[Nick Hargrave]

XLM is a business we have been following for a while and we have been waiting for the Capital Markets Day tomorrow (1-Feb-23) for additional insight and input to further inform what was likely going to be our next memo. The company released a trading update this morning (https://www.londonstockexchange.com/news-article/XLM/trading-update/15816669) which is quite positive in terms of progress and so we wanted to highlight this opportunity now for those interested in the capital markets day which can be accessed here

https://otp.tools.investis.com/clients/uk/xlmedia2/rns/regulatory-story.aspx?cid=807&newsid=1664044

XLM has gone through a tumultuous few years and is on the verge of completing its transformation. It was historically an affiliate marketer for online casino / gambling operators in Europe i.e. it operated thousands of websites with content that would provide links to online gambling sites to its audience and get paid for the leads it generated. It was hit hard a few years ago when Google manually penalised all of their sites and demoted them in their algorithms, dramatically reducing their traffic. In addition, European regulations became much more restrictive in its key Scandinavian markets, significantly impacting the performance of the business.

Under new leadership, the business has pivoted successfully to the growth market that is US sports betting, which is gradually getting legalised state by state and provides a very attractive opportunity. The business acquired successful US businesses with large sports audiences and has implemented its affiliate marketing strategy to achieve strong early results while rationalising its European footprint significantly. It is currently in the process of selling its now loss-making Personal Finance assets which are non-core.

This brief background is by way of highlighting that the financials for the last several years have been ‘messy’ and legacy assets have clouded the performance of the now core assets. With a market cap of c.£40m and net cash of c.£8m (note the company reports in US$) the company has an EV of c.£32m. The trading update confirms EBITDA of c.£13m for FY 22, so it trades on an EV/EBITDA of just 2.5x. The business is clearly in the penalty box for the historic issues and legacy assets, but we expect the capital markets day to be the public unveiling of the current / future core assets and the valuation appears to provide a significant margin of safety as the business model proves out and we complete our diligence.

Topic

[Nick Hargrave]

https://www.londonstockexchange.com/news-article/XLM/divestment-of-europe-and-canada-assets/16389150

A relatively huge transaction realising the hidden value within the asset and highlighting the market undervaluation

[Nick Hargrave]

https://www.londonstockexchange.com/news-article/XLM/results-for-the-six-months-ended-30-june-2023/16143164

Another solid period for the company as it continues its successful repositioning. While new market launches and a strong NFL season are needed to meet expectations the business is trading in line with our expectations and continues to trade on a lowly multiple that we don’t believe is justified

[Nick Hargrave]

https://www.londonstockexchange.com/news-article/XLM/exclusive-media-partnership/16110212

A new partnership. No figures provided with it but highlights continued growth opportunities

[Nick Hargrave]

https://www.londonstockexchange.com/news-article/XLM/trading-update-and-notice-of-results/16057935

Update with trading in line with expectations, adjusted for the sale of non-core assets. The refreshed strategy appears to be bearing fruit with good progress on costs, including at board level, alongside some momentum in the core assets as the business now prepares for new US state launches. We note there is a 2nd revenue share agreement with Betway now disclosed.

[Nick Hargrave]

https://www.londonstockexchange.com/news-article/XLM/sale-of-three-european-casino-assets/16036961

Continuing to rationalise and focus the portfolio. A relatively small deal but helpful to the investment case while realising funds for investment in the core

[Nick Hargrave]

https://www.londonstockexchange.com/news-article/XLM/disposal-of-personal-finance-assets/15975888

Tidying up the personal finance assets. Very limited monetary value but clearing the distraction

[Nick Hargrave]

https://www.londonstockexchange.com/news-article/XLM/xlmedia-signs-revenue-share-contract/15947065

Announced their first revenue share agreement in North America, delivering on the clear strategy that they have outlined. No financial details unfortunately but encouraging nonetheless

[Nick Hargrave]

Valuation assumptions: The market consensus is £9m EBIT for 2023 and we assume a single digit multiple of 9x for this asset light and growing business i.e. the market re-rates upon recognition that the business has successfully recovered and re-positioned itself. For the risk price we assume £8m EBIT in 2023 at an even more modest 6x multiple.

[Nick Hargrave]

The Capital Market Day presentation confirmed our positive thesis on the business, but was light on disclosure of useful metrics to aid our financial analysis and forecasting. From the initial thesis previously outlined, we should note expected deferred consideration payments of c.£15m over the next 2 years which adds c. 1x EBITDA to the multiple when the EV is adjusted, still providing quite some margin of safety. A key part of the investment case will be the ability and timing of the US operations to move from one off customer acquisition payments to the more European model of lower up front payments but longer term and more forecastable revenue share arrangements

[Author]

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