Small Cap Value Report (Tue 26 Feb 2019) - XLM, 888, AIR, CMCX, TAP

Tuesday, Feb 26 2019 by

Morning folks.

Today we have:

Non-Standard Finance (LON:NSF) / Provident Financial (LON:PFG) - the Competition and Markets Authority has started investigating the proposed merger.


  • Share price: 53.6p (-31%)
  • No. of shares: 217 million
  • Market cap: £116 million

Strategic and trading update

Isn't it remarkable how things nearly always seems to go wrong with these Israeli tech companies?

You can see my historic coverage of this "performance marketing" business in the archives. I've always found XLM to be worth reviewing, and have been encouraged by its share buybacks. But I never pulled the trigger and put it in my own portfolio, because the category it's in is just so dangerous.

Strategic Update

  • more investment in its Publishing division (i.e. managing its own websites) going forward,
  • reduction in "non-core" Media activities, so there will be a "substantial reduction" in Media revenues.

XLM has never to my knowledge used the phrase "non-core" in relation to some of its Media actitivities, until today.

But it has previously reported the regulatory pressure on its Media revenues in various markets (e.g. bans on gambling advertising), and that its main focus is on growing its Publishing revenues instead. Media revenues collapsed by 31% in H1 2018, and contributed just 22% of total gross profit for the group.

So today's strategic update is not really a change in direction - it's more like an acceleration in the direction it was already going, if that makes sense.

XLM's investment in Publishing will create a "short-term impact on Group EBITDA", as the $7 million of internal spending will not be capitalised.

Current trading

  • 2019 has started in line with expectations
  • expected $11 - $13 million impairment in acquired intangible assets as their associated activities cease.
  • FY 2019 revenues expected down by c. $30 million and EBITDA…

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All my own views. I am not regulated by the FSA. No advice.

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XLMedia PLC is the United Kingdom-based online performance marketing company. The Company focuses on paying users from multiple online and mobile channels and directs them to online businesses who, in turn, convert such traffic into paying customers. The Company's segments include Publishing, Media and Partners Network. The Company owns over 2,000 informational Websites in approximately 20 languages. Its Media division acquires online and mobile advertising targeted at online traffic with the objective of directing it to its customers. It buys advertising space on search engines, Websites, mobile and social networks and places advertisement referring users to its customers Websites or to its own Websites. It manages marketing partners, whose role is to direct online traffic to its customers. Its partner program enables affiliates to have a single point of contact for directing traffic. more »

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888 Holdings Public Limited Company is a provider of online gaming entertainment and solutions. The Company is the owner of software solutions providing a range of virtual online gaming services over the Internet, including casino and games, poker, bingo, sport, emerging offerings and brand licensing revenue on third party platforms. Its segments include B2C (Business to Customer) and B2B (Business to Business). The B2C (Business to Customer) segment includes casino and games, poker, bingo and emerging offering. The B2B (Business to Business) segment offers total gaming services under the Dragonfish trading brand. Dragonfish offers to its business partners use of technology, software, operations, e-payments and marketing services, through the provision of offline/online marketing, management of affiliates, search engine optimization (SEO), customer relationship management (CRM) and business analytics. The Company provides payment services, customer support and online advertising. more »

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Air Partner plc is a United Kingdom-based aviation services company. The Company provides worldwide solutions to industry, commerce, governments and private individuals. The Company has two divisions: Charter division comprising air charter broking and remarketing and the Consulting & Training division comprising the aviation safety consultancies, Baines Simmons, Clockwork Research and SafeSkys, as well as Air Partner's Emergency Planning Division. In addition for reporting purpose, the Company is structured into four divisions: Commercial Jets, Private Jets, Freight (Charter) and Consulting & Training (Baines Simmons, Clockwork Research, SafeSkys and Air Partner's Emergency Planning Division). more »

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

53 Comments on this Article show/hide all

insy09 26th Feb 34 of 53

In reply to post #452098

Exposure to the US, and experience of both, retail and online markets is key imo in with the potential large growth area. PP, have the acquired Fanduel, and WHM both have that experience. Further regulation is possible, New York state have announced that it will be retail only when it launches when that is i'm not sure. Only a few of the states allow betting at the moment with more expected this and next year. These would dwarf UK revenues although the margins are less due to betting habits and it only being a sportsbook no gaming and Horse racing is an additional licence.

This is just New Jersey figures for Jan 2019:

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Alexgedla 26th Feb 35 of 53

XL Media implied divi yield must be c10% now. Even allowing for the disastrous performance of last year or so - on every level - its also a free option now on takeout and/or some rerating

Fingers crossed. There’s no trust here really

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andyfwwrench 26th Feb 36 of 53

XLMedia (LON:XLM) and Taptica International (LON:TAP) in the same boat for me. What they actually do is something of a mystery and whatever it is seems to have been a flash in the pan. Market is assessing revenue decline from current services and a negligible terminal value embedded in the remainder. Plenty of tech is a great idea at the time but has no moat or longevity; this even applies to category creators like $GPRO .

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Graham Neary 26th Feb 37 of 53

In reply to post #452068

Hi Andrew, I'm sorry but that's not a stock that I analyse. I generally don't look at things which could be classified as utilities. Thanks for the suggestion anyway. G

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rwalford 26th Feb 38 of 53

In reply to post #452068

Hi Andrew,

I also think the results from Augean (LON:AUG) are pretty good. I wonder if the small price drop is attributable to disappointment at there still being no dividend:

"Although the Group's balance sheet and operating cash flow have strengthened considerably in 2018 the Board will maintain its position of not paying a dividend for 2018 (2017 final: nil) whilst the HMRC matter is being resolved."

I hold and am planning to continue to do so: they have done well for me since I followed Christopher Mills into them.

Regards, Ricardo

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peterthegreat 26th Feb 39 of 53

Although not a stock that Paul or Graham would cover, I thought I would highlight that Allied MInds is a notable performer today, up over 10% at the time of writing, presumably because Edison has produced a paid for report on the company which goes into considerable detail about this investment company's technology holdings. The current CEO, Jill Smith, is not responsible for the company's awful share price performance up to now and is experienced at running tech companies so a turnaround could be possible. I also note that activist investor Crystal Amber now has a 2% stake. I have made an initial small investment earlier today as a few of the holdings appear to be at or near commercial launch (though sadly not the life science ones).

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DJCP 26th Feb 40 of 53

In reply to post #452043

@barney100 (#18) re Duke Royalty (LON:DUKE)

I've looked at the new presentation, but do have some queries/comments

The £30m net cash you mention (slide 15) is at the H/Y. Cash now is about £7m (Slide 3).

They mention 16 distinct businesses (slide 4) but only list 15 (slide 10) - what one is missing ? I only have 15 listed on my spreadsheet.

I think I've worked out the Ormonde partner is the Pearl & Dean Cinemas Limited / Wide Eye Media from Capital Step. Perhaps Ormonde is classed as these two separately, which would answer my question above.

The Lynx Equity (Partner Service) royalty pre July 18 placing accounted for 7% but now only 1% - not sure why this has reduced so much as I think it should be about 4%. I'm going to replicate their Portfolio percentages and see how the rest of my figures compare to theirs.

I know I could contact the company with regards to the above, but if any Duke Royalty (LON:DUKE) holder can give insight or show me where I've gone wrong, I'll be grateful.

Overall, I'm pleased with their on-going presentations to keep investors updated, and it also gives me an opportunity to review/correct my own spreadsheet.

I think the fact that the existing team can support £250m of deployed capital i.e 3x current, confirms that even though income should increase 3x, the associated costs won't.

With their own pipeline and now the added from Capital Step, I know they'll need more funds for the next royalties, and maybe they will be able to increase and re-negotiate the £11m debt taken on from Capital Step.

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Ramridge 26th Feb 41 of 53

Hi Graham re. CMC Markets (LON:CMCX)
Like you, I have been looking at this trading update a bit closely. Generally I agree with your analysis. But there are a couple of areas which give me more concern.
- the current forecast FY19 operating income = 163m, which is the same as before the announcement as the co. says their group net operating income remains unchanged.
- your forecast NOI for CFD & spreadbet is a central figure of 122m
- which means the co. has to generate FY19 £41m from other streams, stockbroking and institutional
- however they only generated £7.5m in 2019H1 from stockbroking & instis

So this is my first concern. For the other income streams, to go from £7.5m in H1 to £41m for FY is a tall order.

My other concern arises from the company being honest in their outlook (and I compliment them on this). They clearly admit that this is uncharted territory, How the customers are reacting to the ESMA regulations is something they cannot predict. They are learning and adapting to external behaviours. They have been wrong over the past year as the profit warnings show. What is the probability that they are again wrong resulting in another drop in perceived NOI in a similar range?

I see the risk/ reward ratio probably not as attractive as you do. I am going to sit on my hands with this one.

Happy to be corrected for any factual mistakes.

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ROGraham15 26th Feb 42 of 53

Yesterday You were going to report on \\\\\\\\\\\\\\\\\\\\\\\\\\\tristel but ran out of time or energy or both, so I hoped to see something today. Can you comment tomorrow?

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michaelbsmyth9 26th Feb 43 of 53

In reply to post #452133

(I meant it was Nektan that was the risky co.)
The best co. in this sector, in my view, is Paddy Power - it just rarely gets into the Value rating that I like. It is the least exposed of the high street operators to FOBTs, and even campaigned for lower stakes. Meanwhile, I think their shops will benefit from unlimited sports betting terminals.
By the way, if you want to test 888’s sports betting service, I suggest “Too Darn Hot”, in the 2000 Guineas. More seriously, 888 have recently started sponsoring some high profile horse races, which suggests they are getting quite serious about the sports betting sector.

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Andrew Brien 26th Feb 44 of 53

In reply to post #452173

Hi Ricardo, yes the lack of dividend could well be the cause (+ the HMRC matter behind it still dragging on).


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Snoo 26th Feb 45 of 53

In reply to post #452228

If you think sports terminals are the future, then you want to buy Playtech - they operate the sports terminals in virtually all the high street bookies as well as some of the cartoon horse races that go on the TV.

Personally I do think the market could be heading this way, temporarily. Many shops will become quite redundant. An idea for them to save costs would simply to be to close the counter to bets and just put in a load of machines.

The very latest generation of machines I think can offer integration with punters online accounts, which coupled with the casino products could be a backdoor way around the FOBT ban. After all, you can stake what you want on roulette if you went on a computer and have a funded account - does it make it illegal if that computer was in a betting shop and was styled to look like a FOBT? I don't think it is, although it is a grey area.

This would be short-sighted though as the government would recognise the backdoor nature of this. And the odds on these sports terminals are so bad that they may cause brand damage (the odds are provided centrally and vary from shops, sometimes very significantly so).

Personally I think with sports betting 888's attitude is actually the reverse. They used to have their own proprietary sportsbook, now their sportsbook is a whitelabel (meaning they don't have to bother employing traders). Their sponsorship of sports events I think is more to drive people into their other products (casino/poker/bingo).

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PinkDalek 26th Feb 46 of 53

In reply to post #451933

Hello "Arr"

Air Partner (LON:AIR)

My Investegate email was timed at 7:28am whereas that from arrived at 7:10am.

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Gromley 26th Feb 47 of 53

In reply to post #452188

Hi peter,

Other than the Edison note I think the other reason that Allied Minds (LON:ALM) may be up today was that they announced that Hawkeye 360 (one of the companies they are incubating) successfully commissioned the three micro satellites they launched in November.

The launch itself saw the share price virtually double in short order (from c. 37p to c.75p) it subsequently resumed the relentless decline getting as low as 50p again in the last few days.

The satellite stuff all sounds very sexy, but in fact is an early pre-revenue milestone for H360 that was late and over budget.

I'm on the other side of this one to you with a (very) small short. I'm still comfortable to stay short for now - I can't vouch for their reliability (nor even remember off the top of my head where I saw them) but I saw some numbers recently suggesting that they ( Allied Minds (LON:ALM) ) are likely to need to come back to the market for yet more cash before they can commercialise any of their companies.

I'll certainly be looking to close out the position at any sign of tangible progress on generating profits (I might even go long at that point) but for now I think it still deserves its 'sucker stock' label (which is to say, low probability, but not without potential to be a multi-bagger)

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Graham Neary 26th Feb 48 of 53

In reply to post #452213

Hi Ramridge,

Thanks for the comment,

For your information, the updated FY 2019 revenue forecast is £149 million (year to March 2019). The £163 million forecast is now out of date.

The bit that is unchanged is in relation to FY 2020, where the consensus forecast that I am using is £168 million.

I agree that it will be difficult for them to hit FY 2020 forecasts and so there is probably another profit warning in them when this becomes apparent, but I am now also valuing them in relation to tangible book value which is highly liquid and is worth at least 71p per share.

Given the downside protection which this implies, and given the scale of my exposure to IG Group (LON:IGG), I am happy putting my toe in the water here. If there is another profit warning, then depending on its severity, I would expect the shares to fall to tangible book. It would surprise me, and I would probably be a keen buyer, if the shares traded below tangible book.

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Edward John Canham 26th Feb 49 of 53

Metro Bank (LON:MTRO)

As something that was put forward as a challenger bank its governance seems to leave a lot to be desired.

Leaky onto Bloomberg then confirms equity raise potential after hours.

Thankfully I don't hold.

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clarea 26th Feb 50 of 53

In reply to post #452093

Hi Graham,

I fear you are right after the long list of banana skins I am beginning to think its safer just to avoid aim for every Bioventix (LON:BVXP) there seem to ten disasters, interesting you mentioned you prefer to fish in the 350 index.

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gmtrader 26th Feb 51 of 53

In reply to post #452068

The problem with AUG is the alleged tax owed to HMRC. The shares fell of the cliff when this was first bought up, i think about 2 years ago. Since then the sp has roughly trippled but the tax issue is still there. The sp imo has increased due to the ceo buying shares and I am a little wary of this person from odd comments i have read in the past. The share price is now higher than when the tax problem was announced. Technically it is looking over bought.

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Metatron 27th Feb 52 of 53

I`ve found 888`s customer services inflexible and their sports betting website is much more cautious about offering early odds on horse racing compared to competitors

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abtan 3rd Mar 53 of 53

Hi Graham, or anyone else who might read this and have an interest in CMC Markets (LON:CMCX)

In the analysis above I noticed a particular comment on "exceptional client losses", presumably in the latter part of (what looks like) calendar year 2018.

This was of course the same time that global markets decided to take quite a rapid dip.

This brought me quite simplistically to ponder that: 

  • if the market goes down, 
  • clients profits go down, 
  • (so clients are generally hold long positions on the platform)
  • client activity decreases, 
  • therefore CMC Markets (LON:CMCX) profits go down
  • ...and vice versa

So some questions/thought:

  1. Are CMC Markets (LON:CMCX) (and by default IG Group (LON:IGG) ) simply proxies for the direction of the market? 
    And if they are, why not simply hold a tracker?
  2. Is the rationale to hold these shares that the number of clients will go up over time, therefore company profits will go up?

Any thoughts would be appreciated.



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 Are LON:XLM's fundamentals sound as an investment? Find out More »

About Graham Neary

Graham Neary

Full-time investor and independent analyst. Prior to this, I spent seven years in the financial markets as an analyst and institutional fund manager. I'm CFA-qualified, also holding the Investment Management Certificate and the STA Diploma in Technical Analysis.Away from finance, my main interests are recreational poker and everything to do with China, especially Mandarin Chinese. more »


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