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Is Monitise Plc Still Worth A Punt On Bid Hopes?

Shares in profit and cash flow challenged Monitise (LSE: MONI) (NASDAQOTH: MONIF.US) responded well to the firm’s statement released on Friday 23 January. As I write, they are up by a percentage in the mid-twenties this morning.

Media speculation correct

The firm reckons media speculation in connection with the initiation of its Strategic Review on 22 January is right on the button. Monitise has indeed received what it describes as “a number of expressions of interest in a range of potential corporate transactions including a merger with a third party or a sale of the company.”

That statement was enough to send mouse fingers stabbing at buy buttons across the investing community as we all imagine a premium boosting the eventual valuation realised in any sale or merger to reflect the potential of the business.

However, such speculation may prove premature. Let’s not forget that Monitise can’t seem to turn a profit and demonstrates an unpleasant ‘talent’ for growing losses as fast as it grows grows revenues. Here’s the firm’s financial record:

Year to June

2010

2011

2012

2013

2014

Operating profit (£m)

(17)

(15)

(11)

(46)

(59)

Net cash from operations (£m)

(14)

(12)

(12)

(24)

(36)

Monitise itself warns, “discussions are at a highly preliminary stage and there can be no certainty that any transaction will result.”

Strategic re-engineering

Firms don’t do drastic, all-encompassing strategic reviews for the hell of it; they do them because something is wrong, and they have to. In the case of Monitise, it’s because the business model hasn’t worked so far in terms of profit-generation.

Capturing the vision and building the world’s first mobile banking, payments and commerce ecosystem is quite an achievement. Turnover ballooned as more than 350 financial institutions and other leading brands globally got behind Monitise and helped it generate users measured in the tens of millions for its mobile money services. So far, though, whichever way we look at it Monitise has been unable to make that business pay.

Now, the firm says its strategic review will include consideration of a range of corporate transactions and stock market listing options. Monitise is debt free with £129 million of gross cash at 31 December 2014, say the directors, and they have it that the company has a unique set of global partners and customers. Furthermore, the company seems set to be EBITDA profitable during 2016.

Should we keep the faith?

The opportunity for Monitise remains vast. The directors reckon 200 million users should be aboard the service by the end of 2018, based on the market potential and partnerships in place.

The trouble with such exciting potential, backed by rising losses, is that it’s all jam-tomorrow until we see a crumb of positive cash flow or profit. Make no mistake about it, the best trade on Monitise for some considerable time has been to sell. Even after today’s rise, the shares are down around 80% over the last year.

The potential may be huge for Monitise’s business but will current shareholders benefit from the realisation of that potential or will it take new ownership to squeeze out profit from the business model? This morning, after the speculative share-price rise, my inclination is to remain cautious on Monitise.

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Kevin Godbold has no position in any shares mentioned. The Motley Fool UK owns shares of Monitise. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.