Tip of the year for 2013 Number 3 (of 7) – Buy Cupid at 192.5p

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I promise something for everyone in my 7 stock tips of the year 2013 selection and that brings me to Love. If you are in a Long Term relationship you may after 7 days cooped up with your nearest and dearest be wondering why homosexuals are so keen on the right to get married. Have they not suffered enough already? If you are not you might be getting kind of lonely by now. So love, or lack of it, is in the air. I think that some day in mid December is the most frequent day conception occurs in the UK. I have no idea why. This all brings me to online dating group Cupid (LSE:CUP) which is my third tip of the year for 2013 at 192.5p – my target price is 330p on an eighteen month view.

I am attracted to this area because I just see this industry continuing to expand thanks to changing demographics – that is to say high divorce rates, increased longevity, etc. And although the upside may not very large rather than spectacular this is a sort of recession resilient industry. Consumers may not spend greatly on discretionary items but as they feel increasingly miserable about life in general, I sense that the quest for love, or sex, or both will be seen as a non discretionary item. Folks will always be able to find a few quid to spare on the off chance of a bunk-up or more.

To read my macro predictions for 2013 on which my seven tips of the year are based click HERE

To read my first tip of the year for 2013 (recession resilient financial) click HERE

To read my second tip of the year 2013 (gold play to come good big time as its mine opens up) click HERE

Cupid is a play on that quest for love. It successfully uses social media to tap into what is a global trend. On a superficial basis, the current price-earnings multiple may not look overly attractive, further investigation reveals that within a couple of years the current share price seems likely to be looked back on as a great opportunity. Having risen from a 60p listing price to highs of 250p just over a year ago, the shares can now be bought at 192.5p valuing the firm at £163 million.

The rating might look high. But this is one of those quality growth stocks on AIM (there are not that many) which deliver premium earnings growth year in year out and generate cash. They never look cheap but then the shares just keep on rising.

Cupid listed on AIM in June 2010 and is an Edinburgh-based provider of online dating services. The company offers a wide variety of websites for diverse ages, cultures and social interest groups, with its most heavily visited sites including cupid.com, flirt.com, benaughty.com, girlsdateforfree.com and datetheuk.com. Niche brands include datingforparents.com, indiandating.com and maturedating.co.uk. Currently Western countries are the core market of operations, though the company is expanding into faster growing territories such as Brazil and India. You will note the demographics here. The idea of tapping into the quest for 60 and 70 year olds to find love on line would have been seen as madness 15 years ago. Today the silver surfers are a booming market.

The key man is co-founder and CEO Bill Dobbie – an experienced tech entrepreneur who was also co-founder of fellow AIM-listed Iomart Group. He holds 13,811,053 shares in the company (16.28%) with his basic salary in 2011 £180,000, with a £45,000 bonus. For an AIM CEO that is not that high and his shareholding aligns his interests very closely to those of ordinary shareholders. Mr Cupid wants the same thing as you. And in this vein the company held an EGM just before Christmas authorising a share buyback programme that kicks off on January 7th. That will underpin the share price.


Cupid’s most recently released results were interims for the first six months of calendar 2012. Compared to the first half of 2011, in its ‘Established Markets’ – where it has traded for more than two years (the UK, Ireland, Australia and New Zealand) – revenue increased by 6.1% (to £15.99 million), in ‘New Markets’ (those it has entered within the last two years – USA, Canada, France, Italy, Spain and Germany) revenue increased by 120.9% (to £22.16 million) and in ‘Developing Territories’ (Brazil and India) it grew by 32.6% to £0.464 million. These performances benefitted from a 69.3% increase in direct marketing spend (to £23.17 million) – particularly in the seasonally strong sign-up period to April.

Overall revenue was 51.7% higher and a pre-tax profit of £3.84 million (£4.12 million before acquisition-related costs) was recorded – this compared to £4.08 million in the comparative prior year period. The increased costs extended – particularly due to a continuing driving of international expansion and product development to ensure compatibility with mobile devices and mobile monetisation – to there being £2 million of capex more than depreciation & amortisation in the half year period. This spend is though forecast to smoothen at lower levels going forward – the £3.78 million capitalised in this first half having been only £67,000 lower than the amount capitalised for the whole of 2011 – and the company has noted that the end of the seasonally strong sign-up period has seen, from May onwards, it having “scaled back its marketing expenditure in order to ensure that the increased revenues translate into stronger monthly profitability throughout the remainder of 2012”.

At the half year end the company had net cash of £7.64 million, with net current assets £10.65 million and non-current liabilities of £0.251 million. It has subsequently announced acquisitions of French online dating company Assistance Genie Logiciel for €3.7 million (circa. £3 million), seeing it become one of the largest French online dating businesses, and UK-based Uniform Dating for an initial £3.6 million (with up to a further £3.4 million payable subject to future performance). In conjunction with this latter acquisition, £3.6 million was raised in a 200p per share placing. Despite this, brokers’ earnings per share forecasts were increase on the back of the acquisitive activity – this following Cupid having noted in its results announcement that “strong trading in July and August supports the planned improvement in profitability in H2 2012 and management’s expectations for the year to 31 December 2012” At the EGM Cupid stated that it was trading in line with expectations..

Calendar Year 2010A 2011A 2012E 2013E
Revenue (£m) 25.71 53.55 79.0 100.0
Pre-Tax Profit (£m) 4.32 7.61 13.0 19.0
Earnings per share (p) 4.97 7.85 11.11 16.0
Dividend per share (p) 1.3 2.25 3.0 3.6

 

My forecasts assume no share buybacks. That is clearly not going to be the case. I shall adjust forecasts as the scale of the buybacks becomes apparent. However this business generates cash, has net cash and can clearly enhance earnings by buying back shares for cancellation. It will do so. Mr Cupid’s interests are aligned with those of anyone else smart enough to own this stock.

The longer term outlook also appears promising – with the market global and relatively immature but growing fast. Organically, Cupid particularly notes that it has “seen our USA revenues grow to 2% market share of a market of around £800 million after only two years within this market, and we see significant opportunity for the business to grow further in the USA… In addition, Canada, Italy, Spain, and lately Germany have been making steady revenue growth progress”. Its international footprint and marketing technology and experience also mean it has a strong base to unlock value from acquisitions that vendors typically can’t.

Having grown earnings per share by nearly 58% last year, more than 40% growth is currently anticipated for this year and next and I anticipate comfortably in excess of 20p in earnings per share to be delivered in 2014. If the earnings per share multiple remains as it currently is (15 times anticipated 2012), the shares would then trade at comfortably above 300p. Given the growth profile here, I consider this quite realistic – in these staid economic times I would not be surprised to see the market reward exciting growth prospects disproportionally and there is also the possibility of the company becoming an M&A target itself as it continues to build its market presence. However, without this, the shares, at192.5p, look to represent an attractive buy for the long-term.  My eighteen month target is at least 330p – I expect a modest re-rating as growth is delivered.

I shall continue my 7 tips of the year series tomorrow with a mining play. 3 of my remaining seven tips of the year will appear on various websites and you can alerts to all of those tips (plus on all the other articles I write) by following me on twitter @tomwinnifrith. The 7th tip of the year will be sent out by email on January 2nd on the launch day of the new onefreesharetip.com – to receive that tip and a free share tip from a panel of 20 top tipsters each day of the working week sign up NOW at onefreesharetip.com

 

 

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