Small Caps | Jan 19 2023
This story features ADVERITAS LIMITED, and other companies. For more info SHARE ANALYSIS: AV1
Last year's acceleration in top line growth has already attracted one foreign bid for ASX-listed Adveritas. Is this the end or but the beginning of foreign interest? A commissioned report suggests the valuation is at multiples of today's share price.
-Growth for Adveritas is accelerating on the back of major client wins
-Board dismissed opportunistic bid from Nasdaq-listed competitor
-Commissioned report by MST Access Research suggests share price is trading well below intrinsic value
By Rudi Filapek-Vandyck
It is estimated some 28% of all digital advertising is somehow subjected to fraud. Since this is a US$455bn industry made up of many global spenders whose growth is closely aligned with their spending on advertising, it is not difficult to see the importance of addressing this issue.
Many global advertisers spend big through Google, but it is the inclusion of social media platforms and mobile applications that has added many more windows of opportunity for the fraudsters. Well-known "tricks" range from the creation of fake clicks and fake website visits, to invisible ad placements, click hijacking and fake installation of mobile apps.
As the eCommerce industry continues to grow, the ad fraud problem becomes an ever more expensive problem for the sector to deal with. Industry estimates are that digital advertising spend lost to fraud has grown to US$80bn last year, up from US$65bn in 2021, and expected to reach US$100bn by the end of calendar 2023.
No surprise thus, a whole new industry has emerged in years past of companies attempting to provide a solution, ranging from Adverif.ai, based in Israel, Optics in Spain and about a dozen corporates headquartered in the USA. One of such companies is WA-based and ASX-listed Adveritas ((AV1)).
As Adveritas' market capitalisation is only circa 34m and its bottom line is still negative (no profits), it should also not come as a surprise its share price has received a true shellacking since 2021 as investors, globally, first abandoned the most speculative segments of equity markets and then abandoned the technology sector altogether on a significant reset in global bond yields and general risk appetite.
Adveritas shares were trading around 20c in early 2021, still at 15c at the start of last year but they are trading around 7c today. Not for the lack of interest though, equally unsurprising, the depressed share price elicited corporate interest from Nasdaq-listed competitor Integral Ad Science late last year, with the suitor offering 11c per share or $51.7m for the whole of the company.
Even though that bid offered a 30% premium to the share price, it was considered opportunistic. The board at Adveritas thinks the company is worth a whole lot more and refused due diligence. For all we know, Integral Ad Science has walked away instead of offering a better premium, but speculation is rife the suitor has not completely lost interest.
What about other competitors in this global space? Now that one suitor has shown interest, it's not inconceivable others might be interested too.
Mark McConnell, who co-founded the now Pacific Equity Partners owned Citadel Group, and his related entities reportedly own 15.94% of the company.
Small cap technology companies in Australia whose share prices have been beaten down throughout 2022 have received a number of take-over approaches from private equity and corporate suitors recently, including Elmo Software ((ELO)), Nearmap ((NEA)), Nitro Software ((NTO)), Proptech Group ((PTG)), Pushpay Holdings ((PPH)), ReadyTech Holdings ((RDY)) and Tyro Payments ((TYR)).
Not all approaches have been, nor will be, successful.
At this stage, Adveritas is offering no profits, but its growth has been accelerating and management at the firm believes breaking-even might only be two years out. Among recent positive developments are an exclusive agreement with Google Cloud, preparation for a self-serve platform aimed at SMEs and the signing of commercial contracts with large global eCommerce spenders including Disney, SingTel, William Hill, Ladbrokes and Superbet.
One of the strong growth segments in digital advertising is the gaming industry with the likes of William Hill, neds and Ladbrokes operating on supersized marketing budgets, often offering financial rewards for new customers who open an account. This has led to so-called Bonus Abuse whereby fake accounts are created in order to steal those financial rewards.
Adveritas currently counts twelve customers in the gaming sector, but its key product, TrafficGuard, is applicable to the entire digital advertising market, across Google, mobile and social media channels. Given strong growth achieved last year, and more in the pipeline as the likes of Better Collective, Lux Escapes and Disney Streaming Services signed up as customers, and with profitability approaching (FY25?), the board at Adveritas is understandably optimistic about the company's valuation.
Which is the key reason as to why Integral Ad Science's offer has been quickly dismissed.
It appears key shareholders agree with the board, judging from the fact the company managed to raise $3m late last year, at 10c a share, a sizeable premium to its share price, with nine of the ten largest shareholders participating. It's rather rare to see a non-profitable, micro-cap technology company issuing shares at a premium to its share price. No doubt, this also indicates any suitor will have to come up with a much higher offer in order to be successful.
How high is anyone's guess, but Adveritas has since commissioned MST Access Research to "initiate" coverage on the company. That report was released on January 16th, putting the company's intrinsic valuation at 20c per share – almost twice as high as Integral Ad Science's initial non-binding suggestion.
Some of the key assumptions that support MST's valuation assessment are continuing strong top line growth with revenues forecast to rise from $3.5m in FY23 to $8m in FY24, and to $13m in FY25. By then, EBITDA is projected to be minimally positive with EBITDA losses projected to decline from -$8.6m in FY23 to -$4.5m in FY24. MST's forecasts also see operational free cash flow per share at a small negative in FY25, suggesting this metric too should turn positive in FY26.
Adveritas was founded by current Chief Technology Officer, Luke Taylor in 2010. The business used a reverse takeover of Fortunis Resources to list on the ASX in 2015 as Tech Mpire, at that time a performance marketing business. The company underwent a major transformation with the arrival of current CEO Mathew Ratty, who focused the business on its software-as-a-service (SaaS) flagship product TrafficGuard.
Right now, it seems the company's future hangs in the balance between the unwavering confidence of the board, with support of the major shareholders, and the ongoing attraction of this local success story for much larger capitalised, foreign competitors.
At what price?
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