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Shares in Cupid (LSE:CUP), the AIM-listed online dating business have tanked since some unhelpful media coverage in January. But calendar 2012 results last week should have silenced the critics. They did not. Neither did the CEO splashing out c£1 million to buy 865,000 shares at 114p. This is bizarre. What is going on?
I tipped this stock at much higher levels and so far look like a prize ninny – as you can see HERE – so is the fundamental case a bad one?
The results show an adjusted pre-tax profit of £10.60 million on revenue 51.1% higher than in 2011 at £80.91 million, generating a more than 31% increase in earnings per share to 10.56p (14.24p excluding intangibles amortisation). After paying £1.90 million in tax, £1.84 million of dividends and expending a net £0.34 million from existing reserves on acquisitions (£5.28 million paid out v. £4.94 million raised via the issue of new shares), net cash increased by £6.37 million during the year, to end at £14.11 million. Net current assets totalled £10.27 million and non-current liabilities £2.51 million at the year-end. A 33.3% increase in the dividend, to 3p per share, has been recommended – with this payable on 2nd July to shareholders on the register on 7th June and “the board intends to continue with a progressive dividend policy”.
There was growth across the company’s established (UK, Australia, New Zealand, Ireland, South Africa), new (USA, Canada, France, Italy, Spain, Germany plus any newly entered countries) and developing (Brazil, India) markets, with the subscriber number average increasing to 533,000, though monthly churn was up to 29.1%, from 22.5%, “due to a combination of the increased value of subscriptions from new markets, which have higher churn, and slightly higher churn in some established markets”.
The company is “confident that the business is well positioned for another year of strong revenue growth, profitability and cash generation”, expecting ongoing revenue growth at a sustained rate of around 10% in its ‘established markets’ and estimating that the scale of the opportunity within the ‘new markets’ is approximately six times the market size of the ‘established markets’. In 2012 revenue from the ‘new markets’ totalled £44.80 million and from the ‘established markets’ £34.94 million.
As well as organic development – a division has also been established to explore and develop opportunities outside the core dating business but leveraging the company’s proprietary technology and know-how – the company continues to look for acquisitions in the UK and overseas. There has been some recent reports in the media of some unhappy customer experiences with Cupid and the company notes as a principal risk factor that “in the event of the reputation of one or all of the sites being ‘damaged’, this would impact on consumer confidence in the group’s products and the group’s ability to generate revenues”. However, the company emphasises that “as the business has been growing rapidly there has been significant investment in customer relationship systems and customer service staffing to meet the growing business demands”, adding that “we continue to invest further in customer service where we believe a quality offering will build the brand in the long term” – key to further and sustainably improving financial performance. House broker, Peel Hunt, expects an upcoming third party audit of customer practices and the database and an increase in marketing spend to improve brand image “to be well received by investors”.
However, this has seen forecasts for 2013 pared back somewhat – with we now anticipating earnings per share heading towards 13p (a reduction in forecasts of 3p), though this still represents circa 20% growth and Peel Hunt now forecasts a dividend of 4.4p per share, up from a previous expectation of 3.6p. This suggests, at 115p, a current price-earnings multiple of sub 9 and a dividend yield of 3.2%.
With the company having consistently delivered results that have been ahead of its IPO plan over the 32 months since it listed on AIM, operating in a market which is clearly global and growing and delivering strong financial returns whilst still generating strong growth, Peel Hunt describes the current rating as being “no reflection” of the company’s growth profile and has a 290p target price. Whilst a house broker’s bullish views need to be taken with a degree of caution, there does look to continue to be strong value on offer here. My target price is 260p – a PEG of just one. But at the current level that still leaves the shares as a buy.
Tom Winnifrith writes for 10 US and UK websites and you can gain access to all of his free content at www.TomWinnifrith.com while you can also follow all his thoughts on twitter @tomwinnifrith
Tom Winnifrith is half of the team behind t1ps.com during the 12 years when it delivered such stellar gains on its share t1ps. The other half is Steve Moore who quit t1ps on a matter of principle in October 2012. The two men are now replicating the t1ps success with a new product The Nifty Fifty, details of which you can find here – the next hot tip from which is due next week
A couple of bears have been at the stock – and they would appear to have had deeper pockets than the company and its directors.Whether they or the directors were right in the long term remains to be seen.