In the competitive world of retail, restaurants and leisure, creating the right atmosphere is vital for spreading brand awareness, attracting repeat business and encouraging customers to spend more. Background music is crucial in this regard, and the supply of such music in the UK to the likes of coffee shops, retailers and hotels, is worth an estimated £250m a year. Starbucks even sells its distinctive tracks to punters who want to recreate the chain’s comforting environment at home. And background music is this company’s bread and butter:
Gamble of the week: Imagesound (Aim:ISD)
The firm joined Aim at 20p in August 2004 and is the UK’s second-largest supplier of in-store music, radio and TV services to more than 17,000 outlets. Customers include Superdrug, B&Q, Starbucks, McDonald’s, Halifax and many other big-name brands. Most clients are on three-year contracts, so even a possible downturn in the retail sector this autumn shouldn’t significantly harm recurring revenues, which are presently a healthy 68% of turnover. Furthermore, the prospects for the sector are attractive, albeit competitive. Only 25% of the addressable market currently pipes in music from third parties; the rest either do it themselves (50%), or have not yet installed such systems (25%). Opportunities abroad are also vast, where Imagesound already generates 12% of sales and has distributor agreements in Portugal, Spain and Dubai. Moreover, on the supply side, the market is highly fragmented, with only one competitor, DMX UK, being of a comparable size.
House broker Collins Stewart forecasts sales and underlying earnings per share of £9.1m and 1.7p respectively, rising to £11.6m and 2.2p in 2008. Hence the stock trades on attractive p/e multiples of 8.2 and 6.4. This looks good value, especially considering its growth opportunities, blue-chip customer base and high recurring revenues. Collins Stewart has a price target of 23p. Lastly, there are opportunities for growing profits, as customers are currently being encouraged to move away from costly satellite transmission technologies to cheaper internet-based systems.
So what do we need to watch out for? The main concerns are that this is a small company with a relatively high level of debt (around £7.5m by year-end), together with the usual dangers associated with contract slippage and operating in the retail sector. However, the risk/reward profile looks attractive, and if the City doesn’t recognise the firm’s hidden value, then there is a strong chance somebody else will. Following the release of the interim results on 10 September, the finance director bought 250,000 shares at 13.25p.
Recommendation: speculative BUY at 14.25p (market cap £9m)
• Paul Hill also writes a weekly share-tipping newsletter, Precision Guided Investments