Here’s Why I Would Sell Monitise Plc And Buy Optimal Payments Plc

Until the 9th of September, I was relatively optimistic about Monitise’s (LSE: MONI) future.

However, when the company warned alongside its full-year 2015 annual results that it was going to miss forecasts once again next year, and the company’s experienced CEO, Elizabeth Buse, was leaving after only a few months on the job, I lost all my confidence in Monitise. 

Losing confidence 

For full-year 2015, Monitise’s revenue declined 6% to £89.7m. The group’s loss before exceptional items, depreciation, amortisation, impairments and share-based payment charges (EBITDA) totalled £41.8m. Including impairment changes and other factors, Monitise reported a statutory loss after tax of £224m. 

What’s more, Monitise now expects revenue to decline further during 2016. However, management still expect the group to report a positive EBITDA for full-year 2016. 

Unfortunately, it’s no longer possible to trust these predictions from the company. City analysts believe that while Monitise could reach EBITDA profitability next year, the group will continue to report hefty statutory losses for the foreseeable future. Current forecasts suggest the company will report an operating loss of £61m for 2016, £54m for 2017 and £54m for 2018.

That being said, EBITDA is often used as a proxy to indicate cash flow. And if Monitise does move to EBITDA profitability next year, the company’s rate of cash burn could slow, which would give management more time to instigate a turnaround. 

Still, now that Monitise’s growth has come to a halt, management will find it harder than ever to turn the company around. 

Surging ahead

As Monitise struggles, Optimal Payments (LSE: OPAY) is surging ahead. Indeed, unlike Monitise, Optimal is cash-generative, growing rapidly and has a strong cash balance. 

For example, for the six months ended 30 June 2015 Optimal’s sales increased 40.2% to $223m. Adjusted profit before tax rose by 18.7% to $37.3m and diluted earnings per share increased 11.4% to $0.12. Excluding cash raised through Optimal’s rights issue, group cash at period end amounted to $113.3m. 

Optimal’s deal to acquire its money transfer peer Skrill should start to show through in the company’s earnings during the second half of the year. 

City analysts expect Optimal’s earnings per share to fall by 6% this year, due to acquisition costs and the higher share count — a result of the rights issue used to fund the Skrill deal. Nevertheless, after Optimal completes the integration of Skill, which should take place next year, City analysts expect the company’s earnings per share to jump 26%. Further, group costs should fall as merger synergies flow through, improving Optimal’s profit margins and cash generation. 

Based on current City figures, Optimal currently trades at a forward P/E of 18.1 and 2016 P/E of 14.2. And according to these numbers, Optimal trades at a PEG ratio of 0.5 for 2016, indicating that the company’s shares offer growth at a reasonable price. 

The bottom line

So overall, as Monitise continues to disappoint, Optimal is pushing ahead. For this reason, investors should sell Monitise and buy Optimal. 

But if you're not convinced, our analysts here at The Motley Fool believe they've discovered a company that has the potential to grow even faster than Optimal. 

The company in question has the potential to increase sales by 300% to 500% over the next few years. This is one of the most impressive growth stocks around. What's more, few have realised its potential.

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Rupert Hargreaves 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.