Digital Performance Group (DIG) - formally ComTel (CMO)

[Catalyst]

This company may be of interest to some Sharetraders, whose largest shareholder is the Co-Investor Group, the outfit that successfully took large stakes in Software of Excellence (SOE.NZ) and Travel.com.au (TVL.ASX), restructured them and brought them to profitability over a 3-year time frame before initiating a take-over for them in 2007.

ComTel looks like a similar exercise for them and is run by ex-Travel.com.au CEO, Chris Meehan. Note: It is currently named ComTel (CMO) but is due to change its name to Digital Performance Group (DIG).

The company is now in the online marketing area, through its two 100%-owned subsidiaries Empowered Communications and Deal Group Media plc. Both subsidiaries are profitable (EBITDA of $3.4m and $1.4m respectively in their last financial year). It's net debt is approx nil. The current share price is 2.1cps and maket cap $9.6m.

A quick snapshot for those interested:

Dec 2007 - Co-Investor buys a 68% stake in debt-stricken CMO at 3cps, through an underwritten rights issue. CMO at this stage was more a Telecommunications company, with its main business a Mobile phone outfit along with recently acquired media company Empowered Communications.

2008 - 2009 - Restructuring, paying down debt.

July 2010 - The Mobile business is sold for approx $9m. The company now is Empowered Communications and has net cash of approx $5m. CMO announces it will focus on growing its digital business/online advertising and change its name to Digital Performance Group (DIG).

Sep 2010 - CMO/DIG buys Deal Media Group Australia for approx $5m. The company has net debt of approx nil and two profitable subsidiaries.

[Catalyst]

Well, nearly 6 months has passed and the share price remains the same, A2.1c. It appears a lot is going on behind the scenes with the restructuring of this company though.

The recent half year result gave some helpful numbers to value DIG, which I have valued at between 4.0 - 4.8c, based on:

Number of shares = 762m (currently there are 457m but I'm assuming the proposed rights issue will be based on 2 new shares for every 3 held at 2c, which will raise about $6m).

Net debt = $0 (the proposed rights issue will clear all debt and utilise most of remaining cash).

FY12 EBITDA = $3.8m (the company stated that it's 'run-rate' by June will be between $3.75m - $4m).

FY12 NPAT = $2.5m

PE of 15x = 15 x ($2.5m / 762m shares) = 4.8c
EV/EBITDA of 8.0x = 8 x $3.8m / 762m shares = 4.0c

Final comment - It has been a bit frustrating the time it has taken DIG/COM to finalise its resturturing and it appears the upcoming rights issue is the last bit of tidying up. The largest shareholder, Co-Investor, obviously likes the growth profile of the company as it has bought an additional 2m shares on market over the past couple of days.

[mamos]

Couple of things I dont understand:

1. How can you do a rights issue at 2c when share-price is trading at 2.1c there is not enough of discount to make it attractive. Other companies recently, with lower risk profile than DIG have had to offer substantial discounts to get rights issue away. The only reason is for Co-investor to fully underwrite and take up all shares investors dont want at 2c.

2. Their vowcha.com.au business looks like crap. Have a look at how many deals they have sold in last 2 weeks. It is pitiful. There was an article in AFR yesterday about how there are too many of these sites and they ones that dont have critical mass like vowcha.com.au will either die or have to be consolidated. I think vowcha.com.au will very likely die unless it is taken out soon. For one of these sites to be successful they need critical mass and bargaining power and vowcha.com.au does not have this.

3. I dont know their other businesses too well. Appreciate some analysis here.


Well, nearly 6 months has passed and the share price remains the same, A2.1c. It appears a lot is going on behind the scenes with the restructuring of this company though.

The recent half year result gave some helpful numbers to value DIG, which I have valued at between 4.0 - 4.8c, based on:

Number of shares = 762m (currently there are 457m but I'm assuming the proposed rights issue will be based on 2 new shares for every 3 held at 2c, which will raise about $6m).

Net debt = $0 (the proposed rights issue will clear all debt and utilise most of remaining cash).

FY12 EBITDA = $3.8m (the company stated that it's 'run-rate' by June will be between $3.75m - $4m).

FY12 NPAT = $2.5m

PE of 15x = 15 x ($2.5m / 762m shares) = 4.8c
EV/EBITDA of 8.0x = 8 x $3.8m / 762m shares = 4.0c

Final comment - It has been a bit frustrating the time it has taken DIG/COM to finalise its resturturing and it appears the upcoming rights issue is the last bit of tidying up. The largest shareholder, Co-Investor, obviously likes the growth profile of the company as it has bought an additional 2m shares on market over the past couple of days.

[Catalyst]

Hi Mamos

1. Your last point is exactly why I think the rights issue will be at the higher end rather than the lower end. Co-Investor would quite gladly take all the shares on offer at 2c in any underwrite. They have bought on market over the past week at 2.1c and 2.2c. The rights issue could be anywhere between 1.5c - 2c but Co-Investor will not want to dilute the shares too much though, especially at an already depressed share price.

2. There was a radio interview with the CEO last week. He mentioned DIG will not take over the vowcha daily deals site until mid-March and that the company's rationale for buying it is to leverage off its 500,000 Empowered database. Vowcha was only bought for $95k so its quite a small segment of its business.

3. DIG's two main businesses are Empowered (1H11 EBITDA $1.5m) and dgm (1H11 EBITDA A$0.9m); both profitable and growing online marketing companies. The best overview of these businesses is in the recently released company presentation.

4. DIG's two main problems over the past couple of years, in my view, is: (1) it's been hard to understand what the company is about during its transformation from a telecommunications company to a purely online advertising company. This restructuring seems almost complete provided they sell its retail mobile arm shortly; and (2) they have been unprofitable at an NPAT level despite being profitable at the EBITDA level. This should be solved now that Dep'n and Amort'n is now close to 0 and their interest bill will go once the rights issue is complete. However, it could be 6-12 months before they are 'unmasked' in my view.

[Catalyst]

It's interesting that the rights issue announced today allows for over-subscriptions of up to 20m shares per shareholder at 1.8c.

That means that someone can get a sizeable stake in DIG at 1.8c (provided they at least own a small parcel before the ex-date of next Mon/Tues).

For that, they get a company for A$15.3m (using total 849m shares at 1.8c) that will be debt free (net cash position after rights issue of approx A$2m) that is generating annual EBITDA of close to A$4m (recent company guidance) and growing. Not a bad deal I would have thought.