fairly typical and the overall update is very good. The company effectively targets operating profit over £150 million for its year to end-June 2018, and progress towards this is the more significant issue.

Management is similarly hostage to fortune in the way it targets profitability in the year to June 2016, although it could never have raised money without releasing targets. Net cash of £144 million and no debt "provides balance sheet strength to see Monitise through to cash flow breakeven and beyond." My deadpan feeling about this results from decades of hearing such promises from tech-firms. So take care: while "mobile money" offers attractive growth at a time when global recovery remains in question, and Monitise enjoys a leading position, the path will be bumpy.

Events also show how a trailing stop loss - e.g. "sell" if the stock drifts 10% from its peak - can be useful to protect gains where shares race up but the company has yet to show profits. You are then left weighing when potentially to buy back, and may miss doing so or be defeated by costs. But this approach can help manage risk exposure to speculative shares and doesn't have to involve one's entire holding.

For more information see monitise.com

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall.The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.