XLMedia - A Contrarian Buy?

Tuesday, Jun 18 2019 by
17

My thoughts on XLMedia. Has a stock rank of 93.


Could XLM be a good contrarian investment?

XLMedia is a performance marketing company. The company owns over 2,300 websites, mainly within the online gambling, personal finance and cyber security niches.

Is the company profitable?

Since their IPO on AIM in 2014 the company has been profitable with rising revenue and growing net profits. 

Key metrics include – 

Operating margin averaging 28%
Return on capital employed averaging 27%
Return on equity averaging 22%

However in 2018 the revenue and resulting profits took a dip as one of their biggest websites lost organic traffic when Google updated their algorithms. 

This resulted in the share price dropping from over 200p to a price, at time of writing, of 46p. Quite a fall by anyone’s standards. This of course was in the background of a general negative market for whole UK stock exchange.

2018 also saw a fall in free cash flow too.

Is the company at a fair valuation?

The company is currently being valued at £107 million. It has £40 million cash in the bank and no debt. Dividend is currently at 10%. XLMedia Plc have historically paid dividends and intends to continue doing so. The Board’s policy is to pay out at least 50 per cent of retained earnings by way of dividend. 

With a current PE of 5, I think this represents extremely good value.

My hypothesis on why XLMedia could be a contrarian play

Since its IPO on the AIM stock exchange in 2014 XLMedia has been on a spree of acquisitions and building a big portfolio of affiliate websites. One of its biggest buys was the personal finance website moneyunder30.com for $7million. 

I am presuming this website is the companies biggest earner. If you look at the chart below you can see the organic traffic of this website has grown tremendously since they purchased it.

5d08418cd1e8fmoneyunder30.com-site-traff

stats from ahrefs.com

This suggest two things to me – 

1)  They have a team in place who knows how to grow website traffic
2)  I presume the increase in traffic has resulted in more conversions and more revenue for the company

Coming from a digital marketing background I can testify how difficult search engine optimisation (getting lots of organic traffic from Google search engine) has become. This is due to increased competition and multiple changes with googles ranking algorithm.

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Disclaimer:  

Our analysis is for research and educational purposes only. We are not financial advisers.

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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 »

LSE Price
74.75p
Change
1.0%
Mkt Cap (£m)
153
P/E (fwd)
7.0
Yield (fwd)
7.1



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


5 Posts on this Thread show/hide all

aston_22 18th Jun 1 of 5

I agree. The company saw improvements to trading in H2, 2018, and we await the next trading update. I bought in a week or so ago at 48.5p and tried to buy more at 46p 'ask' but couldn't get filled. The company metrics look good with cash in the bank and the £10M share buy back supporting the share price. Time will tell...

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tinybullcapital 18th Jun 2 of 5

In reply to post #484397

Thanks for your feedback. Yes will be interesting to see what the next trading update brings.

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jwebster 18th Jun 3 of 5
9

Yes, very cheap, good cash on hand, high dividend yield, 39% shares held with eight investment firms, good cash generation.

Business is lead generation for gambling firms, they are branching out into personal lending but small. Personal lending - this is a very competitive area so I don't buy into this as a good move.

My only question with this one is in reading the 2018 accounts, they....
Raised 31.68m in a share placing priced at 198p - good timing!
Spent 54.1m on acquisition of web sites to drive traffic (47.3m) and IT (8.2m)
Spent 14.9m on dividends and 6.4m on share buybacks
Cash generation from operating activities around 31m

Yet revenues still dropped. My concern is given the share price is now 51p they won't be able to raise more capital this way again. Without buying more websites can they grow? Actually, given they bought those sites for 47m why did revenues still drop? I can't find a underlying revenue number excluding the acquisitions

So that's the question from me.. did underlying traffic drop significantly, and a bolt on 47m of acquisitions still failed to stop revenues declining?

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uktim32 18th Jun 4 of 5

From my brief understanding it basically seems to be trying to bypass Google and find leads to other businesses of its own accord. Which obviously is what Google does.
As with most sites most of its traffic will come from Google. I can't see it's search engine ranking improving seeing it's in competition with its main source of traffic. With that I wouldn't buy myself.

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tinybullcapital 13th Aug 5 of 5
4

Just in case anyone missed this - 


Jeff Meyers of Cobia Capital talking about XLMedia on Real Vision https://www.youtube.com/watch?v=odG0vA8EyZk

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