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Dotdigital expected to continue winning streak

Last updated: 01:43 07 Nov 2015 AEDT, First published: 22:43 06 Nov 2015 AEDT

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Clearly, it has been a successful period for dotdigital...

With dotdigital’s (LON:DOTD) shares up more than 30% in 2015 driven by a growing and largely recurring revenue base, a progressive dividend policy and a proven core technology – for investors it is probably tough to not like the company right now.

Indeed, the AIM quoted marketing technology company has risen more than 200% over the past three years, from around 13p to above 40p per share today.

But, the question now for investors is surely whether or not the company can keep delivering.

Expansion in the United States principally via a partnership with Magento Commerce, up until very recently a unit of eBay, has become a key driver for the AIM quoted company.

The flagship dotmailer email marketing product was integrated into the commerce platform just over 12 months ago, via the ‘Magento Connector’ software.

Over 200 of Magento’s users - typically high-volume e-commerce ‘senders’ - now use dotmailer’s Magento Connector for their campaigns.

Last month’s results, for the year to June 30, reflect the significant jump in orders that this move yielded.

Revenues rose by 32% to £21.4mln, while pre-tax profits were 45% ahead at £5.2mln and the full year dividend was increased by 80% to 0.36p (albeit still a modest yield of about 0.9%).

City analysts expect the Magento link will continue to bear fruit, and after beating 2015 expectations the group is forecast to do better still in 2016.

Clearly, it has been a successful period for dotdigital.

Indeed, as Peter Simmonds retired from his near ten year tenure as chief executive, initially in February 2015 but remaining as deputy CEO of the Company until 30th June 2015 he was described as leaving “on a high note”. He continues to be involved in the company as  a non-executive director.

The attention now turns to new chief executive Simone Barratt, and investors are watching keenly to see whether she can build on her predecessor’s success. The initial evidence is positive.

Whilst the momentum in the US is expected to continue, and 76% of 2015 revenue is said to be recurring, further international expansion is a stated aim for the new chief executive.

The company has already begun its move into the Asia Pacific region, initially with an operation in Australia, and it is also looking at opportunities to deploy ‘localised’ versions of its technology into Latin America.

Barratt, chief executive since February (and non-executive director for two years before that), is confident that the direct marketing company can replicate that success as the company continues to expand into new markets.

“I couldn’t be happier (with the group’s position),” she said. “Everything is exactly as I would’ve expected. We’ve got great people, great technology, and great opportunity.

“So, I’m thrilled to be in the privileged position.”

Barratt, formerly president of e-Dialog, another part of eBay’s enterprise division, explained that partnerships with “strong strategic players”, similar to its successful relationship with Magento, remain a key facet of the company’s geographic expansion plans.

She also points out, however, that there remains scope for further organic growth within dotmailer’s existing markets and that the technological progression of its software can also yield further revenue growth catalysts.

Analysts at Northland Capital, after October’s results statement, highlighted that problems besetting the online advertising sector – namely issues relating to ad-blockers, fraud and the continual shift to mobile devices – leave direct marketing via email “well placed to capitalise”.

finnCap’s view, meanwhile, was buoyed by the group’s ‘high level of recurring revenue, strong forecast growth, and scope for international expansion.’

Tintin Stormont, analyst at house broker N+1 Singer, expects 2016 to be another successful year for dotdigital.

“Opportunities continue to abound both in the UK and in overseas markets and it is clearly gaining traction with both its direct sales and partnership approach,” the analyst said in a note.

“There are very few companies in the technology sector that has had the track record of double-digit organic revenue, profit and cash growth (£11.9m) that dotdigital has delivered over a number of years.”

According to N+1’s forecasts, which were upgraded following last month’s results statement, the company will increase revenues up to nearly £28mln in 2016 to produce earnings of about £7.4mln, rising to £35.6mln and £10.5mln respectively in 2017.

Over the same period, the broker expects dividend payouts to investors to rise from 0.36p this year to 0.4p per share next year, and to 0.51p per share in 2017.

The current rating of around 23.8 price-to-earnings (P/E) for 2015 is forecast to narrow significantly and quickly to 22.4 by June 2016 and 15.9 by June 2017, N=1 estimates.

Stormont added: “We believe the group is capable of growing its overseas business to be as successful as that of the UK and that we can look forward to continued strong delivery from the group.”

It is quite plain to see that dotDigital has been one of 2015’s winners, but, if Stormont is right, then under Simone Barratt’s lead this could still be just the beginning for the digital marketing business.

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