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…
