DDD Group: Strong Growth Potential

DDD’s (DDD.L) 2012 interims are in line with the trading update provided by management in July. H112 revenue grew by 74% and the group reported its maiden first-half profit. Shipments of the group’s intellectual property in H112 totalled c 7m units, bringing the cumulative total to date to more than 20m. Market shipments of 3D TVs and PCs continue to show healthy growth within a slightly declining overall market. With good growth in the installed base of 3D devices, the group is developing new markets to capitalise on this. We are edging up our 2012 normalised EPS estimate by 0.1c to 0.6c and initiating a 2013 estimate of $11m revenue (up 37%) and normalised EPS of 1.9c, reflecting economies of scale.

2012 interims in line; initiating 2013 estimate
As foreshadowed in management’s July trading update, H112 revenue rose to $4.0m, up 74%. Royalties represented 97% of revenue versus 76% in H111. Gross margin remained a high 96%. Operating expenses, as expected, came in 23% higher as the group invested in resources for growth. We are edging up our 2012 estimate, based on a slightly better gross margin and a decrease in tax charge on the expectation that further deferred tax will be recognised in H2, as in 2011. We expect continuing strong revenue growth in 2013 (up 37%) and we are initiating a 2013 normalised EPS of 1.9c (up 217%), reflecting economies of scale, following the growth investment made in 2011.

Adding new markets
Management is focusing existing resources on developing a number of new markets. In China, beta testing of DDD’s TriDef 3D game conversion solution was successfully completed in Q312 and this is anticipated to create sizeable demand for royalty earning 3D monitors and PCs for the group. To capitalise on the expanding installed base of 3D devices, DDD has executed its ‘3D everywhere’ strategy by launching its Yabazam content portal on LG and Samsung Smart TVs.

Valuation: Strong growth potential – 20.2x 2013e P/E
We believe that DDD has established a strong position of leadership for 2D to 3D conversion across multiple display segments and that DDD should be able to participate fully in the growth in the 3D market through its 2D to 3D offerings in the 3D TV, PC, gaming, mobile and content markets. Our proxy comparator matrices (see Exhibits 1 and 2) suggest that DDD’s share price has potential upside.

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