Fool's Eye View

[ August 21, 2000 ]

WILink -- Keeping With Tradition

By Maynard Paton (TMFMayn)

Carburton Street, London -- For me, the London Share Service of the Financial Times is a great way of discovering potential investments. Running my eye over certain sectors, searching for companies that exhibit high dividend yields and low price to earnings (P/E) ratios is often the first step of my investment research.

The second step of my research is the company's annual report. Being an investor who concentrates on the financial nitty-gritty, I always want to look at a set of full company accounts. Although third party "overviews" of a company's financial data can be a quick and easy way of delegating your financial analysis, I find studying the annual report will always reduce the chances of relying on rogue data and incorrect calculations. Simply, there's no substitute for performing your own financial calculations based upon an annual report.

More often than not, to get hold of the company's latest details, I tend to use the annual reports ordering facility via the FT. Having used this service many times and being pleased with the efficient responses, it was natural to discover more about the company behind this investor-friendly operation. Therefore, I ordered the latest report of WILink.com (LSE: WLK) from its own service within the FT.

Foolish warning

On the face of it, WILink isn't a Foolish investment. It's a penny share listed on the Alternative Investment Market (AIM). The usual warnings of huge spreads, a thin trading market and a less regulated listing environment very much apply here. Nevertheless, it's business and record is quite intriguing.

WILink's route to the stock market wasn't without a little publicity. The company was the eventual corporate "target" of the infamous Knutsford outfit, the story of the latter warranting a brief mention.

Market madness

Knutsford floated on AIM last September as small supplier of leather garments. In November, Knutsford "acquired" a small private company whose only asset was its management's reputation. The purchase was effectively a reverse takeover and so stock market "entrepreneurs" Nicholas Leslau, Julian Richer and Nigel Wray, alongside former Asda chief Archie Norman, quickly entered the Knutsford boardroom.

The stock market immediately put a premium on the incoming management's talent. Loose talk, notably surrounding the purchase of Marks & Spencer (LSE: MKS), caused Knutsford shares to soar from 9p to peak at 270p in late November. At the top, Knutsford was valued at £740m, was generating post-tax profits of around £200,000 and owned assets worth £5.7m.

Inevitably, the bubble burst. Two months ago, another reverse takeover saw Knutsford "acquire" WILink. By issuing shares at just 10p each, the small residue of speculative fever promptly evaporated.

The future's great...

The investment "story" behind WILink is the usual tale of Internet growth plus the increasing awareness of the stock market amongst the general public.

WILink declare: "The primary strategic goal of the group will be to build an on-line investment services group comprising investment banking and investor information services."

The online investment arm will be developed via "appropriate acquisitions and strategic alliances." The other half of the company, investor information services, will expand its annual report service into Europe and possibly the Far East. Knowing which companies (through their annual report orders) its customers are interested in should help WILink target specific audiences for additional investor-related products.

A dotcom profit!

Let's put aside all of the future possibilities of investment banking and other services. I'm interested in their current line of business. It's a simple enough operation. Quoted companies effectively outsource to WILink the administration of ad-hoc annual report orders.

Given WILink's high-profile and unique position within the back pages of the FT, I'm enticed by the operating "niche" it's carved out for itself. I'm also impressed over its recent financial record prior to the "reversal" onto AIM.

                           1997        1998        1999
                             £           £           £
Sales revenue           6,308,143   8,239,076  11,320,928
% growth                   +23.8%      +30.6%      +37.4%
Revenue per employee       74,213      74,226      93,561
                                                         
Pre-tax profit            879,784   1,113,391   1,694,024
% growth                  +276.5%      +26.5%      +52.1%
Pre-tax  profit  per       10,350      10,030      14,000
employee
                                                         
After tax profit          536,880     690,556   1,026,435
% growth                  +278.8%      +28.6%      +48.6%
                                                         
Net cash inflow           729,305   (548,792)   1,538,636
(outflow)

Whoa there! A "dotcom" with 15% pre-tax profit margins! With plenty of cash being generated too, the company clearly stands out from its loss-making Internet industry counterparts.

The question for WILink is this -- will the advance of electronic information herald the end of the annual report in its traditional hard copy form? It's an obvious threat for WILink.

I tend to think that the typical private investor won't move from the traditional annual report to instead read the accounting small print from a computer screen. Indeed, WILink states that 75% of clients already have Internet access, so I suspect that the online threat is perhaps overplayed. The Internet appears to be aiding WILink's growth, rather than stifling it. The debate over the merits of the traditional annual report continues to rage over on the WILink discussion board.

Valuation

At 7.5p per share, WILink is valued at £73m. Assuming the original Knutsford clothing business is worthless, the company stands at a historic P/E of 71. Assuming 15% profit growth in this current calendar year and a 4% return on the £10m of cash the group raised in July, the prospective P/E is around 50 times the estimated profit. Hardly cheap.

WILink is an interesting and profitable company in the ever-growing world of services for the private investors. It's managed to get itself firmly installed in perhaps the most prominent pages of the FT and other notable investor publications. WILink scores highly when it comes to the relative "advertising quality" of its customer base too. WILink claims that the portfolio value of a typical customer is worth over £160,000.

There are definite attractions to the WILink business and financial history. But for now, given the valuation and inherent risks of penny shares, WILink is a company to watch from the sidelines.

Annual reports -- your vote

How about a Foolish poll to determine the merits of the annual report and the future of WILink? I always use a traditional annual report to study a company's financial details. Where does the annual report fit into your investment decisions? Answer this question with your vote:

You want to study a company's financial details. What would be your preferred method of getting that information?

1. Contact the company direct for a hard copy of the annual report
2. Contact a third party (eg WILink) for a hard copy of the annual report
3. Visit the company's website to view/print the annual report
4. Use a third party data supplier for "overview" financial details
5. I never bother with annual reports or financial data

Click here to vote.

Where Next?

WILink discussion board | website