Small Caps | Aug 02 2017
Media intelligence business iSentia has disappointed the market, downgrading FY17 guidance for the third time and writing down the value of its King Content division to zero.
-Likely to take time to rebuild investor confidence but the stock retains value appeal
-Market should be looking at Australasian business to ascertain current revenue base
-Potential for King Content to be divested if it continues to underperform?
By Eva Brocklehurst
Media intelligence business iSentia ((ISD)) has downgraded FY17 guidance for the third time. The additional revisions to guidance include a -$500,000 impact from bad debts in Asia, currency translation, and increased losses from King Content. Asian revenue grew 16% while Australasian business grew 1% over the year.
The company now expects revenue of $155m and operating earnings (EBITDA) of $41.5m. The loss for King Content has blown out to -$4.4m.
Macquarie believes it will take time for management to rebuild investor confidence but continues to find value looking ahead 12 months, and Deutsche Bank agrees attractive investment qualities that underpin the stock remain in evidence, notwithstanding the emergence of competitive and execution issues. The company is the leading media intelligence business in Australia and has a dominant market share with strong customer relationships and a high proportion of recurring revenue.
UBS was disappointed with the guidance but believes the company may be in a better position now than in the past 12 months because it has a stronger competitive offering and an ability to increase prices that is based on product improvement and not just to offset copyright cost increases.
The stock appears inexpensive on an FY18 price/earnings ratio of 12.3x and the broker recognises the appeal to value investors but, ahead of the actual result, maintains a Neutral rating.
With 70% of the shortfall to prior guidance related to King Content and currency Deutsche Bank believes the reaction in the share price is overdone. Net client additions in the fourth quarter are also a positive sign, considering a number of these are returning to the company from competitors.
The broker believes the update provides evidence of a further stabilising of the competitive landscape and, along with the cessation of losses in King Content, provides a tailwind into FY18.
FY18
Australasia does not appear to be a driver of the FY17 downgrade relevant to expectations, but the second half revenue decline was worse than Macquarie forecast. The broker expects FY18 to be divided into two halves, with the first half cycling a stronger top line and not realising the full benefit of price increases, while banking annualised cost savings. The second half should cycle a weaker top line and have a full six months of higher costs.
UBS notes, in the absence of the drivers which historically cause a seasonally stronger second half, it is reasonable to annualise the adjusted second half operating earnings for FY18. Revenue should normally be higher in the second half because of price increases and higher volumes coming through, but these were partly behind the downgrade and, hypothetically, this should reduce the seasonality between the first and second halves.
There were a number of cost reduction which could be permanent, although UBS suspects at least some were temporary, which helps explain the uplift to margins. The broker's current forecasts allow for growth of 5% for the core business, considered conservative, with the risk to the upside. The net impact of revisions reduces UBS forecasts for earnings per share by -8% in FY17, -9% in FY18 and -7% in FY19.
Shaw and Partners, while finding little comfort in the trading update, also requires more transparency and will look to the result to quantify the weaknesses. The broker, not one of the eight monitored daily on the FNArena database, has a Sell rating and $1.51 target.
Shaw and Partners believes the negative result from King Content is noise and the market should be looking at the Australasian business to ascertain the current annualised revenue base, and whether this has further downside. On current evidence, the broker finds little to suggest the company has turned a corner.
King Content
The losses in King Content, a content marketing agency, are a poor reflection on the company, Deutsche Bank acknowledges, but do not change the view regarding the value of the core group. The company has written down the value of King Content to zero, which will result in a -$37.8m impairment.
The King Content brand is being discontinued and will be integrated with the iSentia brand. The New York and Hong Kong offices have been closed. Macquarie envisages potential for the company to close or sell King Content if it continues to underperform and this would be a positive, as it would allow management to return its focus to the core business.
There are two Buy ratings and one Hold (UBS) on the database. The consensus target is $2.07, suggesting 17.4% upside to the last share price. Targets range from $1.80 (UBS) to $2.40 (Deutsche Bank).
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