Small Caps | Sep 02 2014
-Strength from media move online
-Variety of revenue streams
-Asian potential
By Eva Brocklehurst
ISentia ((ISD)) is a market leader in an attractive industry. This is Macquarie's view of the recently-listed stock. The increased fragmentation of media channels and growing importance of online and social media are the main drivers of the company's growth. UBS believes iSentia is well placed to make accretive bolt-on acquisitions across the Asia Pacific (APAC) region.
So what does iSentia actually do? The company has become a media intelligence network, catering to both corporate and government clients. ISentia monitors mainstream, online and social media and provides analytics and database services. As of 2013, iSentia was the largest media monitor in APAC, with 90% of the Australasian market share and 28% share in Asia.
Opportunities exist for revenue growth and the business is very scalable. The valuation premium can expand further as management delivers on expectations as a listed entity. The company has suggested paywall discussions with publishers are encouraging. The other spoke in the company's growth wheel is acquisitions, in Asia. Based on Macquarie's forecasts there is $20m in available cash to use for acquisitions.
The first eight weeks of FY15 are tracking as expected and UBS lifted forecasts after the results by 3-5% on the back of better cash generation and lower net interest. The transition of the company's SaaS platform is on track too. Brokers separate revenue sources into SaaS and VAS. SaaS is Software as a Service, a way of delivering applications over the internet. VAS is Value Added Services, massaging content to provide extra benefits to subscribers.
Maiden FY14 earnings were ahead of prospectus forecasts and Macquarie considers the beat was high quality, driven by revenue. Subscription penetration was slightly below forecasts but this has no impact on revenue. Still, Macquarie believes it is crucial that iSentia transfers as many clients as possible relatively quickly to a subscription model, largely as a defence against further changes in print content volumes. Connect and Newsboost – contact/database products – penetration was also below expectations. Management is confident of an improvement in this area, following updated IT functions.
Australasian growth was better than forecast, driven in the company's view by higher uptake of social media product. Asian revenues were in line with prospectus expectations. UBS expects the company will leverage its advantages in Asia with the multilingual MediaPortal Asia launch later this year. UBS factors in a 60% dividend pay-out ratio and forecasts imply increasing cash accumulation. The company did not pay a dividend in FY14, as expected.
UBS retains a Buy rating, noting the four pillars of the company's revenue stream are intact and being enhanced. One pillar emanates from a stabllisation of traditional media, which moving to subscription pricing and decreasing its reliance on volume-based print. VAS is being lifted by the upgrading of products online and on social media, with further scope to increase penetration. The third pillar is the leverage to growth in Asian media monitoring while the fourth is a highly scalable cost base which allows for accretive bolt-on acquisitions. The company is looking for further accretive opportunities in Asia.
Macquarie considers the business requires very little additional investment in terms of working capital and capex. The company has a strong market position in Australia and can increase prices in conjunction with technology upgrades. It has a low effective tax rate as it is eligible for R&D credits. The broker expects that once the company develops a listed track record, it should be able to increase its premium to the emerging leaders industrials, given an attractive growth outlook. Macquarie forecasts earnings growth of 15-17% in FY16-17.
The Asia-Pacific media intelligence industry is small in a global context, relative to the Americas and Europe, but has experienced stronger growth than the other two regions. Drivers of growth are the outsourcing from organizations of media intelligence and growth in the scope of usage.
See also, iSentia Has Potential To Impress on July 2 2014.
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