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It's time to consider banking some profit on Dotdigital

By Gary Newman | Monday 7 August 2017

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from ShareProphets). I have no business relationship with any company whose stock is mentioned in this article.

Even with shares which have exhibited steady share price growth over a period of years there comes a time when you have to consider selling up and moving on, especially in cases where the market valuation looks to be ahead of the financials.

I believe that to be the case with an old favourite of mine, AIM-listed Dotdigital (DOTD), which I have followed for the past six years or so since its shares were trading at around 12p - I first covered it as a buy and long term hold back in May 2014, at around 34p.

I think this is a great example of an AIM company which it has been possible to treat as a long-term investment and which has delivered steady share price growth – it has never been one to see huge fluctuations in share price, but for anyone holding it has given steady growth in share price.

That has been matched to some extent by fairly rapid and consistent revenue growth, but the problem for me is that has never really caught up with the sort of forward valuations we are seeing here based upon that growth. With the share price now standing at 72p to buy, and giving it a market cap of nearly £210 million, I think it is starting to look quite pricey, even if it does continue to grow at the current rate.

Full year results up to the end of June 2017 aren’t out until mid-October, so we probably won’t have a clearer picture of the exact situation until then, but the company has released a trading update based on management estimates.

Revenue for the year is expected to be up around 19% at £32 million – the interims showed revenue of £15 million, so that has grown by a further 13% or so in H2. Given that it made a net profit of £3.65 million in H1, I would expect full year profit to be approaching £8 million on a net basis. That should give a PE ratio of somewhere in the region of 25, based on current market valuation.

We have also seen recurring revenue within the business growing and that now stands at 81%, with a lot of that coming from dotmailer. The company has been seeing high levels of revenue growth in some of its newer markets, especially in the Australia-Pacific region, where annual growth is expected to be 156% - but the reality is that only equates to £0.7 million and it remains to be seen whether such growth can be sustained as that area of the business grows. The North America operation has also been impressive and is expected to be up 36%, at £3.9 million in revenue. 

The company is also in a strong position in terms of cash in the bank, with just over £20 million currently and no debt, and net assets stand at around £27 million on the balance sheet.

In terms of distribution of profit back to shareholders, at this stage you wouldn’t be buying into this company for the income – the final dividend for 2017 is yet to be set, but last year it was 0.43p (along with a special dividend of 0.41p), so the yield is likely to be below 1%.

Just to be clear, I certainly don’t see any problems with Dotdigital, I’m just wary given the market cap level it has now reached and it still remains to be seen whether growth rates can be sustained now that it has reached this size. There are certainly an awful lot of AIM companies out there that look far worse investments, but I’d still be cautious buying this company at this level, and were I holding, I’d probably be tempted to cash some in at this level.

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