United Mobility Technology: When you don't communicate, nobody sees you
[WARNING: Trouble may be brewing in paradise. The first of June 2023, Alexander Hupe was appointed to the Management Board in the role of CFO. Just one month later it was announced that he resigned from the position. What did he do in the meantime? "Mr. Hupe has been actively involved in the preparation of the annual financial statements." Didn't he like what he saw? I have no idea. However that may be, one day after making the resignation public, on the fifth of July 2023, UMT announced they were writing down the value of their assets Buchberger and Mobile Payment UMS. As to Buchberger, it was to be expected ("due to the stagnation in the construction industry"), but Management adds in the announcement: "...and the legal case." From a former announcement, I thought the legal case all but resolved; however, even unresolved I believe it's not consequential. Consequential, however, is their perception of UMS, their biggest asset, the rationale of the reduction in value being: "the successes from the payment business have not yet been seen". Two short announcements with little information that apparently scared investors a lot, driving down the stock price - this and the prospect of a capital increase "to secure liquidity" and for further acquisitions, when according to the H1 2022 financial statements no liquidity would need to be secured, as the company was flush in cash and cash equivalents on paper. It fits with the unlucky communication style I flagged below in the article. Add to this inconsistent communication; Management promised the numbers for full year 2022 until the 30th of June (cf. Financial Calendar on their website) and did not deliver on that promise. Perhaps I'll write another update article when full year results 2022 come out, still expected for July 2023.]
[Second Update: I’ve published a new article about UMT, the bear case with new data to the bull case below. It can be found here.]
United Mobility Technology (UMT) is a German micro-cap company that operates as a "technology house" for innovation and value creation. The company offers various solutions in the fields of mobile payment, smart rental, collaboration and process management, and e-commerce and consulting. UMT has a current market capitalization of about 18 million euros and trades on the Xetra exchange under the symbol UMDK.
UMT has shown a strong and resilient performance in the first half of 2022, improving revenue and earnings. UMT has also confirmed its guidance for full year 2022, expecting further growth and profitability. Full year 2022 results will be reported some time later this year, possibly in July.
This article is no stock picking advice. Indeed, I discourage anyone from following investment advice who hasn’t invested a considerable amount of time in getting to know a company and its financial results. Although this reads like a positive article on the company, inciting to buy the stock, in reality this is a thought experiment I'm running. Please keep that in mind.
My goal with this article is to showcase how fundamental undervaluation might mean very little when circumstances are set against an appreciation of the stock price. Those circumstances are, in this case, a) the stock passing under the radar of investors, b) the communicative no-man’s-land between management and shareholders, and c) no policy of return of capital to shareholders in place.
Overview of the company
UMT's main source of revenue is United Mobile Services (UMS) with its flagship mobile payment platform, which enables merchants to accept digital payments from customers via smartphones. UMT licenses its technology to large retail chains, banks, bonus program providers, and end-users.
UMT's second source of revenue is its smart rental app for equipment for the construction sector: the Buchberger Group, acquired in February 2021. Buchberger Group rents out construction machines via their digital platform connecting them with potential tenants.
The company’s third source of revenue is its collaboration and process management software MEXS, acquired in July 2022. MEXS provides messaging technology for B2B and B2C applications, combining software solutions for corporate resource planning with the messaging service.
The fourth source of revenue is the consulting business unit, which comprises consulting activities for IT and even asset management.
UMT's business model is based on its buy-and-build strategy, which aims to acquire and integrate companies that promise growth by digital scalability.
The business model is supported by UMT's strong customer base and market position. Its legacy business, the mobile payment technology, is in live operation at around 16,000 stores and 71,000 cash registers. In Germany alone, more than 14 million users have been able to use UMS for more than 6 years.
Revenue and earnings growth
UMT generated a revenue of EUR 17.5 million in the first half of 2022, up 10% compared to the first half of 2021. This result reflects the diversified and scalable business model of the company.
UMT posted earnings before interest and taxes (EBIT) of EUR 4.9 million in the first half of 2022, up 9% compared to the first half of 2021. This result corresponds to an EBIT margin of 28%, a little lower than the EBIT margin of 31% for full year 2021, reflecting the operational efficiency and cost optimization of UMT which has managed to maintain its profitability despite higher expenses. The profit margin remained unchanged at 27%.
Fortress balance sheet in times of economic uncertainty
UMT has a singularly strong balance sheet which supports its growth strategy and financial flexibility.
As of June 30, 2022, UMT had a total capital of EUR 51.2 million, almost unchanged from EUR 50.2 million at the end of 2021. The equity ratio decreased slightly from 97.9% to 95.9% over the same period. In absolute terms, the equity amounted to EUR 49.1 million as of June 30, 2022. The Buchberger group contributed EUR 23.5 million to this amount. A significant part of UMT’s total assets was still the stake in UMS (EUR 9.4 million), which accounted for 18.4% of the balance sheet total, and the receivables from the loan to UMS with 34.1%. Thus, UMS had a weight of 52.5% of UMT’s total assets as of June 30, 2022.
The debt ratio as of June 30, 2022 was 4.1%, with a debt of EUR 2.1 million.
The debt-to-equity ratio demonstrates that UMT’s balance sheet is a fortress and puts it in a uniquely advantageous position to weather economically uncertain times.
Growth prospects
The company attributed its positive results for the first half of 2022 to the successful integration of the Buchberger Group and the expansion of its product portfolio and customer base. UMT also confirmed its guidance for full year 2022, expecting a revenue of at least EUR 35 million and an EBIT of at least EUR 10 million, translating into a double digit percentage increase for both metrics.
UMT’s guidance is based on several assumptions and factors, such as the continued successful integration of MEXS, a continued expansion of its customer base, the increase in transaction volume and value on its payment platform, and the improvement in operational efficiency and cost structure. While UMT will report full-year 2022 some time later this year, I assume that their guidance, usually not exuberant, is sound and that their future performance looks bright, providing visibility to estimate business success at least until 2025.
UMT major growth driver would be its ability to leverage MEXS's technology and expertise to offer a flexible and scalable SaaS solution that can address the growing demand for digital transformation across all sectors. UMT expects that the acquisition will generate synergies and cross-selling opportunities, as well as increase its recurring revenue stream.
Valuation
UMT Group had a consolidated net income of EUR 4.6 million and a revenue of EUR 17.5 million in the first six months of 2022. Assuming these figures remain constant for the second half of the year, we can estimate the annual earnings per share and sales per share as follows:
Earnings per share = Consolidated net income / Shares outstanding
Earnings per share = (4.6 x 2) / 5.29 = EUR 1.74
Sales per share = Revenue / Shares outstanding
Sales per share = (17.5 x 2) / 5.29 = EUR 6.62
The stock price as at the time of writing of this article is EUR 3.28. We can use this figure to calculate the P/E and P/S ratios as follows:
P/E ratio = 3.28 / 1.74 = 1.89
P/S ratio = 3.28 / 6.62 = 0.50
The above ratios show that UMT is trading at a very low valuation compared to its earnings and sales, promising a considerable stock price appreciation by sheer force of multiple expansion, should that multiple expansion happen.
Discussion of risks to the business model
Since its inception UMT has been active in the mobile payment sector in a very competitive, below-expectations growing and increasingly consolidating market environment. There is a latent risk that large market participants such as Apple, Google and PayPal, who already have a significant market power, could eventually divide the market completely among themselves. While this risk remains, UMT’s own mobile payment and loyalty technology provides a mobile payment method in combination with a customer loyalty tool that has so far proven to be a convincing selling proposition.
With the complete takeover of the Buchberger Group, UMT took the first step of its newly defined “buy-and-build” strategy in order to diversify away from mobile payment and become truly a tech house. However, with a possible recessionary environment and a decline in orders in the construction industry, current and future investments in the segment of construction machinery have been put under scrutiny by management. UMT countered this risk of possible near-future underperformance of the Buchberger Group with increased commitment in the technology sector by the acquisition of MEXS Group.
The short- and long-term consequences of a global recessionary environment are not foreseeable at this point in time. In 2022 it has already become evident that raising capital is becoming increasingly difficult at favourable conditions. However, UMT’s balance sheet puts it in the advantageous position of not needing to seek financing.
From today’s perspective and on the basis of the course set in the past financial year, also against the background of the risks outlined above, further growth can be expected for the 2022 financial year and beyond within the framework of the “buy and build” strategy.
The true risk of an investment in UMT
I consider the risks to UMT’s business to be in line with the macroeconomic risks and not company-specific. The true risk to an investment in UMT is its valuation by the market. This valuation has evidenced a profound disconnect from the fair value of the company for many years, rendering inconsequential the use of a discounted cash flow model to arrive at a target price for an investment.
UMT is a German micro cap that hasn’t garnered any attention from the financial press yet and probably won’t so for many years to come. Management has shown competence in increasing the business, but no competence at all in communicating with potential investors. If you make the test, as I did, and write to Investor Relations, very probably you won’t get a response (I didn’t).
Besides, the stock price, as expected from a micro cap, is thinly traded and therefore very volatile. Extremely wild swings in both the up- and downside direction are to be expected and present a considerable risk to the investment thesis.
Target price and conclusion
I estimate a target P/E ratio above 4 would underestimate the chronic undervaluation German micro caps can face especially when management has no propensity for courting investors. Therefore, I consider a target price of roughly EUR 7 to be a reasonable expectation that could be met by the market by 2025. At a share price of EUR 3.28 at the time of writing of this article, this represents an upside of 113%. I would suggest readers to set a stop-loss limit at 7 EUR when the market price goes beyond it, instead of selling at that price. Like this, a sell will be triggered at 7 EUR should the stock price drop back again, but it will also allow the stock to run higher in case the market should show more appreciation for the company.
UMT presents strong financial performance, attractive valuation, and promising growth prospects. However, it has been severely undervalued by the market for many years already and management has shown little effort for establishing a solid communication basis with investors, and no effort in returning capital to shareholders.
Investors who are interested in UMT should weigh the potential rewards and risks very carefully before making a decision. UMT is a very risky investment for the reasons given, although it could potentially offer substantial returns if the market realises some day on its own how much value is hidden in the company, because sadly management won’t help the market to realise it.
The sell-off in 2022, which brought the stock down from 8 EUR, was based on a broad-based sell-off in German micro caps and, as shown above, didn’t reflect any darkening in the prospects of the business, which, to the contrary, brightened.
While I see no reason for the stock not to recover to a EUR 7 share price by 2025, presenting significant upside, the subdued communication strategy of management and the lack of capital return to shareholders cannot make this a safe assumption.