May 23, 2016 | 9:54 AM by Fahad Khalid |

Unlock: Xura (MESG) Closing Calls for +213% Gain

(This note was sent to clients on April 10. Calls +213% today on news MESG to get acquired for $25/share cash by Siris Capital Group)

Xura (MESG) – Reports earnings on Friday, April 15, before market opens. To be clear, this earnings play is more on speculative side with limited amount of research available. We like the news flow in past 3 months and extremely low valuation in high growth markets, we believe this could sharply surprise to upside as sentiment improves around outlook.

Xura is small $473 million under the radar small cap stock, formerly known as Comverse. Provider of cloud-based and in-network services enablement and monetization software solutions for communication service providers (CSPs) and enterprises. The company went through string of acquisitions to boost product offering while divesting some assets, which created noise in quarterly figures and resulting in delayed filings. With Comverse and Acision now closed, we should see cleaner set of results and guidance, which we expect to be $375 to $400 million in revenues and $85 to $100 million in EBITDA for FY2016. That spits out forward valuation ratio of 5x EBITDA, very low compared to peer. As synergies are gradually realized, we expect Q1 revenues of +15% growth YoY, accelerating to +17% in Q2 and above +20% during second half of FY2016. We also expect cash flow will steady increase and turn positive by year end after posting negative $141 million last year.

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Our fundamental bull case rests on couple things: 1) most of their digital product and services are distributed remotely via a cloud-based system of which 40% is recurring and rising which creates visibility and case for multiple expansion, 2) EBITDA margin expansion with continued realization of synergies after dramatic shift in business model with at least 6 acquisitions and multiple asset sales in past 12 months.

Trade Idea – Buy MESG July 20 Calls for $1.30 or less.

Reason we like going for July instead of earlier month is to have enough time in our hands to see the restructuring come through and let Wall Street analysts catch up to changing story. Stock has very little coverage at the moment.

MESG Chart


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