Online betting marketer XLMedia (XLM:AIM) looks primed for a recovery in its share price assuming an expected January trading update confirms delivery of promised profit and revenue growth. With less than two weeks of 2014 to go, chief executive officer (CEO) Ory Weihs tells Shares he is ‘comfortable’ with published forecasts.

House broker Cenkos’ earnings per share estimates for 2014 and 2015 – upgraded in the wake of interim results on 17 September – are pencilled in at 4p and 5.4p respectively. This implies a price-to-earnings ratio of just 9.7 falling to 7.2. The expected 1.8p dividend feeds through to a generous looking prospective yield of 4.6%. The lowly valuation reflects a pronounced slump in the £69.4 million cap’s shares which are now more than 20% under water on the 49p issue price from 21 March’s flotation which raised $69.5 million.

XLM - Comparison Line Chart (Rebased to first)

Investors can be rightly wary of companies promising substantial growth given the painful experience suffered by shareholders in Quindell (QPP:AIM) – discussed on pages 44-47 – but we can’t spot any nasties in XLMedia’s published accounts with profits backed by cash flow and the balance sheet in excellent shape thanks to the remaining IPO funds.

The Israeli firm’s main source of business is its 2,000 and counting website portfolio and its search engine optimisation (SEO) activities. The websites are typically gambling portals which offer information on gaming-related topics. XLMedia uses the sites to direct traffic to the likes of 888 (888) and Unibet (UNIB:SS) and it banks a fee when users start gambling.

The group stepped out into the social gaming arena through the $19 million acquisition (1 Sep) of ExciteAd Digital Marketing (EDM) and it is also looking to diversify into new geographies from its core focus on the Nordic region with the UK, Germany, Canada, Australia, Denmark, Belgium and the Netherlands in its sights. The deflated share price may reflect some disappointment at the slow pace of the deregulation of online gambling in the US but it is worth noting that, though the group is positioning itself for this opportunity, Cenkos’ forecasts include nothing for any progress in the US.

Newly-acquired EDM already serves leading operator Caesar’s Interactive on the social gaming side and Weihs is confident the company can build on this position when the US online betting opportunity does finally come through, though he warns this unlikely in 2015. The CEO also says investors can expect the significant cash pile (of around $40 million) to be put towards further mergers and acquisitions.

Issue Date: 06 Jan 2015