Is it fair to compare the valuations of two companies whose respective businesses are unrelated? Visiting the DCD Media bulletin board (ADVFN) over the weekend, two posters have questioned my comparison between the current valuations of BURST Media and DCD Media. They argue that the two organizations are totally different, and hence a comparison between the two has no merit. I would agree that apart from both appearing in the same listings sector, they are essentially two very different animals, but does that mean we can’t compare their respective valuations? Both posters appear to be suggesting that BURST should command a higher premium than DCD because its business, internet advertising, is ‘sexier’. I already feel transported back a decade to the arguments about ‘old’ economy and ‘new’ economy stocks. Gulp!
When I invest in a business I want to know if that business is making a profit (or will make a profit in the future) and how cheap it is to buy. There are various valuation tools that can be used, but for me, two key tools are p/e ratio and net asset value. Quite frankly I don’t care what the business does, as long as it’s cheap to buy, makes a profit and will (hopefully) continue to grow profits.
Firstly, let’s consider Burst Media. It made an operating loss of $3.3m and indeed a loss of $1.4m at the EBITDA level. The net assets on the balance sheet were around $21m (including intangibles). In short, it may be a ‘new’ economy stock, but it isn’t making any money. BLINKX are paying about $30m for BURST which is about 1.5 times current net asset value. Paying 1.5 times net asset value for a company that is making a loss at the EBITDA level does appear generous.
DCD Media is essentially a production, distribution and publishing outfit. In its last report, fully diluted earnings were 2.82p per share; EBITDA was £2.1m and net assets stood at £21m (including goodwill and intangibles). At the current SP of just over 9p, the shares sit on a historic p/e of 3, a multiple of around 2.5 times last reported EBITDA and about a quarter of net asset value.
In my view you can make a comparison. At £18.5m Burst looks fully valued (?), and at £5.5m DCD Media looks cheap.
Over time I’ve come across some weird and wonderful valuation calculations and projections. It does appear to me that some stock prices are once again getting well ahead of themselves, and that a bubble is forming amongst some ‘hot’ stocks. Mr Market has a short memory. Buyers beware!
Be particularly cautious when companies or pundits talk about ‘hidden value’. Anybody remember Planestation? (previously Wiggins). I remember pundits talked about ‘hidden value’ in Planestation, but a look at the balance sheet just indicated negative asset value (warning keep clear!). Unfortunately, the value of this company was so well hidden that nobody was ever able to find it, and it wasn’t long before the company went into administration.
Anyway, back to DCD Media. I noticed at the weekend that All3Media is up for sale. Apparently, their private equity backers are looking for 12 times forward EBITDA. Whether they get it or not, of course, is a different matter. However, it will be interesting to see DCD’s EBITDA figure for 2010. Using last year’s figure, at 12 times EBITDA we get a market valuation of £25.2m which is well above the current £5.5m market cap.
On a totally separate note, Indigovision have just announced a 3700+ camera project at Delhi Asia . Indigovision continue to win prestigious contracts, and I believe that the company is modestly rated given the outstanding growth it has achieved over the last few years.
Be lucky.
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