Australia | Apr 21 2017
Moelis & Co asks the question whether beaten-down SaaS company iSentia is offering value at its lower price.
– Model not broken
– Earnings scenarios not inspiring
– Takeover not beyond the realms
By Greg Peel
In the late nineties, investors blindly piled in to any stock somehow related to this new-fangled interweb thingy that was supposedly set to change our lives, in most cases blissfully unaware of what it all meant. PE ratios for internet start-ups flew off the scale, basically because E was still just a pipe dream.
It all ended in tears in 2000, but a decade and a half on those predictions that the internet would change our lives have emphatically come true. There is now a generation who simply cannot conceive how we ever managed to live in those dark ages pre-net. But it has taken that period of time for the world to seriously work out just how to make the internet work to provide that elusive E.
I recall first hearing about The Cloud back in the very early noughties, but realistically we might argue The Cloud was not something the general investing public were particularly aware of up until about 2015. With shades of 1999, that year saw anything “cloud” related take off.
A by-product of the cloud is software-as-a-service, or SaaS, which utilises today’s fast connections and data storage capacity to alleviate the need for individual companies to have to build their own individual software systems to manage all or parts of their business. SaaS companies were all the rage in 2015.
And if the internet has changed our lives forever, there’s little doubting the most fundamental change is the advent of Social Media. Not only has social media manifestly altered the way we personally communicate, it has also completely reshaped the way businesses approach marketing, brand management, customer contact and customer experience.
Social media has also provided governments with the means of more definitively assessing the mood of the people, serving only to enhance and crystalise today’s reality of “rule by focus group” in the place of vision and leadership.
The bottom line is, both the public and private sectors need to manage and monitor their marketing and impact, awareness and business intelligence in today’s world. Enter iSentia ((ISD)).
Founded in 1982, iSentia listed on the ASX in June 2014, offering SaaS in the areas of media monitoring, both traditional (TV, radio, print) and contemporary (social media) on the one hand and content creation and design on the other. In what we might call the Second Wave of investor exuberance in “tech”, iSentia shares shot up from opening at around $2 to hit almost $5 in late 2015.
Then reality bit. Exuberance gave way to the fact that wing and a prayer share prices have to eventually be backed up by earnings performance. By the time iSentia came to post its second half FY16 result in February this year, the stock was trading at under $3. In five minutes it was trading under $2. Today it is trading at $1.38.
The response from analysts to the company’s result was to slash earnings forecasts, noting challenges across all areas of the business. The particular disappointment was the King Content business which analysts had hoped would turn around, but hadn’t. Questions we’re being asked as to whether the model was broken, whether competition was just too easy in the space, and whether the company had reached its limit in terms of being able to further increase prices.
These questions were important in determining, post the exit of frustrated shareholders, whether iSentia was, at the low price, offering value. The three brokers in the FNArena database covering iSentia responded by maintaining one Buy rating and one Hold rating, and downgrading one Buy to Hold. They’ve been quiet since.
Moelis & Co (not a database broker) decided to attempt to assess the equity value of the company, publishing that assessment in a note today. To give a sense of value, Moelis has provided three alternative scenarios.
The broker makes note of the high level of fixed cost required to run the business, which means the loss of -10% of sales can result in a -35% loss of earnings. Moelis does not assume any cost-cutting potential in its assessment. Nor does it assume any earnings contribution from King Contenet in FY18 and beyond.
The scenarios aren’t pretty.
Scenario one has iSentia delivering no earnings growth in the core business. And that’s the most positive scenario, which would value the stock at $1.65. Scenario two has earnings going backwards by -35%, which would value the stock at 85c. Scenario three is the same as scenario two but assumes a takeover of the company at a 30% premium, thus valuing the stock at $1.10.
Moelis does not believe iSentia’s model is broken. The broker expects churn at the small & medium enterprise level, but does not see the SME segment going to zero. The company’s “gold” and “platinum” clients are large corporates and government agencies that are “hyper sensitive about their image,” the analysts note.
“They are likely to continue to pay to be fully informed on media monitoring/intelligence which affect perceptions of their firms.”
iSentia is set to roll out some new features and this should be enough to hold existing prices for the next 12-18 months, Moelis believes. The broker notes earnings were also impacted by the appearance of a competitor in the second half of FY16 boasting lower content access costs, but that cost base differential is now closed.
Moelis values iSentia on the basis of scenario one, setting a $1.55 twelve month price target and Hold rating.
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