Small Cap Value Report (15 Jul 2014) - DOTD, CRW, VNET, NPT, API

Tuesday, Jul 15 2014 by

Good morning!

dotDigital (LON:DOTD)

Today's trading update for the year ended 30 Jun 2014 reads well - the key paragraph says;

The Board is extremely pleased with the Company's performance and now anticipates that full year EBITDA will be slightly ahead of the current market forecast of £4.3m. This performance is a result of continued strong organic growth in the high margin and long-term recurring revenues generated by our core email marketing product, dotMailer.

A table shows how total turnover growth of 19% masks the continuing business growing turnover by an impressive 32%. That's fine, as this was a known issue, I recall management talking about winding down a small part of the group, when they presented at a Mello Central investor evening last year.


The bull case is further strengthened by commentary today about strong overseas growth. Revenues are recurring in nature, with over 45% of clients paying retainers by direct debit, and net cash having risen 52% to £9.3m - so the FD should be pretty relaxed.

I've checked the last Balance Sheet at 31 Dec 2013, and it's smashing. Current assets of £10.5m dwarf current liabilities of £2.0m, and long term creditors are negligible. So that's a working capital ratio of 525% the way I look at it, which is one of the highest I've ever seen. Clearly the company should be either giving that cash to shareholders, or spending it on good quality acquisitions, as they really have about £6-7m in surplus cash.

So, it's a good quality, strongly growing small business. My problem is the valuation - it's capitalised at £96.8m at 34.2p per share. Taking off the surplus cash, and you're really paying £90m for the business.

If they made say £4.4m EBITDA, then looking at the last two sets of accounts (the most recent interims and full year figures), it's capitalising about £1.3m p.a. in development spending. In my view development spending is just an ongoing cost for this type of business, so in valuing the company one should write it off. Therefore the cash profit the way I look at it was only £3.1m for y/e 30 Jun 2014. Take off a notional 20% tax, and you come to £2.5m earnings. Therefore the PER (on a cash neutral valuation) is 36 times! That's too high in my opinion. Personally I wouldn't pay a PER of over 20, so a…

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dotdigital Group Plc is a United Kingdom-based company, which is engaged in providing software as a service (SaaS) and managed services to digital marketing professionals. The Company offers dotmailer, which provides e-mail and multi-channel marketing automation platform with various tools that enable marketers to create, manage, execute and evaluate various campaigns. In addition to its automation technologies, the Company also provides multi-channel marketing consultancy and services for businesses seeking to manage customer acquisition, conversion and retention. The Company also has pre-built integrations with e-commerce platforms and customer relationship management (CRM) products, such as Magento and Salesforce. dotmailer helps in using contact data to design, test and send automated campaigns. The Company's subsidiaries include dotmailer Limited, dotsearch Europe Limited and dotmailer Inc. Through its subsidiaries, it is engaged in providing Web- and e-mail-based marketing. more »

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Craneware plc is a United Kingdom-based company, which is engaged in the development, licensing and ongoing support of computer software for the United States healthcare industry. The Company's Value Cycle Solutions span over five product families, which include Patient Engagement, Charge Capture & Pricing, Coding Integrity, Cost Analytics, and Revenue Collection & Retention. Its Patient Engagement solutions include InSight Medical Necessity, Trisus Patient Payment and Patient Charge Estimator. The Charge Capture & Pricing solutions include Chargemaster Toolkit Discovery Viewer; Physician Revenue Toolkit, Physician Management Toolkit and Physician Revenue Toolkit-Corporate; Pricing Analyzer; Reference Plus; Pharmacy ChargeLink; Supplies ChargeLink, and Supporting Modules. Its Coding Integrity solutions include Trisus Claims Informatics and Bill Analyzer. Its Revenue Recovery & Retention solutions include InSight Audit and InSight Denials. It also offers professional services. more »

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Vianet Group plc is a provider of real time monitoring systems, data management services, and actionable insights for the leisure and vending sectors. The Company's segments include Leisure Services, which includes design, product development, sale and rental of fluid monitoring equipment, data management and related services; Vending, which includes design product development, sale and rental of machine monitoring equipment, data management and related services; Technology, which includes the provision of data management and technology related services, and Fuel Solutions, which includes wet stock analysis and related services. Its Leisure division consists of the core beer monitoring business (including the United States), and gaming machine monitoring. Its subsidiaries include Brulines Trustee Company Limited, Vianet Americas Inc and Vianet Limited. more »

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  Is LON:DOTD fundamentally strong or weak? Find out More »

7 Comments on this Article show/hide all

it_trader 15th Jul '14 1 of 7

With regards to dotDigital (LON:DOTD) and it's recent performance I've just been looking at some of the older snapshotted Stockopedia reports, and in particulary November's. It looks almost identical as to today, i.e. the same excellent quality indicators whilst a PER of just above 20.

To me the market is doing very well keeping up with results, and at a PER of 20 although on the edge, seems a reasonable premium for it's excellent quality metrics.

I know what I'll be screening for in future.

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marben100 15th Jul '14 2 of 7

Hi Paul,

Re the dotDigital (LON:DOTD) cash, most unusually, the company genuinely consulted with shareholders to get their views on dividends and did decide to start paying a small dividend, which I expect to be increased progressively. However, this does, as you correctly indicate, represent only a small part of available cash.

My understanding of the company's strategy is that rather than spending the cash on acquisitions, it will seek to grow and "grab land" by expanding its international sales force & operations. It is good that one of their founder-directors knows the US market well and has moved to NY to build operations in the Americas. That may mean that short/medium term profits are traded for revenue growth, which should lead to bigger profits longer term. This trading update indicates early success with that strategy.

It is interesting to observe that dotDigital's product (dotMailer) is a marketing support tool and, as such, the company is rather knowledgeable and skilled at marketing. Therefore, and as the results demonstrate, they have an above-average chance of success with an accelerated sales drive. Focussing on selling their core product,  and associated services, whist continuing to enhance it in response to customer demand, thus keeping it "best in class" is a strategy I wholeheartedly approve of, as it seems lower risk than seeking acquisitions. Past attempts at acquisitive growth have not worked out very well, as exemplified by the discontinued operation, which represents a past failed acquisition.

I am fortunate to have originally bought shares below half the current price. I've topsliced a few but am happy to hold the remainder as this story unfolds. If the market comes "off the boil" generally, I'd be happy to buy back those topsliced shares.



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RichardK 15th Jul '14 3 of 7

I note that VNET has nothing to say about beer flow monitoring sales in the USA, one of its great hopes. That must be interpreted as at best uninspiring progress and at worst poor progress.

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tads 15th Jul '14 4 of 7

In reply to post #84765

re. VNET and America. I spoke to them about three months ago about how things were going in America. They were happy the way the trials were proceeding.
Perhaps just taking a lot longer than first thought?



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MacroVal 16th Jul '14 5 of 7

I like Vianet - I've been long for about 6 months

For me this company in particular is all about it's cash position. For the current year, It's about break even on free cash flow once capex and dividends are taken into account - but trending downwards from previous years, whilst ROCE is decreasing as well.

Net borrowing has increased - and whilst debt / equity is very palatable 25% (Well in 90th percentile for sector!) we'll need to see a increase in the cash position next year - That's unlikely as they start to invest in the US operations and focus on growth.

So I think the dividends under threat.

Netplay - Surely the bad news is priced in now? It is a play on the gambling sector, but compared to it's peers it's looking in the best possible position.

Gambling is going nowhere - Taxes are a fact of life and life will go on. Netplay massively cash generative, on top of already significant cash pile. I suspect they'll start mopping up the competition in the next few years.


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RichardK 16th Jul '14 6 of 7

In reply to post #84767

Thanks Mike. That's reassuring even if VNET has been optimistic on timing which has happened before.

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Mrx9000 17th Jul '14 7 of 7

It's a pity the directors of DOTD don't share your optimism Paul... they have sold £1.5m this year and around £4m last year.

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About Paul Scott

Paul Scott

I trained as an accountant with a Top 5 firm, but that was so boring that I spent too much time in the 1990s being a disco bunny, and busting moves on the dancefloor, and chilling out with mates back at either my house or theirs, and having a lot of fun!Then spent 8 years as FD for a ladieswear retail chain called "Pilot", leaving on great terms in 2002 - having been a key player in growing the business 10 fold. If the truth be told, I partied pretty hard at the weekends too, so bank reconciliations on Monday mornings were more luck than judgement!! But they were always correct.I got bored with that and decided to become a professional small caps investor in 2002. I made millions, but got too cocky, and lost the lot in 2008, due to excessive gearing. A miserable, wilderness period occurred from 2008-2012.Since then, the sun has begun to shine again! I am now utterly briliant again, and immerse myself in small caps, and am a walking encyclopedia on the subject. I love writing a daily report for on most weekday mornings, constantly researching daily results & trading updates for small caps. Cheese! more »


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