Enjoy this free share recommendation on XL Media extracted from the latest edition of the premium Trendwatch newsletter…
FRANKLY, it’s becoming increasingly difficult recently to find the kind of shares that typically we seek. As you’re probably aware, we try to pick shares from the asterisked items in the uptrend list, because these are share in the early stages of a new or resumed uptrend. But you can see for yourself from the uptrend lists towards the back of this issue how few such shares there are. Indeed, the whole uptrend lists are historically short in length. Sometimes you see that in a bear market, but in this case it’s a symptom of the market pretty much flatlining.
There are, in fact no asterisked shares in this issue that we’re prepared to recommend. So instead, we’re doing 100 what we always do in this situation: we delve 75 into the more mature uptrends in the list, 50 where we can always find companies whose circumstances have changed, or that we might have missed when they first went into uptrend.
So we’ll begin with XL Media, a share that we already know something about, as it was recommended in the February 2015 issue at 60p. It was stopped out in May of that year for a small loss of 6.7%. But we know for a fact that it was the market that got it wrong, not us; because the current share price is more than double what it was when we bought.
XL Media was originally founded in Israel in 2008 and floated on AIM in March 2014. It’s all about online marketing, with a strong emphasis on the gambling sector. Whatever your view on the ethics of gambling, there’s no question that shares related in some way to online gambling have been among the most lucrative hunting grounds for investment gains. Nevertheless, it seems that the company itself is not especially happy about its gambling dependency, and is making strong moves to diversify. More about that later. The company has three divisions:
Publishing: XL Media owns over 2,000 content-rich websites in 18 languages. These websites are designed to attract online gaming players, who are then direct to XLMedia’s gaming company clients – who in turn convert those potential players into paying customers. XLMedia’s in-house platforms continually monitor the effectiveness of these sites through research, testing and optimisation so as to maintain high rankings on internet search engines – which, in turn, drives further traffic to XLMedia’s clients.
Digital Media Buying: XL Media works closely with its clients to run cutting-edge online media campaigns across a range of platforms. It utilises formats such as paid search, display (banners, pop-ups etc), mobile and in-app advertising to drive traffic either to XLMedia’s own sites or to operator brands. Thanks to the company’s established industry relationships, its scale and its track record, it’s able to achieve favourable media buying terms.
Affiliate Network: XL Media manages around 300 independent affiliate partners, who advertise their services on its client’s websites. All traffic generated by these advertisements also generates some form of commission from the affiliates.
One of the attractions of investing in this company is that its policy is to pay out at least 50% of retained earnings by way of dividend. Currently, the yield is a tasty 4.4%.
It has a fine track record, as you can see from the table below.
|Pre-tax profit ($m)||12.2||8.84||9.82||18.7||23.9|
|Earnings / share (c)||6.5||4.7||5.7||9.6||12.0|
|Dividends per share (c)||-||-||3.2||5.0||7.6|
XL Media has a fine track record, as you can see from the table below. Revenue has been growing at a spanking rate – an average compound annual growth rate of 37.7% to be exact. Apart from a dip in 2013, profits and earnings per share have also been growing at a double digit percentage rate.
The forecasts too (below) look good. But we found the forecast figures a little puzzling. Revenue growth is forecast to continue forging ahead; but profit and earnings growth seems to be slowing, especially in 2018.
|Year to March:||2017||2018|
|Pre-tax profit ($m)||27.6||29.4|
|Earnings per share (c)||13.0||14.0|
|Dividends per share (c)||7.4||7.9|
However, when we looked into this in more detail, we came to the conclusion that the forecast might need updating, judging from the very upbeat comments in its latest interim trading update. It said that it was trading ahead of management expectations for the period. The update exudes confidence: “The Board remains extremely confident in the performance of the business.”
That’s all good stuff… but here’s what we like the most. Thanks to its planned diversification, largely down to acquisitions, gambling now accounts for 57% of XL Media’s revenues, down from 70% a year ago. This can only be good.
Clearly the company has a powerful platform for generating new business for its clients. It always seemed a bit strange to us that its undoubted expertise should be confined to one particular retail sector. Now that it’s diversifying into other sectors, it has new worlds to conquer. We see no good reason why it shouldn’t succeed.
BUY (135p; forecast yield: 4.4%; market capitalisation: £271 million; initial stop-loss: 108p; EPIC: XLM; sector: Media & Publishing; classification: AIM; website: www.xlmedia.com; tel: n/a).
We hope you enjoyed this this free share recommendation extracted from the latest edition of the premium Trendwatch newsletter…