Argues Tom Winnifrith of t1ps.com

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AIM-listed WIN plc is capitalised at just £4.98 million...
But by the end of 2008 it had £3.35 million of net cash and no debt.
One division is struggling but the company is re-positioning towards two growth areas and remains profitable...
And ex-cash it is trading on less than 2x trough year earnings.
Even a conservative valuation metric suggests a target price of 95.5p so at 59.5p and at up to 60p, WIN is a ‘buy’

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WIN plc (WNN) is an interactive mobile entertainment and information company which works with leading content owners, mobile operators, corporate enterprises and media corporations in Europe, Asia, Africa and Australia to enhance end-customer satisfaction, attract new customers and improve business efficiency. Its long and growing client list includes the likes of Vodafone, T-Mobile, Orange, Sony Ericsson, AOL, Centrica and E-On.

The company operates through three divisions; New Media, Managed Services and Enterprise.

New Media - Provides aggregation and billing services, principally through premium rate channels, as well as managed services to media businesses and broadcasters. As an example, the company supplies the BBC with a multi-media console which expanded its relationship with the Corporation last year.

Managed Services - Provides content acquisition, management and merchandising services plus the technology platforms to support these services to mobile operators, handset manufacturers and ISPs. A recent project has been to launch the mobile web and WAP portal service for AOL in the UK and Germany – with WIN responsible for sourcing and merchandising all the content on the portals as well as managing the storefronts for the service.

Enterprise – Provides communications solutions to major companies which aim to facilitate improved efficiency, increased customer loyalty and customer acquisition. This sector is advancing quickly, with the likes of Yell and National Rail Enquires embracing a wide range of communications services.
Recent Business Performance

The company’s most recent results were for the year ended 31st December 2008 and were announced on 25th March. These showed...

New Media – Gross profit down 20.4% to £2.76 million on revenue down 12.1% to £28 million.

The contribution of New Media to WIN’s total gross profit fell from 39% to 28% as a result of an expected decline in premium rate profitability. Some new clients were won but the company has continued to reduce its exposure to clients with regulatory difficulties and its remains cautious about the sector as economic conditions stifle consumer demand and regulation continues to stiffen. Although, parts of this area continue to offer good growth opportunities – as witnessed with the aforementioned BBC deal – WIN revealed in an AGM statement on 25th June that gross profit in the division had fallen by 30% during the first five months of 2009, due entirely to the premium rate market. It did however also add that the rate of decline had subsequently slowed to 14% and that it anticipated winning new customers in the second half of the year.

Managed Services – Gross profit up 25.5% to £5.58 million on revenue up 33.6% to £7.01 million.

Regarded as the key to the company’s long-term strategy, its expertise in this field together with the cost pressure on mobile operators, are expected to see WIN benefit from further moves to outsource content and marketing services. Barriers to entry within the area continue to rise as service providers are required to pass increasingly strict criteria to integrate with mobile operators' own systems. Whilst economic conditions would again look to represent a threat in terms of levels of consumer activity, gross profit was again up – this time by 11.6% - during the first five months of 2009.

Enterprise – Gross profit up 52.6% to £1.52 million on revenue up 50.8% to £3.14 million.

WIN has enjoyed a strong take-up of its services in this area by companies including, ADP, Centrica, The AA, GE Money and National Rail Enquiries and the introduction of new products has directly increased gross profit – with further, premium, products in the process of augmenting the current range. The growth in this area in 2008 suggested it should continue to perform well in tough economic conditions and gross profit was reportedly 19% ahead in the first five months of 2009.
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Recent Financial Performance

WIN fell into a headline pre-tax loss of £760,000 in calendar 2008 compared to a profit of £1.68 million in 2007 on turnover down 2.6% to £38.15 million. However, this headline figure is somewhat misleading since before working capital changes £2.44 million was generated from operations and a total of £2.03 million was generated from operating activities.

The P&L suffered mainly as a result of £1.25 million of amortisation charges (2007: £803,000) and £1.38 million of impairment charges (2007: £68,000). Stripping these, together with £278,000 of non-recurring items (2007: £323,000) and £92,000 of non-cash share based payment charges (2007: £90,000) out, an underlying pre-tax profit of £2.24 million was recorded – down from £2.96 million the year before but a bit of an improvement on a loss. Underlying earnings per share came in at 13.74p and a 1p final dividend was declared, making an unchanged total of 2p for the year.

These results were short of earlier expectations, largely due to delays in contracts and ongoing pressure in the premium rate market partly due to economic conditions. Protracted discussions regarding a possible offer for the company, which has since been aborted, were also reported to have distracted staff across the group.

Additionally, there was a £3.15 million outflow as a result of investing activities – largely due to £1.47 million of acquisition expenditure and £1.67 million of capex - which resulted in cash and equivalents declining by £1.3 million during the year to end at £3.35 million. However, WIN has no debt and had net current assets of £3.96 million and net tangible assets of £4.68 million at year end. The company is to announce results for the six months ended 30th June 2009 on 15th September.
*The value of investments can go down as well as up. Past performance is no guarantee of future success. Investing in equities can lose you part or all of your capital. The tips given here are of necessity, general. They cannot relate to the individual circumstances of investors. Anyone considering following the recommendations contained here should seek independent advice. Investments in smaller company shares, by their nature, can be relatively illiquid and thus hard to trade. And that makes such investments more of a high risk than larger company shares.

Valuation & Conclusion

With its shares at 59.5p, WIN is capitalised at just £6.042 million. Strip out the cash and the business is being valued at £1.62 million or just 16p per share. This is less than 2x trough year earnings. Even accounting for the current difficulties with New Media and valuing the company on a lowly 5x forecast 2010 earnings + net cash suggests a share price of 95.5p. The shares are also supported by a dividend yield in excess of 4% at the current share price and I personally see even the earnings multiple I use as too conservative. However, the upside is clear. Buy.

Key Data

EPIC: WNN
Market: AIM
Spread: 57p - 62p (8%)

Tom Winnifrith edits t1ps.com where he publishes 20 t1ps a year with a constant stream of updates. T1ps also plays home to bear raider Evil Knievil. For one year's access for as little as £73 click HERE.