Small Caps | Jan 28 2015
-At discount to online providers
-Asian growth potential
-Low cost options a risk
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By Eva Brocklehurst
With a new analyst covering iSentia ((ISD)), Moelis takes the opportunity to review the company’s prospects. The broker expects the company will grow strongly, with a strategy to increase customer spending domestically and raise customer penetration of Asian markets. The company’s media intelligence covers traditional, online and social media, providing data and analytics.
Yet the company trades at a discount to comparable Australian and international information services/online providers. While elements of the company’s service offering can be found in this sector, Moelis notes there are no true listed domestic comparables in the Australian market.
Moelis envisages multiple short to medium term catalysts, such as growth in its under-penetrated Asian segment where there is a trend to outsource media intelligence. The broker expects more customers will adopt a value-added service over time, driven by a need to adapt to more complex and faster communication campaigns. Moreover, the incremental margin on social media is higher than traditional media as there is no associated copyright fee for social media and data acquisition costs are lower.
The company appears sound to Moelis, offering investors exposure to a high margin, high growth market with a sticky product offering. Moelis rates the stock a Buy with a $3.03 target price, representing around a 15% total return over the next 12 months, with a 12% capital return and 2.0% dividend yield. The company has a competitive advantage in terms of its breadth of services. Moreover, it has long-term relationships with corporate and government clients. Client retention rates are high, with an average tenure of six years and no client represents more than 2.0% of sales.
The company leads the market in media monitoring and analytics in the Asia-Pacific region. Barriers to entry include sizeable up-front capital investment and access to content via copyright agreements. ISentia has dealt with some recent issues on that front, revealing at its AGM that paywall negotiations have been finalised. Macquarie noted late last year that online access should become available this month from major Australian publishers, which should accelerate the take up of online services.
Where are the company’s competitors? ISentia is nearly five times larger than its nearest competitor in the region, US-based Meltwater. Globally, UBM is the market leader with 15% market share and iSentia is ranked sixth with a 5.0% global market share.Â
What are the risks? Low-cost options offered by Google Alerts, Facebook and Twitter, which provide accessible means to monitor key words, provide some risk, if clients increasingly adopt these options. If the volume of print content continues to decline and iSentia is unable to offset this with new services then future earnings may be affected. Traditional geographical barriers and regional monopolies are diminishing. This ratchets up the competitive landscape in terms of opportunities for international players.
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