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Preston Lawrence
5 years ago
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RESEARCH 31 July 2017 Information Technology Software and Services MGM Wireless SPACETALK Rollout Accelerates Highlights MGM Wireless (MWR) has announced a series of announcements that have shown

Momentum is now building for the Company as it looks to capitalize on one of the fastest and newest growing global categories - wearable devices for children.

com website and sales are now occurring via bricks and mortar retailers.

1 RESEARCH 31 July 2017 Information Technology Software and Services MGM Wireless SPACETALK Rollout Accelerates Highlights MGM Wireless (MWR) has announced a series of announcements that have shown progression in its bricks and mortar rollout of its allin-one children s smartwatch - SPACETALK. Momentum is now building for the Company as it looks to capitalize on one of the fastest and newest growing global categories - wearable devices for children. Within this category, kid s smartwatches are forecasted to have a market size of 24 million units or US$5 billion in sales by Sales continue to grow online month on month via its allmytribe.com website and sales are now occurring via bricks and mortar retailers. The Trade Agreement signed with JB Hi Fi has the potential to catapult SPACETALK sales and has brought further attention to the company from other major retailers (domestically and internationally), interested in stocking the device. We expect additional distribution deals to be executed in preparation for Christmas. MGM Wireless has strengthened management and key personnel to help solidify SPACETALK s position as the most advanced and safest device on the market. The addition of Jason Le (ex GoPro and Walt Disney Company) as Director of Digital Marketing and Product Development is a particularly high profile inclusion. MGM s current market cap of $17.7 million severely underestimates the opportunity, the achievements made so far and the probability of execution. The Company holds no debt and has a cash balance of just under $3 million. SPACETALK is not only the leader in this category, but the only way for investors to gain exposure. It is the only watch to meet all privacy and import laws (including the latest EU privacy laws), built to the highest security standard and certified to be sold in Australia. Gregory Tolpigin Head of Proprietary Trading gregory.tolpigin@gleneagle.com.au BBG: MWR AU Software and Services Current price ($) 1.50 Price target ($) month rating STRONG Company data Market capitalisation ($m) Net cash ($m) Enterprise value ($m) Issued Shares on issue Top 5 shareholders Mark Fortunatow Mark Hurd Yavern Creek Holdings Ryanu Family Trust Pink Style Pty Ltd 3.0 mln Shares (m) % THIS DOCUMENT IS BEING FURNISHED TO YOU SOLELY FOR YOUR INFORMATION AND MUST NOT BE REPRODUCED OR REDISTRIBUTED TO ANY OTHER PERSON. IN PARTICULAR, THIS DOCUMENT OR ANY COPY OF IT MUST NOT BE TAKEN INTO OR DISTRIBUTED ABN AFSL

2 JB Hi Fi Trade Agreement Signed MGM Wireless announced a Trade Agreement with JB Hi Fi on July 5, 2018 to stock SPACETALK as part of an online trial before a rollout to its 193 stores, if successful. Since the announcement the share price has declined from above $2.20 to $1.50 or 32%. This has reduced the market cap from $26 million to under $18 million. Any expectation that the Trade Agreement would immediately include all 193 bricks and mortar stores was unrealistic and the share price reaction is exceptionally excessive. We believe the market has underestimated the potential of success to this trial given: Introduction of all new products by retailers are typically conducted as trials The product does not remove sales revenue from any other category within the store To be exposed to this new market category SPACETALK is the only option available to stock in store. As noted in our original research report Watching Out For Kids May 2018 competing watches fail to meet privacy, security and quality standards. Moreover, several are not certified to be sold in Australia or have sustainable business models that guarantee long-term supply and aftersales support SPACETALK is designed to work on the Telstra 3G network providing JB Hi Fi with additional sales and trail earnings as a Telstra reseller We believe that as a result of the above there is a significantly high probability that a rollout will begin across all JB Hi Fi Australian stores ahead of Christmas, cementing the SPACETALK watch as the leader in the new kid s smartwatch market. Furthermore, this Trade Agreement has garnered the attention of other major distributors, retailers and telecoms (domestically and internationally) that are currently in discussion in stocking/distribution SPACETALK. Regional Australia Rollout MGM Wireless in June announced 12 regional electronic stores had signed to stock SPACETALK of which 10 are part of the Leading Edge Group. The Leading Edge Group is an association of over 950 independent businesses and retailers across Australia. Training of staff has been completed and stores are reporting sales. Additional stores have since been signed in July. Key Personnel Hires As part of the Company s move into the wearables market, management has been strengthened with the addition of professionals experienced in designing, manufacturing and marketing premium consumer electronic goods. Jason Le joined in June from GoPro where he held the position of Regional Marketing Manager, responsible for GoPro s expansion in the Asia Pacific region. Prior to this Jason worked at Walt Disney and Oakley. Jason joins Paul Cooper (with MGM for over a year), who held senior positions with Microsoft and Nokia Mobile as Global Supply Chain Management and Aftersales Customer Service. Another recent addition, Amanda Lee has joined to be the National Sales Manager, having had previous roles at Vita Group and JB Hi Fi. Amanda is responsible for the expansion of the bricks and mortar footprint. We believe that these recent additions further strengthens management s experience in bringing to market a leading premium consumer product and supporting a wider distribution network. Page 2

Other developments MGM is currently testing its SPACETALK watch for the Optus and Vodafone networks. Expectations are for it to be ready for sale before Christmas.

3 Other developments MGM is currently testing its SPACETALK watch for the Optus and Vodafone networks. Expectations are for it to be ready for sale before Christmas. Availability of SPACETALK to all three mobile network providers will considerably expand the market reach and sales of SPACETALK. Comment As highlighted in our major research piece into the industry and MGM Watching Out For Kids, May 2018 the overall wearables industry is enjoying huge growth with one of the fastest growing markets being directly aimed at children. Those countries (eg. South Korea) which have embraced and been exposed to kid s smartwatches have seen exceptional sales (300,000 units sold in 2 years) and we believe that over the next months Australia will witness significant sales growth. The company is currently selling at a rate of 3,000 watches per annum via its online store. We expect that JB Hi Fi would be able to match these sales online and expansion to its physical footprint should generate ten times this amount or an average of 13 watches per store per month. During our extensive research and discussion with telecoms on this specific product, we regular received feedback that 20 sales per store per month would be a realistic target. The addition of JB Hi Fi, at these sales rates (13 per month) translates to an annual sales rate of 36,000 watches. Considering profitability is reached after sales of 8,000, the JB Hi Fi Trade Agreement moving from trial to rollout will see a significant valuation uplift. Nearest listed wearables comparison Nuheara (NUH) trades at 30-35x revenue and despite selling 15,000+ IQbuds per annum still generates a net loss. Applying a similar multiple to MGM s FY2019 net profit generates a price target of $4.07, (a small decline on our May valuation of $4.33) due to small delays in our forecasted rollout. Page 3

4 Disclaimer and Disclosure This research is prepared for general information only, and as such, the specific needs, investment objectives or financial situation of any particular reader have not been taken into consideration. Individuals should therefore discuss, with their adviser the merits of the analysis for their own specific circumstances and realize that not all investments will be appropriate for all readers. The author has not independently verified all the information given in this document. Accordingly, no representation or warranty, express or implied, is made as to the accuracy, completeness or fairness of the information, opinions projections and estimates contained in this document. Other than as attributed, the opinions (if any) expressed in this document are entirely those of the author, are given as part of his normal research activities and may change. The author has no obligation to notify opinion changes or if it becomes aware of any inaccuracy in or omission from this document. All opinions and projections expressed in this document are given as of the date of this document and are subject to change without notice. This document is not an offer document and does not constitute an invitation to subscribe for or buy any securities or an offer for subscription or purchase of any securities or a solicitation to engage in or refrain from engaging in any transaction. Neither this document nor anything contained in this document forms the basis of any contract or commitment for the purchase or transfer of securities. This document must not be relied on to make an investment decision. To the extent permitted by law, the author excludes all liability for any loss or damage (including indirect, special or consequential loss or damage) arising from the use of, or reliance on, any information, view or recommendation (the information) whether or not caused by any negligent act or omission. If the law prohibits the exclusion of such liability, the author hereby limits its liability, to the extent permitted by law, to the re-supply of the information or the cost of the said re-supply. This document has been prepared by its author independently of the Company and its subsidiaries. The author has no authority whatsoever to give any information or make any representation or warranty on behalf of the Company, any of its subsidiaries or any of their respective associates, affiliates or advisors or any other person or in its capacity as a manager or underwriter of any offering. This document has been prepared by its author to provide background information only and does not, and does not attempt to, contain all material or relevant information about the Company, its subsidiaries, and/or the business of the Company and its subsidiaries. There are risks involved in purchasing securities. In particular, the prices of securities can and do fluctuate, and any individual security may experience upward or downward movements, and may even become valueless. The author and/or his associates may: - hold securities in the entity discussed and commented on in this analysis; - buy and sell securities in the entity that is discussed and commented on in this analysis before or after publication; - receive commission from clients for dealing in securities in the entity that is discussed and commented on in this analysis and its representatives and analysts may directly share in that commission; - receive fees, commissions and payments including underwriting and placement fees from the entity that is discussed and commented on in this analysis; - receive corporate advisory fees, payments, and commission from the entity that is discussed and commented upon in this analysis. This document is not supplied in connection with any offering of securities. If an offer of securities in the Company is made that requires disclosure in accordance with Chapter 6D of the Corporations Act, a prospectus or other offering document relating to that offer will be made available when the securities are offered and anyone wishing to acquire the securities offered will need to complete an application form that will be in or will accompany that document. A decision whether to subscribe for securities in the Company should be made on the basis of the information in the prospectus or other offering document Page 4

5 Analyst Certification The views expressed in this research report are those of the authoring analyst, Greg Tolpigin, who hereby certifies that the recommendations and opinions expressed in this research accurately reflect the analyst s personal, independent, objective views about any and all potential investments discussed herein. In addition, the author has taken reasonable care to achieve and maintain independence and objectivity in making any recommendations. Page 5

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