We may be wired differently to the rest, but when we see companies fall by 20% or more in a day out interest is automatically piqued. Whether it is the need to search for a discount, or something contrarian in our blood, we tend to see value in these ‘fallen angels’. And with interest rates at an all-time low, markets and most importantly individual companies trading at stretched valuations, there seem to be more and more of these every month. This month we take a look at media monitoring battler, iSentia, whose share price has fallen 70% in the last 12 months and closer to 90% over the last few years.
Who is iSentia?
iSentia operates in an extremely competitive sector, being media-monitoring, advertising and brand management. The sector is that cut throat that iSentia instigating legal proceedings against one of their main competitors in 2018 after learning they were piggy packing off their own site without paying for the service.
iSentia was established in 1982 and is the original ‘newspaper clipping’ business in Australia. In its beginnings the company would physically collate important information about various companies from a variety of sources and deliver this to them on a regular basis to guide marketing, advertising and business decisions. To this day, the business is essentially the same, with the main difference being that the content must be delivered in real-time.
In 2019, iSentia offers a software-as-a-service (SaaS) platform that is easily scaleable and able to collate content from 5,500 mainstream media outlets, 55,500 online news sources and 3.4m user generated sources from around the world. The business is capital-lite in that new clients can easily be added to the platform without additional expenditure, adding quickly to cash flow and boosting profits. The company has a strong competitive position, with the most extensive database of sources and years preparing value added services that it hopes to upsell to clients.
After listing in 2014 valued at some $700m, iSentia is today worth just $50m; hence the recent talk of the business being taken private once again. It has been a swift fall from grace that boils down to a few things, but primarily the disastrous acquisition of King Content for $48m and an inability of management to change the direction of their business as the needs of their customers and the markets changed.
iSentia was a willing acquirer of many business before and after its eventual listing with the purchase of King Content, a content marketing agency, meant to be the one that took it to another level. The company was focused on producing content of questionable quality for businesses in Australia and helping them market this in order to attract new customers. By all reports the company was a leader in its industry but relied upon a heavy sales culture to build revenue and find new customers.
It seems the greater issue with iSentia was its inability to adjust to the entrance of a key competitor in Meltwater and change the way it did business. The industry was quickly moving to a more templated subscription approach to media monitoring and not one of custom, tailored reports that had for so long driven iSentia’s dominant market position. It appears to have simply taken too long for management to adjust to the new normal and combined with King Content resulted in four successive profit downgrades in 2018. The company was recently removed from the All Ordinaries such has been the level of poor performance.
The companies financials aren’t in bad shape given the share price movement. Most importantly the group only carries $41.1m in debt, which it has extended and continues to repay with positive cash flow. The covenants remain well out of sight, at 3x leverage and interest cover, with the company well ahead at 1.5x and 12.3x respectively. Recent guidance for revenue of $120m in FY 19 appears on track after the company delivered $62.2m in revenue for the first half, a fall of 7.2% on the previous year. The issue, however, was the NPAT loss of $22.1m resulting from the $22.3m writedown of goodwill on the King Content and other acquisitions. The company remains heavily reliant on the Australian market ($44.7m revenue) with the Asian market the new focus of management ($17.5m).
What if we told you there was a company with 90% market share in its core domestic market, had the most extensive data base of news sources, serviced 5,000 clients and operated in a sector that is now considered by most business as non-discretionary spending. Sounds good right?
We think it may have some value but is not for the faint hearted. Media monitoring is incredibly important for businesses both small and large, as it is one of the only ways to collate an extensive amount of data and news without employing a dedicated staff member to do so. iSentia allows companies to manager their brand, understand what people are thinking about them and to deploy specifically targeted advertising campaigns that increase the return on their marketing investment. Yet the business has moved from bad to worse.
After announcing a new CEO in August 2018 the company appears to be on the improve, however, the full year results will tell us the real story. According to recent reports, the group is more sales and quality focused than before and better prepared for the continued cost cutting within the industry. At 90% market share of a $100m market in Australia, the company is obviously good at what they do, however, there real opportunity is in Asia, where they are still struggling to break in to the $400m revenue market. The new CEO has doubled down on their Asian expansion as well as refocusing and simplifying their business and re-engineering legacy systems that had been costing clients and staff time and money.
They continue to move into the modern age with the graphic below showing where iSentia have been stuck and where they need to be. Advertising and brand management now needs to be proactive, not reactive, and social media is as if not more important than traditional media sources.
The opportunities for iSentia appear to be in two areas, the aforementioned expansion and investment in Asia, as well as the cost cutting and innovation within their platform. They have been focused on automating key parts of their service delivery including daily updates and other templated reports but need to justify the spend in comparison to lower cost tools like Google.
At this point, just 25% of their clients utilise Value Added Services, something that needs to be improved. Management are focused on tripling the number of products they offer and servicing clients better to ensure their 79% recurring revenue continues. The company is a high risk one, but an interesting deep value opportunity in the small cap space. They are five times larger than their main competitor, have an excellent system and 28% of revenue in their growing Asian market. One for the watchlist.