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I first recommended this stock to readers of my Nifty Fifty website several weeks ago at a 233p offer price. My best tips go first to those that pay and I should make that abundantly clear. But the stock is still cheap at 256p (mid) and should head to 375p within a year. Here is the reason why:
AIM-listed InternetQ (LSE:INTQ) is a Greece-originating mobile marketing and digital entertainment provider. It has however fast developed its business internationally and away from its homeland – with in 2011 more than 25% of revenue from the Commonwealth of Independent States region, more than 21% from the Middle East (including Turkey) & Africa and more than 17% from Asia, with its revenue exposure to the weak Greek economy further reduced from 13% in 2010 to just 7%. The company listed on AIM in December 2010 at 120p per share and the shares promptly rose to in excess of 320p in June 2011 and hit nearly 300p again in May 2012. They subsequently drifted back and commenced 2013 at 173.5p. Although a positive 16th January trading update has helped them back up to a current 256p mid price – capitalising the company at £88.6 million – the rating looks much too harsh considering the growth prospects on offer.
InternetQ describes itself as a “global leader in mobile marketing and digital entertainment solutions”. Based on its proprietary technology platform, the company facilitates mobile network operators, brands, and media companies conducting targeted, interactive and measurable marketing via mobile telecommunications. It also has a digital, mobile entertainment (music, games etc.) platform, ‘AKAZOO’.
In its September announced results for the first half of calendar 2012 the company emphasised that “rising through the next few years to hit some 4.6 billion active mobile users across roughly 9.1 billion connections (including a broadband base of 3.2 billion); the (mobile) infrastructure platform is securely in place for those who can exploit it best. InternetQ already has access to 2.4 billion subscribers and a portfolio that comfortably supports existing feature-phones, yet extends compellingly into all smartphones”. South East Asia, Africa and Russia are key growth regions for the company, where it reports mobile marketing and mobile entertainment services are established as a powerful business development tool.
In October last year the company announced that Non-Executive Chairman Stuart Cruickshank had announced his retirement from the board having steered the company through a successful AIM admission and with it having built a scalable platform. This saw CEO Konstantinos Korletis promoted to Executive Chairman, with responsibility for leadership of the board, its relations with investors and for positioning the company with customers and partners to facilitate further international expansion, with the company’s Founder and President Panagiotis Dimitropoulos becoming CEO with his move into a more operational focused role. In 2011 Korletis’ remuneration totalled €233,521 and Dimitropoulos’ €210,928. The former holds 501,875 shares in the company (1.45%) and the latter 18,268,750 (52.65%).
The company’s results for the first six months of 2012 showed an adjusted pre-tax profit of €2.4 million on revenue 50.5% higher at €32.8 million, with the company ending the period with cash and equivalents of €5.55 million. This was added to through a €7.7 million (gross) July placing at 210p per share (a pretty slight 3.9% discount to the then market price) to “enable the company to capitalise on a number of exciting growth opportunities” – including geographic expansion in Sub-Sahara Africa, Eastern Europe and Asia, additional projects for both the mobile marketing and AKAZOO platform and ongoing technology investment in infrastructure and new product development across the company’s operations.
Four weeks ago, and ahead of 2012 results scheduled for 10th April, the company updated the market that:
“InternetQ has continued to generate strong levels of organic growth during 2012 and anticipates revenues to be more than €70 million and in line with market expectations, representing organic growth of over 45%. Margins have improved in the second half and EBITDA and after tax profitability are therefore expected to be ahead of market expectations… InternetQ maintains a strong balance sheet with cash in excess of €9.5 million, providing sufficient capacity for the further significant growth expected in 2013, both in mobile marketing and mobile entertainment.”
The company’s noting that the July placing funds were partially required for “ongoing technology investment in infrastructure and new product development across the company’s operations” reflects a risk for tech companies that the area is a fast evolving one and that informed investment is continuously required to remain at the leading edge. This can impact the generation of positive net cash flow and the cash flow management of growth is a risk here, as it is with most fast growing enterprises. For instance, the first half of 2012 saw InternetQ report €1.2 million of capitalised capex more than the depreciation & amortisation charge and a net €3.3 million working capital outflow – outweighing the reported profit. However, the company’s house broker, RBC, expects cash generation to improve markedly going forward – with the company looking to be focussing more on this: for example, the interim results release noted that “we have decided to focus on expanding AKAZOO’s market share in some of the key markets we have already launched and moderate our current expansion plans into specific new territories. Our aim is to effectively balance revenue growth with margin improvement, a key measurement for the service, therefore maximizing returns”.
The company is forecast to deliver a 2012 pre-tax profit of more than €7 million, rising towards €11 million this year and €15 million in 2014. This suggests adjusted fully-diluted earnings per share of €cents18.2 (from €cents11.6 in 2011), rising to €cents26 and €cents36.5 (currently 31.3p) – meaning this company which is anticipated to grow earnings per share by more than 40% in each of the next couple of years is trading on a current forward earnings multiple of less than 8.
I noted with another high-tech concern (Blimkx) that an earnings multiple of 20x is easily justifiable for companies with such positive outlooks ypou can read my Blinkx analysis HERE. However, even reducing this – to reflect that InternetQ still has to firmly demonstrate its net cash generating credentials, a multiple of 12x forward earnings suggests a target price of in excess of 375p. Buy.
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