High-yield XLMedia worth a punt

In 2016 the group generated a return on capital employed of 29 per cent, and over the past six years it has achieved a compound annual growth rate of 45 per cent for revenue and 41 per cent for pre-tax profit. And yet this cash-rich company's high-yielding shares still look reasonably priced, trading on just 12 times 2018 forecast earnings. It may be that regulatory risk associated with the moral ambiguity of its business, as well as the looser regulatory standards associated with the Israeli company's Alternative Investment Market (Aim) listing and domicile in Jersey, means XL's attractions are being overlooked.

XL's short history as a listed company demonstrates that, while the risks are certainly real, so are the opportunities. When XL arrived on Aim in 2014 its geographical exposure was largely to Scandinavia. The looming threat of restrictions on gambling marketing in the region encouraged management to expand the group's global reach. And while a tighter regulatory environment has actually had some benefit in creating higher barriers to entry, today Scandinavia generates just 37 per cent of country-identifiable revenue and 31 per cent of the total. Substantial contributions now also come from the rest of Europe and the US.

That diversification has continued so far in 2017. In February, the group bought ClicksMob for $5.1m (£4m), giving XL its first presence in Asia, while the $9.3m acquisition of Greedyrates in January has opened up the Canadian market. In May, the group announced it had been granted a licence to advertise gambling in Romania and bought its first website there. With cash and short-term investments of $35m (equivalent to over one-tenth of the market capitalisation) and $27m of cash generated from operations in 2016, expect more.

The beauty of XLMedia's business model is that each new acquisition not only adds a revenue stream to the publishing division (72 per cent of profit), but can also entice new partners to the media business (26 per cent of profit). In the latter, XL is paid to run advertising campaigns by its gambling partners on online platforms such as Google and Facebook. Although this is a lower margin, rapidly rising demand makes management confident about continued growth.

XLMedia is heavily reliant on global governments' support of gambling advertising and were things to turn sour it would not be the first time a fast-growing, foreign-operated tech company had disappointed Aim investors. That said, a solid assembly of institutions on the investor register adds confidence. As does the group's intention to return half of its earnings to shareholders every year. To date, management has consistently exceeded that promise.