Monitise forces change of heart at Goldman Sachs

Another profits warning has forced management at mobile payments specialist Monitise to take drastic action. Within the trading update it published contact details for any companies interested in buying the business or merging with Monitise. It's certainly created some interest and the rumour mill is in full swing.

But the strategic review is not enough for Goldman Sachs. "While we see some strategic appeal, this could be impaired by execution issues and low visibility around new product take-up." Trading in the first half implies a "concerning" 9% drop in revenue year-on-year, the broker adds, downgrading its rating from 'buy' to 'neutral'. "We believe revenue risks remain and despite cost reduction plans, 2016 EBITDA breakeven looks like a stretch."

And forecasts have been slashed.

Goldman now expects 105 million users in 2018. That compares with a previous estimate of 154 million and company guidance of 200 million "which appears ambitious". And it expects cash profit breakeven to take a year longer than expected. In fact, it has slashed revenue forecasts for the next six years and more than halved estimates for cash profit for each year between 2017 and 2020.

"In order to regain confidence in the fundamental story we believe Monitise needs to demonstrate a clear roadmap around user ramp, rollout of new products (m-commerce) & improved execution," says Goldman, which lowers its M&A valuation multiple to 2.8 times estimated enterprise value-to-sales (EV/sales), down from 5.5 times, and slashes its target price from 38p to just 15p.

Monitise's share price had fallen 83% in less than a year to five-year lows, so there is perhaps some value here. Short-sellers are certainly take fewer chances. According to Financial Conduct Authority (FCA) stats, the numbers of shorts is down below 55 for the first time since July last year.

However, a decision to shift from an up-front licence or integration revenue-based model to a subscription-based model is not working as fast as the City woudl like. It's supposed to cut the high up-front cost of installing the service, which should speed up customer adoption and increase long-term recurring revenues.

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