Burst Media Corporation Share Discussion Threads

[metaphysicalman] 26/1/2007 12:29

Hi

Copy of a post I made on TMF in case anyone is interested:

The purpose of this post is to attempt to come up with a valuation, based on a potential range of results that BRST might fall within for the year ended 31 December 2007 and 2008. I am bullish on BRST, and am long the stock, so please bear this in mind when reading, and, as always, do your own research.

As a further caveat, all such models are edifices built from several layers of guesswork. I have tried to justify my assumptions below, but they are just that, assumptions, which are based on my interpretation of past results, speculations on the future, and conversations with management. In respect of the later, let me make clear that when I spoke to the FD, we did not touch at all on the 2007 figures; rather I mean that from our general chat about the business I have drawn inferences about the level of spending going forwards. I am ignoring stock compensation charges as non-cash and not dilutive of earnings as all options are very underwater or not vesting for a while.

The first step I have taken is to construct a breakdown of the 2006 result, which is itself a guestimate, given that all we know at the moment is that revenue is "broadly in-line" with the forecast of $24m, and EBITDA is "in-line" with the forecast of $2.4m.

Assumptions for 2006:

- I have taken this to mean that revenues will come in at $23.5m and EBITDA at $2.4m.
- The trading update mentioned commission rates remained strong. I have taken this to mean that gross margins have stayed at a similar level, using 48.5% for 2006 total v 48.9% for H1 2006 and 2005.
- DA for H1 2006 was $78k, and EBITDA included other income of $95k; if these remain constant for H2, this means operating profit would be $2.05m for 2006.
- This implies total overheads of $9,347,500 for 2006. I have split this $2.1m technology and product development (around the same as H1 as costs relating to Burst Direct would have dropped off in H2, but may be more relating to AdConductor customisation), $2.2m G&A (constant in H2 05 and H1 06 so assumed to be only slightly higher in H2 06), and $5.0475m S&M, reflecting a full half year of increased sales force.

Assumptions for 2007:

- S&M increases 5% - 15%. Low increase as already heavily recruited in 06 in anticipation of growth. From conversations, I wonder if they may even end 07 with fewer S&M staff than 06. Nonetheless assumed above inflation pay rises and some staff increases
- G&A increases 10 – 20%. Again should be conservative given that there are no key costs areas which will need to increase massively to support revenue growth following investment in 06, e.g. already have sufficient office space for current staff.
- R&D remains flat: bit of an unknown, but assumed a decrease in Burst Direct costs offset by increase in other R&D costs.
- Other income to remain flat. Interest income approximated in line with percentages achieved in prior years, based on assumption that cash inflows are broadly 85% of operating profit.
- Revenue: the really hard one. I have assumed 15% - 40% growth. Why? In a really tough year (i.e 2006) they achieved 9% growth (on my assumption). Renewed management focus, a full Sales & Marketing team, a rapidly increasing amount of money being thrown at on-line advertising, and a strong showing in the online league tables of ad-reach should mean that they should be capable of heading back towards the ~50% revenue growth achieved in both 2004 and 2005.
- Gross margins: to stay strong at 48%. Margins may erode slightly in core business, which management would be happy about as it is usually as a result of longer term contracts, offset by what I assume are higher margin AdConductor licence sales.
- Tax at US rate of 40%, including federal and state taxes
- Dollar/pound exchange rate stays at average $2:£1 – again a large assumption. I note that the UK operations are an increasing part of the business, which slightly mitigates any negative movement.

Assumptions for 2008:

Revenue growth: 15% - 30%
Gross margin: 48%
Overheads increase: 15%
Exchange rate constant

So, what do these assumptions throw out in terms of results? Well, the "worst case scenario" is:

2006 2007 2008 $ $ $
Revenue 23,500,000 27,025,000 31,078,750
Cost of sales 12,102,500 14,053,000 16,160,950
Gross profit 11,397,500 12,972,000 14,917,800
S&M 5,047,500 5,804,625 6,675,319
G&A 2,200,000 2,640,000 3,036,000
R&D 2,100,000 2,100,000 2,415,000
Operating profit 2,050,000 2,427,375 2,791,481
Other income 760,000 900,000 1,300,000
PBT 2,810,000 3,327,375 4,091,481
Tax 1,124,000 1,330,950 1,636,593
PAT 1,686,000 1,996,425 2,454,889
EPS($) 0.020 0.024 0.030
EPS(£) 0.010 0.012 0.015

And the "best case scenario"?

2006 2007 2008 $ $ $
Revenue 23,500,000 32,900,000 42,770,000
Cost of sales 12,102,500 17,108,000 22,240,400
Gross profit 11,397,500 15,792,000 20,529,600
S&M 5,047,500 5,299,875 6,094,856
G&A 2,200,000 2,420,000 2,783,000
R&D 2,100,000 2,100,000 2,415,000
Operating profit 2,050,000 5,972,125 9,236,744
Other income 760,000 1,000,000 1,500,000
PBT 2,810,000 6,972,125 10,736,744
Tax 1,124,000 2,788,850 4,294,698
PAT 1,686,000 4,183,275 6,442,046
EPS($) 0.020 0.050 0.078
EPS(£) 0.010 0.025 0.039

So, as usual with these models, a huge variation between the two cases. I think it is worth noting that even in my "worst case scenario" the EPS is growing at 20%+ per year. Now of course my "worst case scenario" is not the worst case scenario by any means, but I have been reasonably cautious (perhaps with the exception of the exchange rate assumption).

So, how does this tie in with valuation? I tried to find a sector PER – using Sharelockholmes and excluding negative PERs, and the "outliers" (three highest and lowest PERs) gives an average of 21 (if anyone has a more soundly calculated figure, please let me know).

"Worst case scenario" gives, at today's purchase price of 23p, a forward PER of 19 for 2007 and 15 for 2008, not bad for 20%+ EPS growth (PEG less than 1), and under sector average. This suggests that, at the "worst", the current price is slightly undervalued.

"Best case scenario" gives a 2007 PER of 9 and 2008 PER of 6 on EPS growth of almost 100% per year (averaged). If we take a target share price giving equal to market average PER, this suggests an initial target of 52.5p rising to 82p. (The float price was 82p in April 2006!). This would put the share firmly in potential multi-bagger territory.

I was going to finish by saying that the truth probably lies somewhere between these two scenarios, but, given the number of assumptions, I'm not sure that I can even be as certain as that. I believe that our illustrious landlord performs similar calculations on Indigovision and other companies, so I am somewhat reassured that the exercise is not in itself necessarily completely worthless.

Finally, I would not expect the company's own forecasts to be near the upper end of my range. Having had the horrible experience of missing forecasts and being kicked by the market, I am sure that they will be conservative and put out forecasts that can be exceeded.

Any comments welcome.

Regards
MetaphysicalMan

[metaphysicalman] 23/1/2007 18:18

Looks like some big institutional buying - trades of 1m, 1.7m and 650k going through around 15.30 though not all reported as T-trades.

[wiganer] 23/1/2007 16:14

Certainly the 27400 at 19.63p was a buy. Mine was the 10000 at 19.63p.

[cockneyrebel] 23/1/2007 16:13

thanks MetaphysicalMan.

CR

[metaphysicalman] 23/1/2007 16:09

Good to see a little tick up as we approach the end of the day, not sure that ADVFN is getting the BUYS/SELLS right...

[wiganer] 23/1/2007 13:11

Thanks MM.

[metaphysicalman] 23/1/2007 13:10

EBITDA forecast was $2.4m as per interim results announcement (see end of Chief Exec's review.

Loss was due to stock comp charge as discussed above.

[metaphysicalman] 23/1/2007 13:07

OK, I've looked a bit further at the Stock Comp charge and it turns out I wasn't right, as you look at the share price at grant date (my excuse is I'm a tax accountant and don't normally look at stock comp charges except for deferred tax, where the market value does actually matter).

Anyway, the charge reflects a combination of a number of factors, key here is the number of options granted and the vesting periods of previously granted options. As far as I can see the large charge in H1 was due to the large number of options which vested in 2006 and which were subsequently exercised. Since then no further options have been granted and a (relatively) small charge will arise as the vesting periods of outstanding options unwind.

So, in summary, probably likely to be a bit higher than I thought, but still not huge. I don't have enough information to be able to estimate the charge using the calc tools you can get off the web. Finally, in terms of double entry, it would be DR P&L and CR Reserves, AFAIK.

Regards
MetaphysicalMan

[wiganer] 23/1/2007 12:55

I think they get to market hopes in same way as most small caps, they guess. Meanwhile bid is up to 20p, so I'm guessing there will be delayed buys reported later.

[cockneyrebel] 23/1/2007 12:51

ebitda in line.

Have you got the forecasts for Ebitda Wiganer, that's what I'm finding vague. It's difficult to see exactly or nearly what they have actually done,

Turnover increased about 12% in H1 but the co went from profit to loss - I can't even guess what the sales increase fo to the Ebitda - increase the loss or reduce it?

No forecasts on Proquote so if you have any forecast I'd be grateful to find out how they get to 'market hopes'

CR

[wiganer] 23/1/2007 11:42

Also, what is the "double entry"?

Is it:

DR Stock Compensation Charge (P&L)

CR Capital (B/S)

or

DR Stock Compensation Charge (P&L)

CR P&L (B/S)

or something else?

[kenatbabken] 23/1/2007 11:33

Meta

Can you explain about the Stock Compensation charge,If it does,nt affect Cash
as Bill told me then why is it in the accounts and do all Reg S companies have
it in their accounts,I know it relates to Options but how?

Ken

[kenatbabken] 23/1/2007 11:21

I bought all mine through Etrade and had no problem,Bought them all online

[metaphysicalman] 23/1/2007 10:25

nickcduk

I have purchased Reg S shares through Barclays Stockbrokers, but had to fill out a W8-BEN form (to do with US withholding tax) before I could trade, which delayed things by a few days...

Regards
MetaphysicalMan

[wiganer] 23/1/2007 10:15

nick
I seem to recall a poster some time ago saying that Barclays would trade Reg S shares. I'm sure there are others.

[nickcduk] 23/1/2007 10:08

Are there any other brokers who trade "Reg S" shares other than TDW? I wanted to buy some SIT last week but found that Selftrade won't let you trade them either.

[wiganer] 23/1/2007 09:53

I buy via TDWH with no problems. As for spreadbet companies I think IG Index used to quote for BRST, so I assume they still do.

Edit: and there's a tick-up.

[metaphysicalman] 23/1/2007 09:51

Wiganer

And I have increased my holding!

In case there is anyone thniking of buying in for the first time but has difficulty purchasing because they are "Reg S" shares, Spreadex have opened a market in BRST shares. Other spreadbetting companies may well do so if asked.

Regards
MetaphysicalMan

[wiganer] 23/1/2007 08:34

Having revisited the figures I have bought back in.

[metaphysicalman] 23/1/2007 08:32

Wiganer

I think that the stock comp charge is a non-issue - certainly non-cash, and given where the share price was at 31 Dec 06 and the pricing of the options outstanding, I can tell you that the charge for H2 will be minimal (speaking as an accountant with some experience of the IFRS equivalent of FAS123).

My suggestion is to look at the operating performance and note that they are back on track with strong growth prospects.

Regards
MetaphysicalMan

[metaphysicalman] 23/1/2007 08:29

CR

Don't think the TS was that vague as it gave details in terms of turnover and EBITDA, the two items for which they gave guidance, saying turnover would be broadly in-line and EBITDA in-line, which I take to mean hitting $2.4m They then go on to give further detail on each division's performance.

Lots of good positive language about strong finishes and strong prospects.

No specific guidance on 2007 yet, but it is only Jan, I'll give them a few months to get comfortable with where they expect to end the year - after all the last thing they want to do is give over-optimistic forecasts and miss another figure.

On fundamentals I believe that this is cheap and will be topping up.

Regards
MetaphysicalMan

[wiganer] 23/1/2007 08:23

For me the problem is still with the Stock Compensation Charge. Devlin apparently said it will be lower, but we need clarity as to its level and calculation basis. If it continues to wipe out the EBITDA then it doesn't matter how much EBITDA they make.

[kenatbabken] 23/1/2007 08:08

Good contract wins and an impressive client list with 64% increase in the UK.
To meet market expectations,What do you find vague CR

Ken

[cockneyrebel] 23/1/2007 07:24

T/S out - sounds a bit vague.

Glad I only bought a tiny few of these as a pure punt.

CR

[kenatbabken] 16/1/2007 18:48

June. Unique visitors. 76,213,000 Reach. 44% Rank. 12
Dec. Unique visitors. 94,534,000 Reach. 54% Rank. 10

24% increase in unique visitors in six months and not a peep out of the company,The Trading Update should make interesting reading if only to get some
information