DMGT Plc (DMGT LN): Window of opportunity. Use it or lose it
DMGT has become an increasingly interesting investment proposition, but the opportunity may not persist for too long.Â On one side, there is a strengthening cyclical and structural play in both B2B and B2C.Â Obscuring this however is a short term negative technical position with the shares as they approach theÂ 6 June, when the shares will drop out of all the UK FTSE indices following changes in qualifying rules.Â The rule changes will exclude all non-voting shares from qualifying for inclusion, which for DMGT, that means the 95% of the equity that is represented by the non voting ‘A’ shares.Â Speaking with the company, they estimate that around 5% of the equity is currently owned by index funds. While these rule changes have been in process for two years, yesterday’s FTSE reminder (//www.ftse.com/tech_notices/2012/Q2/35442_20120418_FTSE_UK_Index_Series_Ground_Rules.jsp)Â has alerted the hedgies that there will be prospective overhang of at least 5% (nb the closet indexers) of the equity over the next couple of months as these index funds are forced to divest their holdings.Â As hedge funds short into this, the shares have been depressed to levels that would not otherwise be available to investors. This situation however will not persist. As improving B2C advertising revenues are confirmed into May and June (over the Jubilee and Olympics and against easier comparatives) and the group ups its investor relations push to communicate the positive developments in areas such as MailOnline and the DPG/Zoopla merger, we estimate that at these levels, the shares should be mopped up relatively quickly, leaving the hedgies to close their shorts.
In addition to Tuesday’s trading update, which we covered in our report (Opportunity as markets chase shadows), the group held an investor day (yesterday) which covered the non-event activities of B2B and B2C.Â Points which came out of this and subsequent discussions included:
1) Associated (B2C) advertising is stabilising into the summer.Â After the Q2 wobble when underlying advertising dropped to -5% vs the -2% for Q1, this will come as a relief to this momentum sensitive market.Â Having already revealed that March was up +1% YoY, April seems to have eased back slightly. Expectations for May and June however are firming and this is consistent with what we have been hearing from the likes of STV recently.
2) MailOnline:Â Revenues are expected to rise from Â£45m (FY13) and then on to Â£100m by year 5 (FY16?).Â The FY13 target of Â£45m is ahead of my Â£40m existing forecast and the +22% CAGR trajectory beyond that is also ahead of my targets, by approx +5ppts pa.Â MailOnline currently has annualised revenues of approx Â£25m pa and just about at breakeven.Â While overseas marketing/sales are being rolled out, the remaining costs are relatively fixed. Discussing the level of operational gearing with the management after the presentation, they seem fairly confident thatÂ there should be a high rate of future drop-thru of this marginal revenue growth down to the bottom line.
NB, the Co’s forecasts are based mainly on the lagged monetisation of existing online audiences in the UK and the first time monetisation of overseas UV’s. MailOnline reaches 2.4m UV’s per day in the UK (March +136% YoY) from which it generates most of the Â£25m (annualised) revenues.Â This is approx half of the size of the print readership base, but generates only about 15% of amount of display advertising of the print brands (excl Metro). As the reach leadership is extended (including mobile with its higher click thru rates) this discount should also narrow. Overseas UV’s meanwhile are growing even faster (c.+175% YoY in March) and at 3.0m daily UV’s represent over 55% of MailOnline’s global audience. The monetisation of these visitors has only just started.
3) B2B: Tuesday’s trading update provided the overall H1 organic revenue growth for DMGi of +12%, while re-iterating its full year guidance of broadly flat margins of 20%. Speaking with the respective divisional management, what became clear is that this margin target is conservative. While the +20% growth at Hobsons included some H1 phasing benefits (from H2), underlying growth was still robust. Property, which at probably also over +20% organic for H1, benefited from new product introductions. Most of these however were spin-offs according to my discussions and therefore with a good rate of drop-thru to margins.Â Genscape meanwhile which grew by under +5%, has held its margins around the low 20’s, so where was the offsetting margin contraction if the overall divisional margins are flat?Â The remaining activity ‘Finance’, is certainly struggling, although H1 organic revenues seem to have stayed positive, so if margins were lower, they ought not to have slipped by much.Â The net conclusion of all of this is that the official guidance for DMGi is low-balling on its margin targets.
Share priceÂ Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â 416p
Growth rating FY3Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â +2.1%
Revenue CAGR FY1-3Â Â Â Â Â Â Â +3.8%Â Â Â
Target CAGR FY3Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â +3.9%Â Â
Target priceÂ Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â 506pÂ Â Â
UpsideÂ Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â 22%
Recommendation:Â Â Â Â Â Â Â Â Â Â Â Â Â BUY
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