Mitula Group (MUA) - Revised Profit Update and FY17 Results

Ron Shamgar

TAMIM Asset Management

MUA surprised everyone during July and issued revised profit guidance for revenue of $34M - $36M (previous $38M - $41M, growth of 22% - 28% on pcp) and EBITDA of $12M - $13M (previous $17M - $19M). The management team has only just reaffirmed guidance back at the AGM in May. The revised guidance was mainly blamed on “human error” which occurred due to a misconfiguration of the required data centre bandwidth to host Mitula branded sites. This error led to a significant slowdown in website speeds which led to Google penalising Mitula in its search results ranking.

To make matters worse, all this happened during a major algorithm refresh by Google, which masked the underlying problem for an extended period of time. Initially management assumed that they could claw back the lost traffic at a rapid pace and still meet guidance. Unfortunately, by July they have realised that traffic growth rates were slower to recover than expected. The market punished the stock severely, selling it down by circa 40%.

So what do we make of all of this? And is this a structural issue or just one big stuff up creating a buying opportunity? To begin with, we tend to believe management in this case. The reason for this is that the Nestoria, Nuroa, Fashiola and Dotproperty portals were not affected and continue to track ahead of expectations. Those portals use a different data centre provider hence giving some affirmation that the “human error” was real, rather than just an excuse.

The problem in this case, is that it highlights a serious lack of risk management processes within the company to identify such mission critical issues. Its quite hard to believe that a business that relies so heavily on website stability and managing high volumes of traffic, cannot identify a simple bandwidth misconfiguration within a matter of hours or days.

Management has reassured investors that systems have been put in place to ensure no repeat of this event. In addition, the management and board will not receive their short-term incentive payments this year and will take all their annual fees in MUA in the form of shares at $1 – we respect them for at least doing that.

We still believe management is fully committed to the business for the long term (45% equity ownership) and has decided against cutting back on growth expenses just to try and meet short-term profit forecasts. The company has highlighted that growth initiatives will diversify earnings streams over time and will be less reliant on CPC and Adsense revenue to drive growth. Again we commend them for taking this more painful but long term approach.

In our opinion this unfortunate confluence of events, are more of a “one off”, and potentially creates a great buying opportunity for long-term investors. If MUA can claw back lost traffic by year-end, then in theory CY2018 profits should at least match or exceed this year’s previous guidance. If this is the case then the stock is extremely cheap. Unfortunately the market has lost confidence for now and so we don’t see the stock doing much for at least until February next year. In addition, this incident has more than ever highlighted the vulnerability of the business model and its dependence on Google search ranking results, regardless of the company’s impressive track record of revenue and profit growth over the last 5 years.

As we go to print the company has delivered FY17 results that have met the revised update in July. Some positive takeouts from the results are the greater than 100% of EBITDA cash conversion and the traffic recovery in July boding well for the company tracking back lost traffic by the end of the year. Based on revised profit expectations we now think the company will report cash EPS of 4 cents this year growing to at least 6 cents next year. We will determine the future of our holding in the company following further discussions with management.

This article is an extract from the TBF July 2017 Monthly Report. You can access the report here:

Ron Shamgar
Ron Shamgar
Head of Australian Equities
TAMIM Asset Management

Head of Australian Equities for TAMIM Asset Management. Previously Founder & Portfolio Manager of the TBF Small Cap Value Growth Fund. Ron has responsibility for research, company analysis, portfolio construction for the TAMIM All Cap Portfolios.

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