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Edmond Jackson's Stockwatch: Cupid
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By Edmond Jackson | Tue, 19th March 2013 - 01:00
This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.
I concluded with "a cautionary stance where the directors have done significant selling after the company was only listed a year or so, with its shares riding high, and expectations are high relative to the track record." But I also noted "another buying opportunity can still arise if Cupid's numbers stack up".
The shares have recently hit as low as 105p by short selling and adverse BBC coverage on the issue that perturbed me when I tested the main Cupid website and one of its related sites, nearly two years ago: a potential customer may be encouraged to take out subscriptions by "fake" persons.
In my experience this was a string of attractive young women who wanted to chat when I initially put up a profile, then vanished as soon as I took out subscriptions. On both cupid.com and flirt.com I found I could not cancel recurring charges to my credit card, my follow-up requests to "customer service" being ignored. I only got the standing orders cancelled by contacting the head of customer service, saying that if my termination request was not respected then I would take up the matter with plc head office and failing action there, the media.
|Year ended 31 December||2009||2010||2011||2012||2013||2014|
|FRS3 pre-tax profit (£m)||-0.22||4.16||7.05||9.23|
|Normalised pre-tax profit (£m)||-0.22||4.22||7.21||18.5||22.3|
|FRS3 earnings/share (pence)||-0.03||4.56||6.91||8.73|
|Normalised earnings/share (p)||-0.03||4.65||7.11||9.86||17.1||20.4|
|Cash flow per share (p)||87.6||7.65||4.34|
|Capex per share (p)||5.01||4.85|
|Dividend per share (p)||0.5||2.25||3||3.6||3.98|
|Net tangible assets per share (p)||2.76||14.4|
|Source: Company REFS.|
So I am not surprised that a likely accumulation of aggrieved customers means issues have finally got into the media and the shares taken a dive.
Possibly the reasoning why hedge funds maintain short positions is that if integrity is compromised, other flaws will emerge. Yet hedge funds are capable of error; and sentiment is improving after Cupid's chief executive spent just over £987,000 buying 865,000 shares around 114p. Bear in mind he has a vested interest to protect, now owning nearly 14.7 million shares or 17.6% of the company, but it still shows belief in Cupid.
His outlook statement in the latest preliminary results acknowledges: "It is important for the company to have a medium-term goal of improved quality in the eyes of the consumer." Acquisition-assisted growth continues well, brokers are maintaining forecasts and the goal remains to achieve well over a million subscribers globally through operating a small portfolio of distinctive niche brands.
The original rationale therefore remains, which is why I initially drew attention at 105p in November 2010: once a subscription business passes a profits "inflection point", growth can be rapid - as you can see from the latest results and forecasts. But as with the legal tussle the company got into with Sir Stelios Haji-Ioannou after initially calling itself "Easydate", management must not push its luck carelessly.
There is plenty of scope to capitalise on the group's strong-performing and niche brands, especially as smartphone use grows. Annual revenues in new markets have jumped 102% to £44.8 million compared with 15% to £34.9 million in established markets. The scale of opportunity estimated in new markets (the USA, Canada, France, Italy, Spain and Germany) is estimated at six times the market size of established markets (the UK, Australia, New Zealand, South Africa and Ireland). Progress includes two 2012 acquisitions, Uniform Dating and Paris-based AGL, the former helped by a £3.6 million placing at 200p. With those investors now nursing losses, it is ironic that the board has this year commenced a share-buyback programme, now looking a waste of money in parts, buying at prices nearer 200p.
Longer term, Cupid is looking to territories such as Brazil and India, currently a small part of the group. With such a spread of activity by a smaller company, the question for shareholder value largely becomes management capability and execution: for example overheads have risen as a result of greater scale and complexity, such as a second server centre in North America. Higher marketing spending in the first half will continue, so September's interims won't necessarily shine. The next trading update will likely be the mid-June annual general meeting statement.
Management is being augmented with a new finance director as the previous incumbent is now commercial director, focusing on new markets and identifying acquisitions; there is also a new managing director of dating services. So it is possible to move on from the service-quality issues that have caused controversy.
At about 120p currently, a forward price-earnings multiple of about seven times is based on profit doubling this year - rather a tall order. Management says it is "confident that the business is well positioned for another year of healthy revenue growth, profitability and cash generation" which leaves scope for variation, although if expectations become materially at odds to forecasts the company would still need to warn the market. Dividend growth implies a c. 3% yield with over four times cover to earnings, which is becoming supportive.
Provided you recognise the higher risks with this company, its share price drop makes it look interesting again as a speculative buy.
For more information see cupidplc.com.