Australia | Dec 20 2006
By Rudi Filapek-Vandyck
The Australian share market may have broken a few records over the past few weeks, but December 2006 has nevertheless generated a few spectacular share price crashes, one of them being online ad placement agency emitch (EMI).
The shares briefly touched $1.75 when the plan was announced to merge the business with Harold Mitchell’s traditional print and television oriented media buying and planning business Mitchell & Partners for $100m in cash and shares.
The good news about the plan is it will bring emitch firmly under the wings of Harold Mitchell who’s no less than a living legend in Australia’s advertising and media landscape. Word has it “Don’t mess with the fat guy” is rule number one when working in media or advertising in Melbourne, Mitchell’s home city.
The flipside of the coin is that the operation will instantly transform emitch away from its core attraction: the internet. Mitchell & Partners is estimated to bring in sales of circa $900m, around six times as much as emitch’s current annual sales and thus create a billion dollar local advertising giant. But as a result of this the internet will play a minor role only in the merged corporate entity.
The latter will translate into lower valuation multiples as investors are unlikely prepared to pay up to thirty times and more forecast earnings per share for a business that will have relatively low margins and low growth prospects, especially when compared to the emitch prior to the announcement.
These and other considerations are shaping the short term outlook for emitch shares with investors and shareholders having to wait for more specific details about the proposed deal until January next year.
Two of the closest followers of emitch thus far, Select Equities analysts Mark Southwell-Keely and Danny Goldberg, believe the proposed deal is highly EPS accretive for emitch, but they also suggest the benefits are likely to be mitigated by a PE contraction as the business transforms into a completely different corporate animal. This transformation was again highlighted by management’s declared intention to further seek acquisition targets in the Asia Pacific region, as well as in stadium advertising and direct marketing.
While emitch’s online media gross margins have historically been north of 20%, Southwell-Keely and Goldberg estimate the combined group’s margins will be less than 6% in FY08.
Select Equities has upgraded its FY08 estimated Gross Billings, EBIT and net profit forecasts to $1,030.9m (+982%), $25.3m (+104%) and $17.6m (+79%) respectively. The analysts believe the transformation will lead to emitch being compared with companies such as Photon Group (PGA) and STW Communications (SGN). This now throws up an interesting dilemma as Photon is enjoying a PE multiple of circa 22 times prospective FY07 EPS. For STW the multiple is only 13.6. For FY08 the numbers are 19.6 for Photon and 12.5 for STW.
Taking Select Equities’ forecast of an emitch EPS of 7.4c in FY08 as a guide, this would take the future share price range between $1.45 and $0.925. One could argue emitch shares’ new multiple should be more in line with STW’s than with Photon’s due to the lesser leverage to the internet and to the fast growing take up of broadband access in Australia and New Zealand.
As at 12.39pm today, the shares had fallen 17.86%, or 25c, to $1.15.
No surprise then that Select Equities currently rates the stock Marketperform/LT Marketperform.
The other expert in the local market who has been a loyal and close follower of emitch is Peter Russell at Intersuisse. He agrees with all considerations above, but keeps a positive bias towards the stock because of the “Harold Mitchell factor”.
Reports Intersuisse: “We are not equivocal on the deal. We see it as a major leap forward for EMI and a more effective structure for the two businesses. We remain confident that Howard Mitchell will retain his strong drive to build a major online business, so evident in his recent press comments and the breakthrough multi-media deals he struck for Mitchell & Partners and EMI in August and October this year.”
Intersuisse’s forecasts are a little below Select Equities’ forecasting a net profit of $16.4m and EPS of 7.2c for FY08. The fact that the proposed deal will also involve a capital raising next year will contribute to short term price weakness, says Intersuisse.
However, the broker has decided to maintain its Buy recommendation advising investors to pile up in any share price weakness and shareholders to take up any rights opportunities.