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XL Media counts cost of tightening regulation

The online gambling marketer has cut revenue and profit guidance for this year
June 13, 2018

XLMedia (XLM) has always been a high-risk investment, with its sales reliant on global governments’ support of gambling advertising. The Australian government’s decision to bring down the regulatory cosh on the online gambling industry has forced management’s decision to withdraw from the market. Coupled with the culling of low-margin activities in its media division, that’s led the group – which operates by marketing the services of its gambling partners through its 2,300 'clickbait' style websites – to warn revenue for the full-year will come in lower than expected at $130m (£97.5m), down on $138m in 2017. Adjusted cash profit will also be marginally behind the corresponding period. 

IC TIP: Hold at 102p

The group also said a regulatory clampdown in some European markets – although it would not confirm specific territories – had “triggered a realignment in how operators and marketers can work”. However, while regulatory pressures have dampened earnings expectations for the publishing division, investors might note that the media division – which accounted for just over a quarter of direct profits last year – has taken the brunt of analyst downgrades. House broker Cenkos reduced its media revenue forecast for this year by almost a quarter to $53m, with just a 1 per cent cut for the publishing business.

Management had already outlined plans to prune the media division, where it buys and develops ad campaigns for social media, mobile and pop-ups, as part of its strategy to focus on higher-margin work. While gambling accounted for almost two-thirds of revenue last year, management is trying to diversify its revenue sources. Last year it moved into the personal finance market via two North American acquisitions.

Nevertheless, the update wiped almost a third off the group’s value on the day of its release. The main question for investors in the high-yielding shares will likely be how secure the dividend is. The group had net cash flow of £8.1m last year, which Cenkos expects to temper slightly to £7.5m this year, before rising again in 2019. It ended last year with net cash of $41m, including $4.9m of short-term investments, and raised an additional $43.6m to fund further acquisitions. Its dividend was also almost twice covered by statutory earnings last year. Even after downgrading EPS to 14.1ȼ, this year’s forecast dividend per share will be covered 1.8 times, according to Panmure Gordon forecasts.