Today, while we celebrate the end of one of the most prolific period of IPOs of all times (with Neff today, in which I did not participate), I am starting a new series: Depressed IPO stocks worth buying. In other words, I am going to look at IPOs whose share price fell significantly since their debut and see if they’re worth investing now, at a significant discount from the original listing price.
Today’s stock is MOLG, a Malaysian company which has been on my radar since doing its IPO a little over a month and a half ago. It originally wanted to range in the $12.50-$14.50, finally did its IPO at $12.50 and promptly plummeted to $7. It tried to climb back up to $9, then crashed again today, currently at $4.12 (!).
So, is it time to buy MOLG?
Contents
The Good
1. Get in at a ridiculously low price.
I refuse to believe that a company could undergo a complete IPO process, including complete accounting verification, and then turn out to be absolutely nothing - a sham, an empty shell. Oh, it’s a Malaysian company, sure, but the fact remains that Mol Global has been in business for eight years, recently turned profitable, has significant distribution and market penetration and has done several high profile acquisitions (10 in the last 4 years). Mol Global has an established brands, customers, and operates in a highly-profitable and growing segment of the industry, that is, video games, mobile video games and pre-paid mobile phones
Unlike King’s “one-hit wonder” and Zynga “oh damn we’re public now” who risk everything on their next game, MOLG plays another game: acting as an intermediary. Remember when you were a kid and wanted candy? You’d go to a store and buy it with your money. Well, kids today go to MOLG counters and buy points for their games. Ok, let’s face it: not just kids do that. Many adults in countries MOLG operates in do not have a credit cards and, for some of them, buying prepaid cards granting points is their only way to get points in-game.
MOL.com has some great, very popular and quickly-growing games on its list, and not just mobile games: IMVU, Second Life, Steam (yes!), Rift, Guild Wars 2, World of Tanks, etc. Those are all solid games that are quickly adding subscribers. MOLG works by offering a convenient one-stop store for all these games (in other words, people buy MOLG points, and they can spend them in any game they want afterwards). Here:
MOLG accepts cash, Paypal, all credit cards, western unions, e-wallet, etc. I’m sure there is even a way to pay with your cellphone, for those who don’t care paying a 300% premium on whatever they buy (what a dumb, dumb idea). MOL Global also sells prepaid phone cards, which is apparently a hotter business than I had thought, especially in developing countries. All in all, it is quite a big Malaysian company. It’s no Malaysian Petroleum, but it’s not a company started on the corner of a table neither.
All of this has a value: it is, after all, quite convenient, and convenience has a price. That grocery store that delivers your groceries to you? It has a value. Purchasing in-game items through MOLG is no more expensive than buying it directly from the game developer himself (although the game developer do gets less for the same sales price). MOLG also offers a reward program, which is worth exactly 1% of whatever you spend with them.
To be honest, MOLG is a pretty big thing in Malaysia, India, Vietnam, Indonesia and other such countries. It’s not the sham company some people commenting the recent crash make it out to be and we do have something which is worth something here.
2. It’s profitable
Quite oddly, Mol Global is a profitable business. Specifically, it takes a cut every time someone buys MOLPoints or MOLReloads (its prepaid mobile phone thing). It also recently started MOLPay, a paying system, because why not? Here are the current volumnes for these sectors: transaction, and gets to be able to invest money that is paid but not spent (people who buy points, but don’t use them). This is quite a clever way to make money. Currently, MOLG makes around $7.8M USD a year, and this amount is growing. The number of stores it operates is growing by 5-10% yearly on average, and revenues are on fire.
It goes without saying that these are volumes, and that MOL Global makes very little income from MOLReloads overall. In my opinion, the most interesting part of the business is its points system for video games, on which it charges roughly a 6.5% commission. If you remove 0.75% for the rewards system (assuming only 75% of “rewards” are ever used), you are looking at a business that currently brings $12M USD per year, and its growing at an insane rate, more than doubling from 2011 to 2012 and up almost 59% from 2012 to 2013. Even if growth falls down to the low 20%, this is still a business that is literally on fire. Even better, MOLG makes money whenever someone buys points, but end up not using them (think: all those gift cards that you either never used, or only used half of). And this business is already profitable.
3. Malaysia is rich and video games are on the rise
In a country where cars cost more than three times what they cost in the US, it should make no surprise that Malaysians have money to invest into mobile games. Malaysians have money, they have iPhones and mobile gaming is still booming. MOLG is almost omnipresent in that country:
MOLPoints was initially launched in Malaysia in 2001 and has grown substantially, particularly through our ongoing relationship with 7-Eleven Malaysia, which is ultimately controlled by our major shareholder. As of June 30, 2014, MOLPoints could be purchased through our MOLReloads distribution network at more than 1,600 7-Eleven convenience stores across Malaysia.
It’s also quite a diversified company, technically being worldwide (even in Canada, I could buy MOLpoints if I wanted to.) For those who never dealt with credit cards and payment processing in general, this isn’t all too easy to do: all countries have different laws, regulations and ways to do business. Being able to process payments in a secure and reliable manner like is far from an easy task.
As of June 30, 2014, we had 5,337,516 registered members, of which 1,545,624 were consumers in Malaysia.
MOL is a competent company, at least technically, and will keep growing its members, especially in developing countries. It has a strong presence in Vietnam, Turkish, the Philippines and so on. This is a business that has already survived several difficult periods and managed to thrive in multiple countries. I would trust it to overcome more obstacles in the future.
Noticing the volume, we see some large orders being placed all during the day. For instance, the stock spiked at around $5.36, then around $4.50 with some strong volume. It rebounded it the after market by a significant amount and there’s a good chance it will open up on Monday. Someone is clearly believing in this company and buying back a lot of shares as a result. To be honest, it’s hard to blame him, since MOLG, if it survives the current crisis, is worth far more than $4 a share (more on that later).
5. The drop is WAY overdone
50% crash on the day a CFO resigns? Give me a break. You’d think this company was on the brink of bankruptcy given what we’ve witnessed today. Is it really possible a company operating since 2001 is nothing but a giant scam? I suppose so, but what are the odds? And we go back to the question: “Why did the CFO resign?” Personal reason my ***. Based on my (limited) experience of high managers being shown the door gently leaving for personal reasons, and given the fact earnings were postponed by 2 weeks, and given that this guy joined the company in August 2014, I would say that this guy is to blame. I would say that he most likely did a terrible job, perhaps didn’t even prepare the earnings report correctly (hence the delay in releasing them) and probably did not have a great grasp of finance and accounting in general. If such is the case, MOLG is a clear buy.
Even if MOL GLOBAL announced a 25% drop in revenue due to accounting mistakes, this is pretty much priced in. And I don’t believe MOLG will announce bad earnings on Dec. 3th. In fact, I think they will announce a rise in earnings and, unless something catastrophic happened that could explain the crash, either a rise in profits or a small decline. Again, under this optic, the drop is way overdone.
Unless you believe this to be the next Enron (which, to be clear, it may be), the crash is massively overdone. Remember that we have a quickly growing, profitable, well-established company on our hands and that the main risk at the moment is to discover a massive fraud, which I don’t think exists.
6. Deustch bank sets a price target of $12
A day before the CFO resigned, something that will go down in the annals as “the dumbest business move of all times,” Deustch bank came out with a price target of $12 for MOLG. In fact, they recently commented on the crash:
MOL, as a relatively small company which s pans more than 13 markets, could suffer from poor internal reporting systems, rendering a representation of the business challenging until the actual closing of books at the end of reporting periods. We also note that MOL, with 454 employees, has undertaken no less than 10 investment and acquisitions in five countries since 2009.
So, do we have a company that acquired a toxic company and is as a result being crushed by it? Perhaps, yes, but you just have to wonder if that mistake is going to cost them $300M, which is how much market valuation this company lost today. Personally, I find it impossible to believe that, amongst these 10 investments, MOLG managed to grab something that had a negative $300M value. I look at what they acquired, and all of their acquisitions looked quite solid, some of them quite profitable already (!). Is the crash due to some accounting error or discrepancies from what they bought and what they actually received? Is that what caused the CFO to resign, supposedly for reasons that had nothing to do with the company? Maybe, but we are still far from a $300M blow to the company.
The Bad
1. Everything else
It took me nearly an hour to find positive points about the company because there is so little to like. I perused its prospectus over and over again, hoping there was something I was missing, only to come to the conclusion that this was the messiest IPO I have ever seen. I mean, even Peak Resorts (SKIS)’s IPO was cleaner than that, and it’s a goddamn ski resort. Who would seriously invest in that? “Hi guys, if we get one bad season, we are bankrupt. Also, we kind of have to do an IPO right now, because we’re running out of cash. And our debt? Don’t get us starting on our debt; thank God we report our EBITDA predominantly, because our interest payments are 17% of our gross revenue. Oh, did I mention depreciation? No? Good.” Sometimes, I really think people buy anything.
Anyway, back to MOLG: what do you want me to say? When you have to write “it operates in Malaysia and Malaysia is cool” as an argument to recommend a stock, you know the company is not going to be superb. It’s a shaky business model to say the least: who’s the say gaming companies won’t start developing their own currencies? Who’s to say people in those countries won’t get credit cards and pay directly to the company instead? I mean, these guys operate stands so kids can hand in money for internet points. Do you see where I’m going? Would you have invested into Tamagotchi or Pugs? Okay, okay, mobile games and micro-transactions in general are here to stay, but still: MOL could get easily displaced if game developers launched their own points service. I mean, we are talking about a business that manufactures gift cards here.
You know all those annoying gift cards at every damn drug store and grocery store? Farmville, Farmstore, SecondPet, Aion Online, I don’t know, but there seems to be a hundred of them, and I’ve never seen anyone buy any of those. Well, in Malaysia, Mol Global is the one managing that. Is that really a successful business model and, if so, how long can it last? How long before people decide they can buy directly from developers? How long before EA decides to skip that 6.5% commission? A counter-argument to that would be: EA has little knowledge of those emerging markets and might be unable to penetrate them on its own. But as mobile phones get more and more widespread, I’m not certain how long MOL can keep its customers tied to its MOL points.
I can name so many business than went from very successful to complete failure within years that it’s not even funny (see: Yellow Pages, Research in Motion/Blackberry “maybe if we change our name, it will finally work,” Groupon, Zynga, etc.). This is not a company with a business model that I would trust over the very long term; even prepaid mobile is bound to come down sooner or later. Then again, I invested into a checking company (a company that prints cheques) a long time ago and, to my surprise, it is still on fire today. So yes, MOL might be one of those business with a shaky business model that always manage to grow.
2. CFO resigning
The crash was certainly overdone and there are many reasons to explain why the CFO is quitting. It could be something as innocuous (to the company, at least) as “I just got diagnosed with cancer and I have six months to live.” It could be, “I chose to go back to school and become a nuclear physician.” You don’t know and you have no way to know because MOL didn’t say anything about the reason he left . “Personal reasons?” Give me a fucking break. What a bunch of ubiquitously incompetent fools. Couldn’t they possibly be more vague or inaccurate? They could have said, “the CFO is a fraudster and has been embezzling money for the last three months. We are bankrupt” and achieved the same effect.
Still, even if he really left for personal reasons (after three months on the job, nothing less) and even if the company is 100% fine and doing well, why not hold the earnings release anyway? Why delay by two weeks? What did they find in their financial data that caused the delay? Oh, trust my gut feeling when I said that this stinks. This reeks of a major accounting error, this reeks of stock manipulation and this reeks of a corrupts, lying, manipulative, incompetent management who has no idea what it means to be public (see: Fonterra).
The only thing I can assume is that their CFO was a complete tool, butchered his financial reports and, as such, financial data are in no state to be presented to shareholders. But if this is the truth, why not simply tell the market what it is. “Our CFO has not completed his duty accordingly since being hired in August 2014. As a result, he has resigned today and we have appointed a successor. We do not anticipate any material impact on our revenue, income or margins.” Why go with a vapid statement on the very morning of announcement? What, the CEO woke up one morning and realized his castle was crumbling? He rushed through a news announcement at the last possible moment? “Um, sorry guys, no earnings today.” Wow.
I mean, this is the FIRST earnings release after the IPO! What else can they do wrong? What a mess!
3. It’s going down
Even if you believe MOLG is the most fantastic company in the world, the stock is going down. There is no way around it and I simply fail to say what the management could say on Monday to stop the slide. “Hey guys, we’ve hired back our CFO!” What were these guys THINKING? Can they possibly do any worse? What other missteps are they going to do?
What else is going to come out? What if another manager quits for “personal reason”? What if the CFO prepared some bad data in their prospectus, and they get delisted/halted for that reason? I’m telling you: this stinks. When you have so little information like we do, you have to assume the worst. I mean, this guy left on the day of earnings release. Why? What happened? Couldn’t he leave after - or even a week ago?
Really, we have to assume the worst. Given the information that I have, I have to assume the CFO has been sniffing drugs for the past two months and, today, broke down in tears in front of everyone and admitted cheating his way through college and submitting invented and made up data instead of doing his job. I have to imagine him confessing he had no idea what he was doing and that the earnings report was not ready. What else could it be, really? If it’s something innocuous or simple, why not tell the market?
This stock has further room down to fall. Big firms are unloading their shares (do they know something that we don’t?) and they are not done selling. I have very rarely seen a company fall by 50% in one day and not fall further afterwards. Based on that, even if you believed in $MOLG a hundred percent, why would you buy now?
4. Shaky growth
This looks great until you realize those aren’t USD. Converted, MOLG has earned $8.4 millions in profit in 2013. At its current market cap of $302M, it is still trading at a generous P/E of nearly 36. Furthermore, Mol Global’s growth doesn’t seem so impressive when you consider its current annual earnings should be at around $26M MYD, barely any growth from last’s year $25.4M. A quick note however: revenue have been by an impressive 33% when compared to last year’s data and the reduced net margin is due to increased “direct cost and other ancillary expenses.” For instance:
MOLPay’s segment direct costs and other ancillary expenses increased 504.6% to MYR13.1 million for the six months ended June 30, 2014 from MYR2.2 million for the same period in 2013 primarily due to increased volume resulting from a full period of operations in Vietnam and organic growth in Vietnam, where MOLPay pays higher commissions to distribution partners than it does to distribution partners in Malaysia. MOLPay’s segment direct costs increased at a faster rate than MOLPay’s segment revenue as a result of the increase in distribution partners in Vietnam, in particular larger merchants which contribute large volumes, and the relatively higher commissions paid to such distribution partners as compared with the commissions paid to distribution partners in Malaysia.
The problem here is that it’s next to impossible to project how expenses will go. Are we going to see another of those “504% increases” in other categories? In my view, Mol Global face thinning margins and increased competition; therefore, it is possible that the reason the CFO left was a loss in the most recent quarter, as Mol Global has to spend more and more to expand across new countries. It is also possible that the costs have been underestimated in the months and years leading to the IPO, which would require MOL to restate its financial statement. In other words, “creative accounting” might have led this company to be listed on the stock market (remember that it received the IPO funds already, so even if they get delisted, they get to keep the money. Oh, and you can’t sue them, because they are incorporated in the Cayman Islands and operating in Malaysia).
In all events, its growth is not as solid as first thought. Expenses are rising quickly, competitors are rising and the picture-perfect portrait we get at the beginning of its prospectus does not last until the end. This is a company that could easily be unprofitable a quarter from now.
5. This kind of company can go to zero
When you invest in a factory, you invest in something tangible: the factory is not going anywhere. When you invest in Costco, you invest in a chain that is well-established and widespread. Again, not something made up of thin air.
But MOLG is purely a virtual company: its assets are only valuable as long as the business operates. If MOL Global was to stop operating tomorrow, nothing of value could be liquidated; it would be the fastest “going to 0” you can picture. All these nice prepaid cards they have in stores, all these points customers bought, those are basically worthless unless there is someone to buy them, and in order for someone to buy them, MOLG needs to be operating and offering in-game points.
Take it that way. Imagine GoPro had some financial problems. Even if it was headed towards some trouble, it would still have cameras that it could liquidate, perhaps with a 25% off or 33% sale. It would also have its brand that it could sell, its patents, etc. But MOLG doesn’t have that kind of leeway since it’s an intermediary. It doesn’t “have” anything. It couldn’t sell points (which don’t even exist) at a rebate, because gaming companies are the ones delivering the service moment.
6. No barrier to entry
MOLG has nothing proprietary about it. Anyone can start a payment processor. The fact it managed to grow to current level is impressive, indeed, but there is absolutely nothing preventing a competitor from doing the same. Even eHi cars renting (EHIC) had something going for it: a loyalty program, and a barrier to entry given the high cost to develop a complete fleet of vehicles.
Big gaming companies could easily move onto a new payment processor or even start their own payment processor (think: Uplay and Origin, when compared to Steam). At a current value of $300M, this, EA and its $13.4B valuation could launch another MOLG like it was nothing. This crash significantly exposes MOLG to competitors and reduces their only moat (that is, their widespread distribution) to a level that might be unsustainable.
In other words, an absolutely awful IPO process and I simply can’t understand why a) MOLG didn’t wait before doing its IPO b) MOLG wasn’t better guided by its IPO underwriters. This is a disaster in writing.
Conclusion
Verdict: Even if MOLG was a fantastic company (it is clearly not), the management is totally incompetent; it has at best hired a complete tool as a CFO (which doesn’t tell much about their ability to choose competent managers), at worst completely misunderstood what an Initial Public Offering and becoming a public company was. Their complete failure to communicate with shareholders make it clear this is not a company you should invest in. I mean, the CFO resigning the day earnings were supposed to come out for “personal reasons”? Seriously? That’s all they’re going to say? They watched their stock crash after their stupid announcement without even a blink and I doubt these fools will do anything to support the share price. If I was the CEO, I would announce a buyback immediately (as soon as IPO regulations allow), but there is no way he is going to do that. At close to $4.00, a buy can be justified if you like gambling, but in my mind, there is no way this stock is recovering until its earnings release, which is still a long time from now, and given the sentiment that exists, I can’t possibly see this stock going anywhere but more down anytime soon.
Based on that, even at a 66% rebate from the IPO price, I recommend waiting on the sidelines. It doesn’t take a genius to understand that the stock is greatly undervalued right now, but, alas, it is about to get even more undervalued. Stupid? Quite possible so. Unfair? Absolutely. Welcome to the world of stock manipulation.
Still, if I had to take a guess right now, I would guess on MOLG surviving and continuing its development. I see it going back up to its IPO price and above - but not before hitting the mid $3 and perhaps lower before. A gambler could take a small position at midday on monday, but keep in mind this might fall further. I will personally buy 200-300 at $3.40 if it gets that low, but I consider that “extreme risk money.” In other words, I don’t expect to see that money again. If I do, however… Still, keep in mind there is a good chance, probably around a third, that the company is going to $0. Act accordingly.
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