Small Caps | Jul 02 2014
-Organic, acquisition upside
-High barriers to entry
-Strong industry growth
By Eva Brocklehurst
iSentia ((ISD)), formerly Media Monitors, listed on ASX in June and the share price has performed strongly over the month. The attraction for brokers is in a company with an entrenched position in Australasia as a media intelligence provider.
Moelis initiates coverage on iSentia with a Buy rating and $2.80 target price, despite the stock currently trading at 15% premium to the $2.04 IPO price, confident that the company has value on offer in Asia Pacific. Around 80% of revenue is derived in Australasia but Asia is growing strongly. The company has a market share of 28% and this is five times greater than its nearest competitor, US-based Meltwater. Most participants address only a single market segment while iSentia operates in eight countries, with a multi-segment and multi-lingual offering.
The company has revenue sharing arrangements with almost all broadcasters and publishers as well as social media players and a wide client reach that includes more than 92% of the top 100 global brands. The company has the ability to process 100 stories per second every day of the year.
Moelis expects earnings to rise to $50.2m by 2016. The compound annual growth rate between 2013 and 2015 is estimated around 34%, supported by geographic and product expansion, increasing take up of social media, and scale benefits. The company is expected to offer a dividend yield of 2.9% in 2015, rising to 3.4% by 2016. Moelis thinks an FY15 price/earnings ratio of 17 times, based on the prospectus forecasts, signals an attractive investment opportunity given the robust growth profile and high qualitative features. The broker considers earnings risk is to the upside, both organically and via acquisitions, as the prospectus numbers assume no price increases in Asia. Bolt-on acquisition opportunities should be facilitated by balance sheet capacity. Net debt is expected to reduce over the forecast period in the absence of acquisitions, given the strong conversion of operating cash flow.
The broker considers the primary risk is competitive behaviour, although iSentia's superior offering remains a barrier. Declines in volume from traditional mainstream print media may result in lower demand for some products, and was one reason behind a 4% decline in revenue in Australasia in FY13. Moelis thinks this will be more than offset by increased growth in online and internet/social media monitoring.
The company has a market software service, providing clients with media intelligence. Moelis estimates this is a US$340m industry which is growing at 14% per annum. Barriers to entry are high, in terms of scale, client retention and proprietary technology. The company has built a position that is hard to replicate, based on aggregating content, search technology and client relationships. Moelis believes the company is very well positioned against the newer competitors such as Google.
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