One small-cap tech stock to keep an eye on

The market for mobile phones in developed countries is saturated. But in Africa and Latin America, it's a different story. Tom Bulford looks at one company that hopes to cash in on the growth of mobile internet in emerging markets.

By Tom Bulford

published 22 February 2010

in Features

Company presentations don't normally take place in glitzy West End night clubs. But recently I attended one interesting product launch, and the company behind it chose to meet analysts in one such club.

Picture the scene. Flashing lights, fizzy drinks, pony-tailed waiters and cutesy little canaps. And amongst it all, the top brass from penny share hopeful Synchronica (LSE: SYNC), a company that provides messaging software for mobile operators.

The men at the top were there to sell their story and hopefully excite investors about their company's new product.

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Not knowing much about Synchonica, I asked chief financial officer Angus Dent how the company had served its investors over the years. This turned out to be an embarrassing question; its share price has fallen from over £5 in 2005 to just 3p today. But long-suffering shareholders take note: you can now pin your hopes on Synchronica's new MessagePhone.

This handset is just $99. It's designed by Synchronica but made by Korean partner KC Mobile and distributed worldwide by the giant Brightstar. The target is the emerging markets - this is where the growth is.

African and Latin American countries have little in the way of fixed line telephone networks. PC penetration is low as well, so they can jump straight into the world of mobile communications - and are fast in doing so. Western markets are now saturated, with everybody who wants a mobile having one if not two or three, but the same is not the case in emerging markets

To take Africa as an example, industry consultant Informa expects the number of handset sales to increase from 100m in 2009 to 147m in 2014. Synchronica reckons that the MessagePhone can take a slice of this.

It's all about the price

According to founder and chief executive Carsten Brinkschulte, what matters is price and functionality. Although the MessagePhone will be sold in local currencies, the sub-$100 price is clearly important.

As Brinkschulte pointed out, emerging market consumers will not pay a month's salary for a mobile phone. But at $99 this should be within reach at least of business users and professionals. And he expects them to buy the MessagePhone.

You see, it's more than just a good basic phone and camera. MessagePhone also offers instant messaging, access to e-mail, access to the internet via a web browser and access to social networks.

It can display video clips, has a talk time of five and a half hours. Its battery stand-by time is seventeen days. All this comes in a palm-sized device, complete with screen and keyboard, and fast access to email.

It is an impressive piece of kit for just $99, and Synchronica expects it to be popular with mobile operators. They are faced with declining revenues from voice calls and 'churn' from one provider to another - this is a particular problem in Africa. By placing their own name on the device and by offering value-added services, the mobile operators could win the battle for 'ownership' of the user.

The gap in the market for Synchronica

Thanks to low PC penetration across Africa and Latin America, Informa agrees that there is a gap in the market. One "from which mobile operators can benefit as mobile internet is poised to become the main internet connection of the future".

The question for investors, though, is whether Synchronica will make much money out of it.

At $99 there cannot be a huge amount of profit in it. And Synchonica is not the only company to be homing in on emerging markets: in an independent analysis of the MessagePhone, Informa compares it with similar products from industry giants Alcatel, LG, Motorola, and RIM. But these come in at $133-$158, and do not have the same ability to receive streamed videos as the MessagePhone.

So based on this market opportunity and the very competitive price of the MessagePhone, Informa describes Synchronica as "well positioned". Analysts are predicting a rapid escalation of revenues and profits.

But this is a tough area, and Synchronica may not stay ahead of the game for long. As Informa notes, Nokia is in the midst of launching a portfolio of handsets in Africa. Also, "Samsung has plans to challenge hard in Africa."

Synchronica is a small fish in a pond full of sharks. But, frankly, having got this far, Synchronica's shareholders now have little left to lose.

It's an interesting story, and one that I'm happy to stick on my watch list. But I'd certainly need to look a little deeper at the numbers before jumping into this one.

This article was written by Tom Bulford, and was first published in his free twice-weekly email the Penny Sleuth on 18 February 2010.

Tom worked as a fund manager in the City of London and in Hong Kong for over 20 years. As a director with Schroder Investment Management International he was responsible for £2 billion of foreign clients' money, and launched what became Argentina's largest mutual fund. Now working from his home in Oxfordshire, Tom Bulford helps private investors with his premium tipping newsletter, Red Hot Biotech Alert.