Questor: this under-the-radar tech star counts Apple and Spotify among its clients

Richard Evans 4 December 2019 • 5:59am

Man using iphone — ‘Carrier billing’ is seen as a valuable way to attract new customers Credit: PA

Questor share tip: Boku enables the technology giants’ customers to sign up to services without the need of a bank account – and it gets a cut of every transaction

Today’s stock is a little-known London-listed tech company whose software helps the likes of Apple and Spotify sign up new customers.

Boku, based in California but quoted on Aim, provides the systems that enable Apple, for example, to let its users pay for its services via their mobile phone bill rather than via a bank account or credit card.

This can be particularly valuable in emerging markets, where banking systems may not be fully developed.

“Spotify, Apple and others see this ‘carrier billing’ payment method as a valuable way to attract new customers because it makes signing them up very simple,” said Matt Evans, who holds Boku shares in his Investec UK Smaller Companies fund.

He added that, although it hadn’t lived up to early expectations that everyone would use it for buying smartphone apps, carrier billing still accounted for about 4pc of payments made on mobile phones and was now growing rapidly.

“The amount of money that flows through Boku’s systems is huge and is growing at about 40pc a year,” he said. “The company takes a cut of each payment and its own revenues have been growing at about 70pc annually. This is expected to slow to about 30pc over the next couple of years but I expect it to be well into double digits for a long time.””

Because Boku’s costs are in building the systems in the first place, there is minimal expense involved in servicing transaction growth and roughly 95pc of additional revenues fall straight on to the bottom line, Mr Evans said.

As a result, this part of the business is highly profitable and cash-generative.

However, in January it bought a loss-making identity verification firm called Danal. “Identity checking fits very well with carrier billing because merchants such as Apple and Spotify want to protect themselves from fraud,” the fund manager said.

“But the acquisition looked expensive and because Danal was loss-making the market struggled to value the combined business.” The shares have been volatile this year but now stand below the level at which they traded before the deal was announced.

“The combined business is valued at a multiple of about 15 on the ‘enterprise value to Ebitda’ measure using forecast 2020 numbers, with a ‘free cash flow yield’ of 7pc,” Mr Evans said. “This looks cheap for a company that’s growing so quickly.

“The next stage of growth is in the identity business, which should offer a greater contribution in the next few years, driven partly by regulation. It could be very interesting.”

The company has net cash and its already good returns on capital of about 22pc should rise thanks to the way extra sales translate so well into earnings.

Cash conversion is currently held back by investment costs but should also improve.

Questor says: buy

Ticker: BOKU

Share price at close: 82.5p

A reader has commented that, because of an unusual type of "settlement" in relation to Boku shares, they are not available on all investment platforms. However, AJ Bell has told Questor that its customers are able to trade in the shares. Other platforms may also offer them.

Update: Costain

This column tipped Costain, the contracting firm, in February on the strength of Matt Evans’s belief in the stock. Unfortunately the shares have been punished heavily since then, but the fund manager is not selling.

“The firm saw a slight reduction in the order book and had probably been a little complacent about managing the market’s expectations,” he said. “There was also a change of chief executive.

“However, there were no operational problems and the company has net cash, so it was never going to be another Carillion. But investors’ mood today as far as contractors are concerned is to run away at the first sign of trouble.”

He added: “The shares trade at five times earnings, or eight if you strip out the HS2 work the firm hopes for but won’t get if the project is cancelled, while the yield is 8.5pc and well covered.

“I can understand why the share price is where it is but this stock is far too cheap to sell.”

Questor says: hold

Ticker: COST

Share price at close: 182p