Forsyth Barr starts Plexure coverage with a big call

Forsyth Barr has initiated coverage of Plexure with a big call.

Analysts Jamie Foulkes and Ashton Olds rate the maker of mobile marketing, ordering and loyalty apps “Outperform” with a 12-month target price of $1.58 – or nearly double what it is today.

There are few points of comparison. Plexure’s investment relations manager confirms ForBarr is the only broker covering the stock, bar Ord Minnett – which was joint lead manager (with Potter Bell) for Plexure’s dual listing on the ASXand $30m raise in November 2020. The following month, Ord Minnett released research that rated Plexure a buy, with a 12-month target of A$1.36($1.41).

Auckland-based Plexure – then known as Voucher Mob or VMob – first listed on the NZX is 2012.

Its mission was to make mobile apps that would help companies get customers into bricks and mortar stores, then spend more once they got there.

Its breakthrough moment came in 2015 when it signed a global deal with McDonald’s. The US fast-foot giant took a 10 per cent stake in Plexure in 2019 for $5.4m.

Today, McDonald’s uses Plexure’s software in 11,500 stores around the world. Even before the pandemic hit and social distancing became the norm, the company was experimenting with Plexure to increase its drive-through business. For example, in Japan – where about 20 million McDonalds customers use a Plexure-built app to order and pay for meals from about 2784 stores – the chain was already experimenting with geo-fencing. That is, preparation of an order starts when the system detects a customer has come within a certain distance of the drive-through.

Although generally sunny in their outlook, ForBarr’s Foulkes and Olds caution, “There is significant concentration risk attached to generating 95 per cent of total revenue through its contract with McDonald’s” [by ForBarr’s estimate].

More Maccas is on the menu. Plexure has told investors it expects McDonald’s to expand its app to another half-dozen country over the next year or so.

But Plexure also signed White Castled in 2019, and its app is now used for the iconic chain’s 363 stores in the US, with about 429,000 customers registered for the app. And last year it inked a deal with Indonesian grocery chain Super Indo, covering 182 locations and 106,000 registered app users. At home, Flybuys operator Loyalty NZ (with around 530,000 signed up) is a long-standing customer. The diversity is good, and growing, but still small beans next to the 209m registered for McDonald’s app.

Plexure upgraded its forecast last November, then bumped its numbers up again in a March 9 guidance update, when it said as a result of 1 per cent higher revenue than expected, at $29.2m, and lower costs as headcount increase was slower than expected as Coivd tightened the tech labour market, it was now forecasting an FY2021 ebitda loss of $5.6 million. That is, 20 per cent or $1.4m less than its original forecast.

Mac attack on apps

All is not completely well with Plexure’s largest customer.

On February 27, the Wall Street Journal reported the gloss was coming off Daily Yield, an Israeli-based app that McDonald’s bought for US$300m around the same time as it invested in Plexure – and with the same aim: to increase drive-through sales; an objective that has become more focused as the pandemic sees fewer customers dining-in.

But McDonald’s told the Journal “a review of transactions found that Dynamic Yield’s technology had contributed to sales less than originally reported”. The artificial intelligence engine designed to drop super-size me hints at just the right time was, apparently, not quite as smart as billed.

The chain was looking at a partial sale of Dynamic Yield, the Journal reported.

McDonalds’ review was prompted by complaints from franchisees, who claimed no return on investment from monthly technology fees that paid for the app – about US$6m of which were refunded.

Plexure CEO Craig Herbison said he couldn’t comment on what was happening with Dynamic Yield in the US market, “because we don’t work with McDonalds in the US”.

“All I can say is we are being asked to do more and more by the 62 markets we serve and the global team as they come out of Covid restrictions.”

With the Kiwi-made app proving its chops, Dynamic Yield’s pain could even prove Plexure’s gain.

Foulks and Olds say there is cause for optimism as they contrast McDonald’s expanding use of Plexure in more and more countries to its “intent to sell Dynamic Yield”.

They also see scope for diversification from the Golden Arches via Super Indo’s owner, Ahold Delhaize – a conglomerate that has 16 other businesses in its stable beyond its grocery chain.

Plexure shares were down 1.2 per cent to 85c in late trading, for a market cap of $147m. The stock is still up 75 per cent for the past year, despite a sustained pull-back since November.

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