Income and growth from DGS

DGS is profiting from surging demand for online advertising - analysts expect global industry spending to climb 17 per cent to over $140bn (£87.5bn) this year. The group uses paid search, call centres, email and social media campaigns to attract customers to clients, such as Comcast (US: CMCSA) and Time Warner Cable (US: TWC), in exchange for a performance-based fee. The strategy has proven very lucrative, with group revenues up by more than half to $39m for the year to 30 June. Moreover, analysts at broker N+1 Singer expect both cash profit and EPS to both rise 43 per cent this year to $7.7m and 20.7¢, respectively.

There is good reason to think DGS's success will continue. A new multi-year deal with Comcast will net the group recurring fees when the customers it acquires for the cable titan stay put for more than a year. It is also diversifying geographically, having signed up a UK mobile operator, and it expects a large European cable operator to begin trialling its service this year.

The group has also proven adaptable to changes in its industry. For example, when Google bumped up the costs of paid search, DGS diversified into social media, email campaigns and other areas. It further broadened its business by acquiring the education division of San Francisco-based social media marketer Edu last November. And in the past month it has launched a business-led delivery platform, targeting one of the fastest-growing telco segments - business services. DGS has already signed up two of the largest US cable providers to the service.

But, despite this impressive growth story and the blue-chip client base, shares in DGS trade at only 12 times this year's forecast EPS. What's more, a buyer can also expect a tidy income based on forecasts of a full-year dividend of 14¢, equivalent to a 5.6 per cent yield. rising to 6.5 per cent in the 12 months to the end of June 2016.

One potential explanation for the lowly valuation is that DGS looks rather over-dependent on a handful of clients. The group derives over two-thirds of its revenues from four customers. But the group's successful diversification means this is already down from almost 90 per cent in June 2013. Mergers between big clients, such as Comcast, which accounts for about a third of revenue, and Time Warner which accounts for 15 per cent, are also a risk. But pressure will remain on these expanded groups to win more customers. Investors should also note that DGS plans to invest heavily in its technology platform this year, which could curtail short-term returns.