2023-03-22 03:41:09 ET
Summary
- MIND C.T.I. develops software for low-tier telecom carriers and enterprise solutions around messaging and calls accounting.
- The company seems similar to a bond, with slow-moving profits, a high payout ratio, and good cash conversion.
- Without prospects of capital appreciation, MNDO's low multiples express the company's lack of a growth story.
- Things could change if MNDO announced a good acquisition or a share buyback program, but that has not happened in 10 years.
- On the risk side, the company will eventually lose revenues or profits in its current business lines, given these are competitive and under pressure.
MIND C.T.I. ( MNDO ) is the developer and seller of software solutions for telecom carriers and a provider of corporate messaging services. The company has been stagnant for a decade, paying a steady dividend but providing little opportunity for growth. Its markets are currently under attack.
In articles from February 2022 and September 2022 , I issued a Hold on the stock, because its business lines were being threatened. The company did offer a substantial dividend and earnings yield but against the almost certain future decline of business.
Today, I still consider the stock not an opportunity.
Recap
Slowly decaying business : MNDO develops software solutions for telecom carriers. These include account management and CRM. The company also incorporated a messaging service for other types of clients in Europe.
MNDO's business is threatened by the consolidation trend among telco carriers. Small carriers prefer MNDO's software because it is cheaper than developing it in-house. However, for a bigger carrier, those costs are spread among a larger customer base.
The trend to consolidation seems unstoppable, if not because the same regionally consolidated companies can acquire all of the operators in a region without affecting competition (which is the main regulatory barrier to consolidation).
This reality is recognized openly by MNDO's management. For example, from the company's latest earnings presentation :
The decline in 2022 results, compared to 2021, was expected. As previously announced, the record revenues in 2021 were driven by temporary activities related to COVID-19 in our messaging segment. In our telecom markets, we experienced a decline mainly due to the continuous market trend of lower prices, low demand, and strong competition. We expect a continuation of these unfavorable trends in the foreseeable future.
No renovation and a cash treasure : The company has held to cash reserves for more than a decade, and has consistently mentioned the possibility of acquiring other businesses, to diversify away from the decaying telco software business line.
In 2019 the company did acquire two German companies dedicated to messaging services that ended up being very accretive acquisitions. However, for the time being, that option has not been deepened.
Consistent yields and multiples : With the above realities widely understood, the company has consistently traded at a low multiple to earnings and a relatively high dividend yield. The effective dividend yield is a little lower than shown below because the company has to pay the Israeli dividend withholding taxes of 22%.
Valuation and thesis revision
Revenues and profits continue falling : The underlying trend has been maintained for FY22, and the fall has been especially noticeable given the relatively uncommon increase in revenues in FY20 and FY21, which was, according to management, caused by the pandemic, and nonrecurring.
Net income now barely covers the dividend : Net income for FY22 was $0.26 per share, and the company announced a dividend of $0.24 with an ex-dividend date of March 20, 2023 . This indicates that the dividend could be cut if next year's earnings are lower.
The cost of money is higher : Today, the stock trades at $2.24 and offers a dividend yield of 8.3% after the Israeli withholding taxes. Against this return, the company offers an almost certain fall in income, which would translate to a fall in share price.
Additionally, each share represents approximately $0.85 in cash reserves that would eventually get paid if the company liquidates ($0.66 after the withholding tax). However, this payment is dependent on the company liquidating or choosing not to find a new business route, which again would be compensated by a corresponding share price decline.
To me, the MNDO proposition sounds like putting money from one pocket into the other. To recover the $2.24 invested, the investor should expect 8 years of the current dividend, and then the liquidation of the cash reserves. That seems difficult, and in that case, the investor would only be at the start, without making much money.
Conclusion
MNDO's situation has not changed much from its long-term trend. The medium-term trend has become more clear, now that nonrecurring revenue growth in FY20 and FY21 is behind.
The company seems like a bond paying a fixed interest, but differs in the fact that the principal is only covered partially by cash reserves. If the company liquidates, the stock is worthless.
For that reason, I still believe MNDO is not an opportunity.
For further details see:
Options Ahead For MIND C.T.I.