James Faulkner on 7digital goes BOOM!

Almost two months ago, I suggested that 7digital (7DIG) shares might be a more savvy way to play the ascent of Audioboom (BOOM), rather than investing directly in Audioboom equity. Well, my instincts appear to have been on the money. Since then, Audioboom shares have advanced by a sizeable c.50%; but shares in 7Digital almost doubled during the same timeframe. So what’s all the excitement about?

7digital shares rocketed upon confirmation that the firm is in talks with Will.i.am, via his company i.am.plus llc, about delivering a music service on a new smartwatch being launched by the musician and entrepreneur, most well known in the UK for his appearances on the BBC talent show The Voice. In a rather laconic statement, 7digital said the potential contract “would further underpin the Company’s revenue expectations.”

According to the Telegraph, one of the major attractions of the deal is that record labels and independent music producers will be treated equally. “This could give it the edge over other music services, which have experienced problems over the different rates offered to independent music producers and big labels,” the paper said.

But the main factor that drew me to the shares was the stake in Audioboom, which at the time of my original write-up was covering the majority of 7digital’s market cap. At the beginning of October, 7digital took advantage of the strong rally in the Audioboom share price and offloaded 29,029,307 shares for £3.5 million in cash. This leaves 7digital holding 58,000,000 Audioboom shares, and 8,765,404 warrants which are exercisable at 1.5p. However, there is the caveat that 7digital’s remaining shares in Audioboom are subject to a twelve month orderly market agreement, albeit one which can be waived subject to market demand and the permission of Audioboom’s brokers.

At current prices, the remaining Audioboom stake is worth c.£9.14 million, with the value of the warrants taking the total value to c. £10.4 million. The last stated net cash position was £5.3 million. Throw in the £3.5 million proceeds and that makes £8.8 million in cash. With cash and financial assets of c.£19.2 million, 7digital’s current market value of £35.7 million looks reasonably well underpinned – but not to the extent that it was at the time of my original write-up.

Nevertheless, the shares could still prove good value should the firm be making north of £2 million profit in 3 years’ time, as broker finnCap suggests might be possible.

For my part, I would look to top-slice at this stage to lock in profit.