LON:XLM | XLMedia - A Contrarian Buy?

18th Jun '19 by jonkingston

9 comments 2472 reads

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.

…

Unlock with Email

Unlock with Google

Already have an account?
Login here

aston_22

18th Jun '19

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...

jonkingston

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

jwebster

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?

uktim32

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.

13th Aug '19

Just in case anyone missed this -

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

john652

30th Oct '19

For those interested in XLMedia (LON:XLM), the ex CEO Ory Wells & founder , who is now a non exec after the institutions were legged over with the 180p share offer, has been buying heavily in the last month including today. Today another 250k shares making that 1.2 million since 24th September.

I have watched this march all the way up to the top of the hill and....all the way down. For someone still at the centre of this company this doesn't seem a gesture.

As an aside, I don't really understand stoko momentum score of 68, why so high when this share has been falling for a long time ?

aflash

Thank-you.

1. Stocko Momentum is more than price changes, it includes Quality factors such as momentum of earnings growth, returns on capital etc. Why not ask them?

2. It has not been falling continuously. It was rising from beginning of June to end of July and then went sideways. Stockopedia only update the Momentum values periodically so the algos may still be chewing that data. It started falling 23 Sep.

I bought back in before ex-divi date and may add as close to 50p as possible.

Nick Ray

The XLMedia (LON:XLM) Momentum Rank is computed from these components:

A value of 69 is somewhere in the middle, but you can see it is actually made up of a few low and a few high components. Although it is down a lot over one year affecting two of the price momentum factors, it is up over 6 months which has helped the other two. (NB: % 50DMA / 200 DMA is roughly the % price gain over the last 100 trading days, or about 5 months)

More amusingly it has picked up a highish (green bar) score from % 1m EPS Upgrade FY2 by the clever trick of not having any data! (I notice that stocks with no data for this metric now pass screens which use it. I'm sure that is a change from previous behaviour which would reject stocks with an N/A value for this metric.)

So the short answer is that the Momentum Rank is middling because it is up over 6 months, down over one year and there are no broker forecasts for FY2 (year after next) in the last month!

31st Oct '19

Nick Ray, Thankyou for that explanation.

XLMedia - A Contrarian Buy?

Unlock the rest of this article with a 14 day trial

About the Author

Jonkingston

9 comments

Unlock the metrics for all these stocks and more...

Unlock the metrics for all these stocks and more...