Buy MBL Group* (MUBL) at 178p

Says James Faulkner of specialist small cap website WatsHot.com

Today's free share tip is a small cap growth stock but not a penny share. Here is the non technical analysis of why the share price will go up! MBL is consolidating the electronic entertainment distribution market in the wake of the tsunami dealt out to the sector following the collapse of Woolworths et al that sent many of MBL's competitors down the pan. The firm continues to win major contracts with retailers, prompting regular earnings upgrades; its balance sheet is in tip top condition, with forecast net cash of c.GBP5 million; and it is expanding into new mediums, most recently through the acquisition of Global Media Vault. The shares remain too cheap, trading on a PE of under 5.

MBL Group is a UK distributor of home entertainment products encompassing several distinct divisions which supply to large retailers, independent retailers and export customers. It specialises in the supply of DVD, CD and computer game formats and works with some of the UK's major retailers, providing a comprehensive service to include category management, merchandising support and promotional offer generation. Based in Leyland, Lancashire, the group has been listed on AIM since July 2002 and was previously known as Air Music and Media Group. Its customers include national supermarket chains such as Morrisons, Somerfield and the Cooperative Group, high street chains such as Wilkinsons & TJ Hughes, motorway service stations and other wholesalers. The firm's services remove the burden from the customer to manage what would otherwise be a complex category for a non-traditional home entertainment retailer.

MBL, or "Music Box Leisure", is the eponymous main division of the group. It offers a specialised service to its customers, most of which are large retailers without the necessary expertise in the home entertainment sector. The team at MBL offers a complete category management service through its co-ordinated customer account management, buying, operations and in-house merchandising. MBL has experienced continuous growth year on year since its foundation in 1996.

The wholesale division, ESD, is the UK's leading "alternative wholesaler" offering a wide range of CD, DVD, Music DVD, Blu-Ray and games products in good depth at best value prices. ESD's customers are independent and internet based music and film retailers which offer consumers an extensive range of catalogue and chart products. The vast experience gained within the industry gives its sales and marketing team a unique advantage in sourcing product at excellent prices and providing a range tailored to the needs of its substantial customer base. ESD is based in Farnham Royal, Buckinghamshire.

The newest division, Windsong, specialises in supplying DVDs and CDs to export and internet customers. Most recently, MBL acquired Global Media Vault, a leading digital media distribution business, for GBP839k. Global Media has a comprehensive catalogue of digital entertainment content, and its technology enables the downloading of all formats, CDs, DVDs and games, to a variety of channels. The acquisition is a milestone for MBL as it gives the company a foothold in the digital arena and will help alleviate any longer term investor concern over the future of the CD and DVD markets. Its impact is anticipated to be earnings neutral during the current year and moderately earnings positive during the next.

At the interim stage, MBL posted a 39% increase in pre-tax profits to GBP3.2 million on revenues up 124% at GBP78.2 million. EPS jumped 48% to 13.2p and a dividend payment of 6p per share was announced. The firm was strongly cash generative during the period and remained debt-free with net cash of GBP3.2 million at the period end (30 September). They key event during the period was the signing of a three-year contract with Morrisons, while a new contract with US firm Best Buy was signed post period end. On the back of the strong results, Seymour Pierce increased its EPS forecast for 2009/10 to 36.4p from 33.5p. Although growth thereafter is likely to be less dramatic, it is likely to remain steady given the recent impetus provided by competitors leaving the market. The firm intends to restructure its logistics infrastructure in 2010, which is likely to result in efficiency gains. There is also the prospect of a full contribution from both Windsong and GMV, both of which should open up new growth avenues for the group.

I am confident that the company's expertise in helping its customers market their electronic entertainment products is a key differentiator for MBL, and I'm sure we'll see the firm win more contracts throughout 2010, prompting further earnings upgrades. The shares remain a buy, at 178p

* The company is a corporate client of Rivington Street Holdings, the ultimate owner of this website.

Key Data

EPIC: MUBL
Market: FULL
Spread: 173p - 183p (5.5%)

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