Wednesday, 19th August 2015 13:28 - by David Harbage
When constructing a portfolio of company shares, it is important to include some businesses exposed to positive momentum or growth. Even the most value-oriented, pessimistic or defensively minded investors should be able to point to company stocks which offer the potential of growth; be it from cost-reduction in a mature industry to some other transformation. Neil Woodford is a fund manager who takes a cautious view of the world (his core fund has a clear bias towards pharmaceuticals, tobacco and other less-economically sensitive business activities), but amongst the high dividend paying 'blue chips' in his portfolio, he also has room for a tail of 'jam tomorrow' (as yet unprofitable), stock exchange listed and unlisted firms. Principally featuring biotech, information technology and other new idea businesses, many of these companies began life within prominent British or overseas universities, and have required venture capital or other forms of funding to move a product from development within a scientific laboratory to application within the real world.
In blogs of the 13th and the 31st of July, the growth potential offered by the likes of Telit Communications and Stadium Group were highlighted, in the context of fast developing M2M (machine-to-machine) wireless connectivity which is progressing from the world of commerce to devices within the home being controlled remotely.
Another new technology-driven business trend, which could prove worthy of further investigation, surrounds marketing opportunities offered by online-driven publishing and other media. Increasingly, consumers investigate, sift through information and then shop online. Most obviously using websites that specialise in introducing consumers to the product or service they seek, who take an introductory commission and often an ongoing share of recurring revenue in respect of that client from the end destination retail or other organisation (akin to QuidCo), part of which they may rebate back to the consumer.
An Israeli-originated business, like Telit, with strong links to the Technion (Israel's Institute of Technology), XL Media has an interesting business model featuring revenue-sharing and a strategy of paying a high proportion of earnings to shareholders. The company owns 2,000+ websites in 18 languages, and its optimisation capability allied to their information-rich content attracts high rankings on search engines. XL Media also specialises in media buying (producing detail-focused online advertising campaigns) to support their own websites as well as constructing them for other operators. Clever technology to assess the right price of search, track the detail of fulfilment, accessing social media and in particular using mobile sites, sometimes outsides its core business in conjunction with a corporate affiliate or partnership program, has resulted in maximising returns and delivering impressive financial results.
XL Media came to the Alternative Investment Market (AIM) eighteen months ago, beginning life at 65p per share, with 48% of stock in free hands. In the five years to 31 December 2014, turnover has grown from US$11.2m to $50.7m and pre-tax profits has grown from $3.9m to $13.2m. Based on last month's positive trading update on the first half of 2015 - indicating revenue of $36.4m+ and EBITDA of at least $12m - growth rates on the comparable period of 2014 are in excess of 83%. Broker forecasts are difficult to find, but the consensus (includes 'shop' broker Cenkos) anticipate earnings per share of 5.94pence and a dividend of 2.7p for the current full year, with EPS of 7.65p and a dividend of 3.27p forecast in 2016.
The online publishing media and digital marketing services industry is very much a global and a fragmented (i.e. no dominant leader) one. The need to maintain an innovative cutting edge is paramount, requiring ongoing quality R&D which can be expensive. XL Media plan to make earnings and proposition enhancing acquisitions as a means of supplementing organic growth. On 26 May, management announced a purchase of UK-focused mobile targeted websites and, on 16 June, paid $7.36m for a majority stake in another Tel Aviv-domiciled performance marketeer with mobile capabilities and extends industry sector reach (beyond gaming) and in to the US and Europe.
The CEO owns 4.8% of this £139m market cap business, with leading domestic fund managers also evidencing confidence in the group's prospects; notably Investec with a 5.5% stake, Hargreave Hale 5.3%, Slater Investments 5.0%, River & Mercantile 4.8% and Inflection Point Investments 3.3%. Private clients must do their own diligence and research, but the way in which new technology is changing the way companies and consumers do business is increasingly obvious. How firms attract new clients' business and - by reference to XL Media's 'raison d'être' - reward the introducers or agents is certainly changing too in the new digital age. Many of these businesses will necessarily be young and often AIM listed (lack a track record and credible governance), growth-oriented and unprofitable (having to reinvest much or all of profit back into developing their technology and market share). Essentially they are higher risk, in the hope of achieving higher eventual reward, but XL Media's policy of distributing profits sooner rather than later has compensatory and stock supportive attractions. That income, worth 4% on the current 69p share price (above the UK stock market's average dividend yield) likely to result from the current year's earnings, could rise to 5% based on projected 28% growth in 2016. A little bit of spice in an ISA perhaps, but until corporate disclosure moves beyond its existing AIM level, not suitable for 'widows or orphans'
17 August 2015
The Writer's views are their own, not a representation of London South East's. No advice is inferred or given. If you require financial advice, please seek an Independent Financial Adviser.