The deployment of a $50m acquisition war chest at mobile advertising platform Taptica (TAP:AIM) could prompt near 30% upgrades to earnings forecasts if it manages to make good acquisitions, according to investment bank Berenberg.

This would provide another leg to the growth story and help drive further momentum in a share price which is already up more than 450% in the last 18 months.

WHAT DOES THE COMPANY DO?

Taptica is a ‘user acquisition platform’ which focuses on mobile and social media. In plain English this means it helps clients to run more effective advertising campaigns through a platform which helps target ads appropriately.

The ultimate aim is to help convert mobile website, social media and app user traffic into paying customers.

The company operates a performance-based marketing model and therefore gets a slice of the user revenue it helps drive for its customers.

Its platform is used by top global brands including Amazon, Facebook, Twitter, Starbucks, Uber and Samsung.

Historically Shares was sceptical on the story after a big crash for the ad-tech space in 2015 driven by fears over fraudulent online ads and ad-blocking technology.

The company’s track record in the interim has led us to change our minds and although we have missed out on some big gains we still see merit in buying at the current price.

We are particularly reassured by the fact earnings are increasingly backed by cash. In the first half of 2017 adjusted earnings before interest, tax, depreciation was up more than 40% year-on-year at $13.1m while cash flow more than trebled to $13.7m.

STRENGTHENED BALANCE SHEET

Taptica recently raised $30m to bolster its balance sheet
(15 Jan) and Berenberg analysts comment: ‘Our scenario analysis indicates that if Taptica deploys its balance sheet firepower over the coming year, there could be 20% to 29% upside to our 2018-20 earnings per share estimates.’

A 2018 price-to-earnings ratio of less than 15 times based on Berenberg’s existing forecasts does not look too demanding.

Deals are likely to be used to accelerate expansion in key markets including Europe and Asia Pacific as well as to plug technological gaps.

There are risks attached to the story, nonetheless. A focus on M&A brings integration risk although we note its recent track record of finding quality businesses is good, as illustrated by the fact its Tremor Video DSP acquisition from August 2017 is proving to be a particularly good deal.

Investors should also be wary of any future regulatory changes to the way online ads are bought or sold.

Taptica pays a small dividend, yielding approximately 1%. You’re really buying the shares for capital growth. (TS)

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