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    from www.ecommerce.internet.com/news/news/article/0,3371,10375_1433201,00.html

    discovered and posted on another site by driftwd

    Sex, Web and Cash Flow
    July 25, 2002
    By Niki Scevak


    Rivers of pink gold keep flowing from Adultshop's acquisition of Today's Success Pty Ltd.


    The phrase 'sex sells' is carelessly tarted around. A New York Magazine article 'Naked Capitalists: There's No Business Like Porn Business' last year claimed it was bigger than Baseball, others say the outlook is so rosy for the industry that not even the dotcom crash hasn't slowed it down. Certainly, there is no shortage of sleazy spruikers willing to compound the myth, but the truth has been largely protected by the fact that most 'adult entertainment' businesses can hide behind the limited financial disclosure of private companies.


    What has been a little difficult to show is a business actually profiting from porn in some meaningful way. Of the four adult entertainment stocks listed in the USA, two - Playboy (NYSE:PLA) and New Frontier Media (NASD:NOOF) - are currently unprofitable. The others - Private Media Group (NASD:PRVT) and Rick's Caberet (NASD:RICK) - both saw dramatic decreases in revenue last year. If the sex is selling, Rick and Heff would like to know who too.


    After today, they might do well to look at Malcolm Day and Perth-based Adultshop.com. The company, listed on the ASX, announced that in the three months from March to June this year it had a positive cash flow of $5.6 million. For those stockmarket faithful - yes, both of you - the latest result will come as no surprise; the company's previous two quarters brought in $5.2 million and $4.9 million in cold hard cash respectively.


    Adultshop.com started life hallucinating on the promise of the New Economy, selling sex toys online and losing around $32 million in two years doing it. Shareholders at that stage were not too concerned - it was an Internet company, they were growing, she'll be right mate.


    The trouble was Adultshop.com was fast running out of cash. Malcolm Day, the firm's CEO, made a brash $12 million acquisition of Brisbane-based Today's Success Pty Ltd - an operator of a paid network of adult webmasters. Even more astounding is that when the offer was made in June of last year, the company had just $1.33 million in cash left. Day was able to deftly negotiate to pay for the deal with $1 million in cash and the rest shares.


    One year on and Adultshop.com has $17.5 million in cash in the bank, and more gushing through. Today's Success Pty Ltd has paid for itself inside a year.


    As well as operate infrastructure for a network of adult webmasters, Adultshop.com also sells toys and videos through its website and a variety of direct mail operators the company also acquired.


    The future, according to Malcolm Day, is only brighter. In the next six months he expects the company to generate a further $13 million in cash, with an EBITDA profit of $20.1 million on sales of $106.5 million.


    If we annualise Day's half-year forecast, that is assume the first 6 months of next year will be same as the last half of this year, then the company has earnings per share (EPS) of 7.6 cents. The stock, which is trading unchanged from yesterday at 33c, thus has a price to earnings (P/E) ratio of 4.3. According to the International Banks and Securities Association of Australia, the average P/E ratio of a company listed on the ASX has historically been 22.


    A growth stock trading on a P/E ratio of 4.3? You do the math.
 
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