ten bagger artcile sais buy

Blue Freeway is an emerging leader in the booming internet
marketing field, which we believe could become a ten bagger
over the next decade.
Corporate Australia’s advertising spending on the internet
will exceed $1.1 billion this year, almost double the level of
2005. Overall advertising expenditure was flat over the same
period, with the internet’s slice of the $10.5 billion cake
growing from 5.9% to 10.4% at the expense of traditional
media. This diversion is happening because advertising dollars
follow customers, and customers are spending more and more
of their media time surfing the internet (up to 40% for some
key demographics), and less time watching TV and reading
newspapers. A major contributor to this trend is the uptake of
broadband, which enables much faster downloads of large
music and video files, enriching user experiences and making
possible more sophisticated and effective ads. While
advertisers are beginning to embrace the internet, its share of
corporate marketing budgets is still much smaller than its
share of consumers’ media time, and online ad spending is
forecast to double again by 2010 as this gap narrows.
Another reason advertisers are venturing online is the
potential to earn better returns on investment. For instance, a
study found that it costs a car dealer US$68 on average to sell
a vehicle on cars.com, against US$493 using other media.
Whether better results are realized naturally depends on an
advertiser’s ability to locate and connect with their target
audience, which is becoming more difficult. Advertisers have
historically focused their attention on mass reach portal
websites such as Yahoo!, but these are increasingly being
bypassed in favour of more interactive websites, including
search engines (particularly google), file sharing sites like
youtube.com, discussion groups, and the ubiquitous blogs.
The headache for advertisers caused by target audience
fragmentation is compounded by the fragmentation of the
Australian online marketing industry itself, which is made up of
many small specialist online agencies and the digital
departments of large traditional media agencies, each offering
only some of the services needed for an effective online
marketing campaign. The result is that the onus currently falls
on advertisers to orchestrate the dozens of digital media
options – website development, banner advertising, search
engine optimization, email and so on – delivered by these
disparate service providers, with each employing different
metrics and reporting methods.
This complexity presents a great opportunity for Blue
Freeway’s pioneering “one stop shop” business model to make
inroads. Under the model clients are offered access to the full
range of services needed for a successful online marketing
campaign, all coordinated by one account director and billed
under one invoice. Launched six months ago, the concept is
already proving popular with top 1,000 companies.
While Blue Freeway itself was only incorporated last October,
management has been busy bringing established and
profitable internet marketing firms, each a leader in their area
of specialization, under the Blue Freeway banner. Of the 16
firms making up the Group today, no less than six (adding
47% to sales) have been acquired since the company listed on
the ASX last December. Management believes that as first
mover Blue Freeway has a golden opportunity to lead
consolidation of the sector both in Australia and Asia, and with
a $20m credit facility granted by National Australia Bank for
that purpose the hectic pace of acquisitions over the last six
months should at least be maintained going forward.
Advertising is a creative industry and under the federal
consolidation model being pursued subsidiaries keep their
established culture, brand identity, sales channels and
geographic locations, so that new acquisitions can be
painlessly integrated in to the Group. Value is added to these
acquisitions from the cross promotion of services to clients,
centralization of administrative burdens and greater provision
of finance to capitalize on organic growth opportunities.
Perhaps the most important determinant of the success of an
industry consolidation strategy is the quality of management,
and in this regard Blue Freeway is well served. CEO Richard
Webb’s most recent role was as head of formerly ASX-listed
software company Citect where he oversaw significant
increases in shareholder wealth, and prior to that he held high
level positions at leading online marketing firms. Blue
Freeway’s other senior executives have similar pedigrees.
The management team is already exceeding expectations,
and recently upgraded pro forma EBIT guidance for this year
from $7.2m to $8.1m (profit after tax of $5.4m). Next year we
forecast tax paid profits will leap 81% to $9.8m – mainly due
to first-time contributions from actual and expected
acquisitions, and emphatic growth in the online marketing
sector – pricing Blue Freeway shares at a bargain FY2008 P/E
of 12. Comparable companies trade at FY2008 P/Es of around
20, suggesting a fair value for Blue Freeway shares today of
$3.45, a 70% premium to the current share price. Long term
our investment could multiply 5-10 fold, depending on the
success of the company’s strategy in Australia and Asia. BUY.
BUY: BLUE FREEWAY

Price: $2.10