A guiding hand for advertisers

Ebiquity 12 April 2019 Outlook
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Ebiquity

A guiding hand for advertisers

Final results

Media

12 April 2019

Price

41.5p

Market cap

£31m

Net debt (£m) as at 31 December 2018

27.5

Shares in issue

75.1m

Free float

99%

Code

EBQ

Primary exchange

AIM

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

(13.5)

(38.1)

(37.6)

Rel (local)

(16.2)

(42.9)

(40.2)

52-week high/low

75.0p

38.0p

Business description

Ebiquity is a leading, tech-enabled, independent marketing and media consultancy. It aims to help the world's biggest brands leverage data and analytics to drive greater transparency in the marketing ecosystem, to create more impactful customer experiences and to deliver greater returns on marketing investment.

Next events

H1 trading update

July 2019

Interims

September 2019

Analysts

Fiona Orford-Williams

+44 (0)20 3077 5739

Russell Pointon

+44 (0)20 3077 5700

Ebiquity is a research client of Edison Investment Research Limited

With the disposal of Ad Intel completed, Ebiquity is now focused on building its business as an independent adviser to global advertisers on measuring and optimising their media spend. The recently strengthened management team aims to improve margins from FY18 levels, but the need to adjust overheads to suit the size of the continuing operations will weigh on current year profitability. The unbundling should, however, set up the group for stronger progress thereafter. The balance sheet is significantly stronger, yet the rating is not recognising the improved investment case.

Year end

Revenue (£m)

PBT*
(£m)

EPS*
(p)

DPS
(p)

P/E
(x)

Yield
(%)

12/17

64.2

7.9

6.2

0.71

6.7

1.7

12/18

69.4

5.2

3.5

0.71

11.9

1.7

12/19e

75.0

5.4

4.1

0.85

10.1

2.0

12/20e

81.2

6.5

5.0

0.95

8.3

2.3

Note: *PBT and EPS (fully diluted) are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments. These figures represent continuing business only.

Market complexity a bonus

Ebiquity’s business model centres on analysing advertisers' media and marketing spend data to measure marketing performance, and to help brand owners improve the returns on investment and business impact from their spend. Ebiquity is also increasingly advising marketers on media management, including the selection of media agency partners and the use of adtech. Because of its independent positioning, the group has access to its clients’ data, not available to others, and has developed the infrastructure and toolset to process data quickly and efficiently. In a growing market where complexity and speed are business issues, Ebiquity is well-placed to be a trusted expert advisor to CMOs.

Rightsizing the overhead

The continuing business, comprising the Media and Analytics and Tech practices, is now free of the distraction of the disposal and can focus on building up the client base and increasing the average revenue generated. The strengthened balance sheet also provides it with greater financial freedom. In the short term, the group’s profitability will still be constrained by the need to carry over some of the cost associated with the disposed business during the transition and the need to carry an element of fixed cost over a smaller enterprise. We expect the profitability to start to recover more strongly from FY20e.

Valuation: Deeply discounted

Ebiquity trades at a considerable discount to other smaller marketing services groups, albeit that they have markedly different business models. Parity on EV/EBITDA across FY1 and FY2 suggests a share price of 81.3p, nearly double the current price. A DCF calculation based on a 10% EBITDA margin (which would be a very disappointing scenario) and factoring in no revenue growth at all (highly unlikely) suggests a share price of 75.4p. Some discount may be appropriate to reflect execution risk.

Investment case

Strong position in the industry

Ebiquity is well placed to assist advertisers in the rapidly changing and complex media environment where trust in media partners has been compromised. Its independence distinguishes it from the consultancies that have moved into the arena, but which also offer some of the services on which they advise. Ebiquity’s brand is highly respected within the industry, with its authoritative reports and keynote speeches. The group works with 70 out of the world’s top 100 leading brands, across a broad variety of sectors, including FMCG, automotive, telco, retail, finance and healthcare. It also partners leading advertiser associations globally, including the US Association of National Advertisers (ANA) and World Federation of Advertisers (WFA). It was contracted by ANA to write a landmark report and recommendations on media transparency in 2016.

Focused on core strengths

The last 18 months or so have been difficult for the group as it sought to reconfigure to coalesce around its core strengths. The disposal of the Ad Intel business, which had limited scalability, was a positive move, despite reducing the size of the group (Ad Intel represented 23% of whole group FY18 revenues and 13% of operating profit). However, the referral to the CMA led to a lengthy delay and damaging uncertainty, and absorbed a great deal of management time and resource. The completion of the disposal in January 2019 draws a line and allows us to offer an appraisal of the health and prospects of Ebiquity in its new configuration.

Stronger management team

The management team has been strengthened by the recruitment of Alan Newman in January 2019 as CFO and COO. He was lately CFO of YouGov, until his retirement last year, and brings considerable experience in running a global business driven by data. We expect him to be standardising and tightening reporting procedures across the various offices, which should improve the group’s visibility and enable any issues arising at local level to be recognised and acted on where necessary. Increasing Ebiquity’s process efficiency through greater automation and creation of a shared delivery centre should help to reduce costs and further improve the service delivered to clients, including by easing the collection of data from media agencies.

Growth goals set

Five-year goals for the continuing business were set up in 2017 across five areas: people, product, process, profile and performance. The last of these, performance, is to deliver sustainable, double-digit revenue growth at sustainable operating margins. Our short-term forecasts are drawn more conservatively than this, with revenue growth of high-single digits, similar to the 8% revenue growth delivered by the continuing businesses in FY18. The operating margin (continuing business, underlying basis) fell in FY18 from 14% to 9%, in part due to planned investment not producing revenue growth to the extent originally anticipated. During FY19, Ebiquity will be carrying some continuing costs associated with the disposed business (property and people), but we model the operating margin starting to recover from FY20e.

Strengthened balance sheet

The disposal has considerably strengthened the balance sheet. End FY18 net debt stood at £27.5m, but the £20.0m proceeds from Ad Intel were received on completion in the first week of January. This gives the group the scope to cover the duplicated costs referred to above and to make appropriate capital investment to support growth in the continuing business. We forecast net debt at end FY19 of £7.2m.

Company description: Marketing and media data

Ebiquity is an independent media and marketing consultancy. Specialising in analytics, its services and products help brands and advertisers maximise the return on their media and marketing budgets, either by reducing costs, or increasing sales. As the group does not buy or sell media, Ebiquity is able to provide impartial advice to optimise return on media investment by channel, industry, brand and country. It conducts no media buying or trading on its own account or for its clients.

Ebiquity was founded in 1997 and, over the decade to 2017, made a series of significant acquisitions, which established it with a global media presence. It provides services to nearly 700 clients, including 70 of the world’s 100 largest advertisers. Its headquarters are in London, and (post Ad Intel disposal) it has c 570 employees across 18 offices globally. In FY18, approximately 29% of revenues were generated in the UK, 20% from North America, 37% from the rest of Europe and 14% from the rest of the world. The group has access to significant quantities of relevant second- and third-party data through its relationships with advertisers and agencies, which management describe as the world’s largest independent pool of media performance and cost data. This represents a notable barrier to entry – one that would be difficult to replicate by the major consultants that compete both with Ebiquity and with its clients.

With the disposal of the Ad Intel operation, Ebiquity is now in a position to focus on its core competency: working with advertisers to optimise their media spend and performance. The disposal to Nielsen was for £26.0m, with the net proceeds of £20.0m received on 2 January 2019. The group is now smaller (in revenue terms), but also simpler and more focused. The FY18 accounts have been presented with Ad Intel as a discontinued business and with the assets separately identified on the balance sheet. The cash flow, however, represents that of the whole group as it stood for the year. The Ad Intel business was primarily a product business, whereas the media offering is heavily weighted toward consultancy.

Media consultancy, analytics, adtech and martech

Exhibit 1: Continuing business revenue split

Exhibit 2: Continuing business op profit split

Source: Ebiquity accounts

Source: Ebiquity accounts

Exhibit 1: Continuing business revenue split

Source: Ebiquity accounts

Exhibit 2: Continuing business op profit split

Source: Ebiquity accounts

The group is now organised in two segments, as shown above. In earlier reporting periods, these segments were known as Media Value Measurement (MVM) and Marketing Performance Optimisation (MPO). The Ad Intel business was reported as Media Intelligence (MI). The new reporting segments offer far greater clarity.

Media Segment

The aim of the Media segment is to help clients to “achieve higher media performance through best-in-class media management and transparency”.

Media management typically encompasses media agency selection and management of those relationships. It also covers setting and monitoring the remuneration model. As well as external relationships, Ebiquity’s media management service can evaluate, plan and manage the in-housing of media buying where this suits the client’s business model. Ebiquity has been focusing on standardising and broadening out the service it offers clients, with new specialists appointed in the UK and the US.

The second element is a media performance service. This generally includes media spend benchmarking, media spend tracking and/or digital media assessment: assessing and optimising media buying performance with one global methodology across key marketing channels.

The third area of service offering is in contract compliance, centred on FirmDecisions, a leading global consultancy in marketing financial transparency, founded 19 years ago and bought by Ebiquity in 2012. It covers marketing and media agencies, incorporating creative, media, digital, events, point of sale, or direct marketing below-the-line agencies. The contract compliance practice has been growing strongly and expanding this internationally has been a key priority.

In combination with the consultancy business offering, Ebiquity has also developed tools in the Media practice:

Ebiquity Connect, which collects and validates data on spend from all major media agencies to provide an anonymised and standardised data resource against which to benchmark and so making it easier for the agencies;

Ebiquity Select, a tool that enables automated comparison of pricing structures between agencies pitching for client business, speeding and simplifying the process; and

Ebiquity Sync, facilitating globally standardised digital media benchmarking in the same way that its tools have been used in traditional media.

Analytics & Tech

These two practices made up the balancing 22% of FY18 continuing revenue of the Ebiquity service offering. The advanced analytics capability covers modelling, forecasting and predictive analytics. The adtech service draws together evaluation to improve the selection of partners, or conduct feasibility studies on in-housing media buying for clients. The martech comprises data analytics and optimisation and areas such as UX (user experience for customers visiting websites).

There are particular opportunities in multi-market analytics contracts, where the group’s broad geographic spread is a distinct advantage over localised partners. The group has also added an adtech advisory service, initially in the UK, which can cover off areas such as appraising the potential returns for clients from in-housing programmatic media buying.

Knitting the services together to support the CMO

The business model centres on taking media and marketing data from advertisers and from markets, analysing it and using the outputs to drive greater marketing returns and business impact. Because of its independent positioning, the group has access to significant data sets not available to others and has developed the infrastructure and toolset to process the data quickly and efficiently.

The graphic below, based on the company’s own version, demonstrates how the overall group service offering can be pulled together to support a client’s CMO in their core activities in order to make best use of their media involvement.

Exhibit 3: Ebiquity service map

Source: Ebiquity, Edison Investment Research

People, product, process, profile, performance

We expect the reconfigured management team (see below) to be defining and refining the corporate strategy over the next weeks and months. The previous Growth Acceleration Plan was centred around the five ‘P’s in this section heading, which retain their relevance:

People: attracting, retaining and developing high-calibre talent from the media, consultancy, analytics and data science communities.

Product: launching proprietary products and services that harness data and insights and enable the group to be a trusted advisor to its clients. Connect, Select and Sync, mentioned above, would be relevant examples of this.

Process: shaping the organisation and its processes to support broader and deeper client relationships, locally and globally, including the centralised Scaled Delivery Centre, based in Madrid, which supplies data to group offices globally.

Profile: raising the brand’s profile and broadening the perception of its expertise to support the growth plans. Ebiquity is often a keynote speaker at media and marketing conferences, publishes regular papers on developments and issues within the media industry, and works closely with the main industry bodies.

Performance: delivering sustainable, double-digit growth at sustainable operating margins.

The ethos is one of organic growth, although bolt-on acquisitions that would bring in a particular skill- or tool-set, especially in data analytics, or those that might accelerate the growth of the group especially in the key US market, could be attractive. This is always with the proviso that the pricing would need to be sensible.

Management with broad, relevant experience

Ebiquity’s CEO is Michael Karg, who joined the group in January 2016. He was previously CEO international of Razorfish, a digital agency acquired by Publicis in 2009, advising clients on their marketing and digital strategies. In January 2019, a new CFO/COO was appointed: Alan Newman, recently retired CFO of 10 years tenure at YouGov. During that time, he helped YouGov to grow its revenues and profits significantly.

Rob Woodward was appointed chairman in May 2018, having joined the board a couple of months earlier. Rob was CEO of STV for 11 years, implementing that company’s digital transformation.

Market need for independent voice

Large, complex and growing market

A lot of the most useful commentary on the state of the advertising market comes from Ebiquity itself. Its latest reports are available at www.ebiquity.com/news-insights/

Global ad spend forecasts have been pulled back over the last year, reflecting concerns over the Chinese economy and the prospect of escalating trade wars, but are still showing reasonably healthy growth.

Exhibit 4: Global advertising forecasts

Forecast revenue growth for year

2016

2017

2018

2019

Date of

forecast

Aug-16

4.3%

Dec-16

4.4%

Dec-17

3.9%

3.1%

4.3%

Jun-18

3.5%

4.5%

3.9%

Dec-18

4.3%

3.6%

Source: GroupM

2019 is expected to be the year when digital ad spending in the US is greater in value than traditional advertising spending in 2019, according to eMarketer and others. The growth is heavily weighted towards Google and Facebook, with a stronger showing still from Amazon as it expands its remit into new consumer and B2B arenas. eMarketer suggests that digital advertising will exceed two-thirds of total US media spending by 2023. Other territories tend to follow the pattern set by the US, the largest global market.

As digital has gained traction, negotiating the advertising ecosystem has become increasingly complex, hampered by the lack of transparency.

A recent widely-quoted report released by Winmo stated that the average tenure of a chief marketing officer was around three-and-a-half years, roughly half the average tenure of a CEO. This matters as the change in CMO will generally prompt an agency review within 18 months. There is therefore a constant source of potential business for Ebiquity as each newly installed CMO reviews their existing supplier relationships.

Transparency

The breakdown of trust between clients and media agencies built over a number of years, fuelled by a lack of transparency over issues such as rebates, and came to the fore in 2015. In 2016, the Association of National Advertisers (ANA) in the US commissioned K2 Intelligence and Ebiquity’s FirmDecisions to write an authoritative report on the issue, with recommendations on how to restore trust and understanding into the relationship. This has only partly been successful. A new (January 2019) ANA study found that only 29% of its 400-plus member marketers surveyed ranked the current level of trust between client-side marketers and advertising agencies as “high.”

Brand safety

Brands finding that their adverts have been served up alongside illegal or offensive content has led to a crisis of confidence with platforms such as YouTube, leading some to withdraw from the platforms completely until more effective controls can be put in place.

In-housing

Some high-profile advertisers have responded to the trust issues, and in response to pricing, by bringing their media buying in-house. Some are also bringing in other aspects of their advertising and marketing back from external agencies.

With constant pressure on advertising and marketing budgets and the increasing requirement for projects to demonstrate the effectiveness in terms of return on investment, as well as some of the issues briefly outlined here, there is a clear role for an independent and authoritative advisor to the CMO – a role that Ebiquity is well placed to fulfil.

Sensitivities

We consider Ebiquity’s growth strategy, which builds on its existing strong foundations, as a relatively low-risk approach to accelerating and securing its longer-term growth profile. Nevertheless, any change of direction carries risk. Investors should also consider the following:

Timescale for de-duplicating costs: Under the disposal contract, there are some costs that Ebiquity must continue to bear to smooth the transition. Over and above that though will be the issue of sharing the central overhead across a smaller enterprise. Rightsizing the overhead, while allowing for the potential for growth, may lead to short-term inefficiencies and the timing of realigning the cost base will have an impact on the financial return across FY19 and possibly FY20.

Incentives under review: Management will most likely set out its revised strategic goals later this year. The KPIs set out within them will be better able to inform our medium-term financial modelling.

Competition: While Ebiquity’s large media and related cost databases provide a significant barrier to entry, new competitors could emerge if they are willing and able to finance such an undertaking, especially as the media industry is dominated by very large global companies, such as Nielson and Accenture. Ebiquity’s independence from agencies, media owners and intermediaries is key in this respect.

Foreign currency exposure: 70% of revenues are non-sterling denominated, with the euro and the US dollar the most significant exposures. Fluctuations in sterling may affect our forecasts. As outlined in the Report & Accounts, a 10% strengthening of sterling against the US dollar in FY18 would have had a 3% impact on underlying pre-tax profit; 6% for the euro; and 3% for the Australian dollar.

Level of advertising and media spend: around half of revenues are from renewable contracts. With a historically high renewal rate, this provides a good degree of forward visibility. However, these contracts are often based on the value of media spend being monitored, hence a significant change in levels of advertising and media spend could affect revenue.

People business: Ebiquity has c 570 employees across its 18 offices worldwide. Attracting and maintaining highly skilled employees, with the necessary data and technology skills, is becoming increasingly challenging. This may affect the pace and cost of expansion.

Overseas expansion: The long-term potential of the group lies in building out its offering overseas; in the US, which is the largest global advertising market and in Asia. The group’s top management has many years’ experience of managing global operations, which should provide comfort in this regard. However, as companies become more diverse, execution risk can increase.

Technology enabled: Unlike most other consulting industries, media and marketing consultants rely on technology to support their service offerings. Maintaining state-of-the-art systems and processes to support their consultants’ strategic advisory and analytics services is becoming ever more crucial as companies seek to harness wider datasets to understand and predict their customers’ behaviour. Investment requirements may vary from the current plan.

Data security: Ebiquity handles large and complex data sets with great commercial sensitivity. Data security is therefore a meaningful reputational risk.

Economic cyclicality and Brexit: We expect Ebiquity to be fairly cushioned from the current uncertainty in the UK economy. Roughly half of revenues are recurring and as its services are geared to helping companies maximise the efficiency of their ad spend, demand may well increase in times of austerity.

M&A: Given the degree of upheaval in the recent past with the Ad Intel disposal, we regard it as unlikely that there will be significant M&A activity in the short to medium term. However, the balance sheet has been considerably strengthened and should opportunities arise to strengthen or complement areas of the business, particularly in data/analytics, we believe acquisitions would be considered.

Valuation

With the potential revision of the group KPIs later in the year, our forecasts – and the market appraisal of the group’s prospects – are based on the continuing businesses and their potential returns. Clarification of additional investment costs and timing of de-duplication will obviously affect the valuation that the market is willing to afford to the group in the shorter term.

Ebiquity is primarily a consulting business and therefore has limited comparability on day-to-day activities with the smaller quoted marketing services companies. Nevertheless, there is no better, obvious peer set to use for a contextual comparison. S4, included below, is a start-up with a highly acquisitive strategy, so its current year multiples are consequently inflated.

Exhibit 5: Peer group valuations

Name

Price (p)

Market cap (m)

Free float (%)

Ytd perf (%)

EBITDA margin 1FY (%)

EBIT margin 1FY (%)

P/E 1FY (x)

P/E 2FY (x)

EV/ sales 1FY (x)

EV/ sales 2FY (x)

EV/ EBITDA 1FY (x)

EV/ EBITDA 2FY (x)

Div yield 1FY (x)

FCF yield 1FY (%)

Cello Health

128.0

134

77.9

16.4

8.4

7.4

14.2

13.5

0.8

0.7

8.5

8.2

3.2

4.6

Huntsworth

82.0

286

89.3

-20.3

17.5

16.0

10.0

9.1

1.5

1.4

8.4

7.8

3.1

9.2

Jaywing

17.5

16

51.0

-3.9

7.8

12.5

6.7

0.6

0.7

7.4

6.6

0.0

Kin + Carta

96.4

150

78.1

-8.4

12.9

11.1

10.5

8.7

1.0

0.9

7.7

6.8

2.0

3.7

M&C Saatchi

378.0

335

78.7

34.0

13.6

12.2

17.0

16.1

1.3

1.3

9.2

8.6

3.2

5.7

Mission Marketing Group

71.5

60

49.8

43.0

15.0

12.7

8.3

7.8

0.9

0.8

5.8

5.6

2.8

7.8

Next Fifteen

540.0

452

89.7

11.0

18.7

16.1

15.0

13.7

1.9

1.8

9.7

8.8

1.6

6.1

S4 Capital

143.0

515

100.0

20.0

18.5

24.8

17.8

3.1

2.6

17.0

12.6

0.0

Average

14.0

12.6

14.0

11.7

1.4

1.3

9.2

8.1

2.0

6.2

Ebiquity

41.5

31

95.6

-36.2

10.0

10.4

10.2

8.3

0.5

0.5

5.1

4.6

2.0

5.8

Discount

27%

29%

63%

63%

44%

43%

-3%

7%

Source: Refinitiv, Edison Investment Research. Note: Prices as at 11 April 2019.

To calculate the EV for Ebiquity in this context, we have used the net debt figure including the capital inflow from the Ad Intel disposal a few days post year-end, which brought in just under £20m. Ebiquity is clearly valued at a discount to these other UK quoted small- to mid-sized marketing services groups of around 28% on a P/E basis and just over 44% on EV/EBITDA, EV/EBIT. The EV/sales metric is a poor tool in this context due to the varying definitions and nature of the revenues.

Parity on a P/E basis would imply a share price of 57.6p (averaged across the two forecast years).

Parity on EV/EBITDA across FY1 and FY2 suggests a share price of 81.3p.

DCF indicates higher valuation ranges

Exhibit 6: DCF under various growth rate, EBITDA margin assumptions (p/share)

Revenue growth FY22–27e

0.0%

2.5%

5.0%

7.5%

10.0%

Implied growth rate

EBITDA margin

15.0%

125.9

137.9

150.7

164.6

179.5

-27.4%

14.0%

115.8

126.8

138.6

151.3

165.0

-25.5%

13.0%

105.7

115.7

126.4

138.0

150.5

-23.4%

12.0%

95.6

104.6

114.3

124.7

135.9

-21.1%

11.0%

85.5

93.5

102.1

111.4

121.4

-18.4%

10.0%

75.4

82.4

90.0

98.1

106.9

-15.3%

9.0%

65.2

71.3

77.8

84.8

92.3

-11.7%

8.0%

55.1

60.2

65.6

71.5

77.8

-7.3%

Implied margin

6.8%

6.4%

6.1%

5.8%

5.6%

Source: Edison Investment Research

A DCF calculation self-evidently looks ahead further, so would be expected to – and does – return higher indicated price ranges. Our modelling shows EBITDA margin returning to 10% for FY19 and FY20, although we would point out that this is based on potentially conservative assumptions about top line growth and overhead recovery. Even if this were to be ‘peak’ medium-term margin and there were to be no revenue growth at all, which would be a very disappointing scenario, our DCF (built on a WACC of 8.5% and a terminal growth rate of 2%) suggests a share price of 75.4p.

Financials

Within the reported numbers, the results from the discontinued business are shown below the line on the income statement and as assets and liabilities held for sale on the face of the balance sheet. The formal cash flow statement, though, is not fully separated out due to the extent of the previous integration at an operational level. Summary cash flow split out between continuing and discontinued was given in the results presentation and is shown below. We have presented our financial summary (Exhibit 11) in exactly the same format as the company.

In FY18, Ad Intel (and the smaller Reputation business, also sold in the year) generated revenues of £20.3m and operating profit of £1.0m. Revenues were 13% below prior year, but there was a more marked decline in profitability, with the operating margin (before highlighted items) retrenching from 13% to 5%.

We withdrew our forecasts last November due to the lack of clarity over the timing of the disposal and the financial implications of the delay. The scale of the impact is considerable; including discontinued business, FY18 revenue increased by 3% to £89.6m over prior year, but underlying operating profit retrenched from £12.0m to £7.3m, a reduction of 39%. £2.0m of the discrepancy is down to the deterioration in the performance of the Ad Intel business as it suffered from the uncertainty resulting from the delay to the transaction stemming from the CMA referral, with both clients and employees affected.

The scale of the disposal makes comparisons with earlier forecasts of limited relevance. The table below therefore shows the results from the continuing business. The measure of operating profit used here is in line with the company’s definition, as being before highlighted items (share-based payments, amortisation of purchased intangibles and non-recurring items).

Exhibit 7: Divisional progression for continuing business

FY17

% change

FY18

% change

FY19e

% change

FY20e

% change

Revenue

Media

51,482

9.2%

54,179

5.2%

58,513

8.0%

63,213

8.0%

Analytics

12,746

-2.3%

15,189

19.2%

16,487

8.5%

17,987

9.1%

64,228

6.7%

69,368

8.0%

75,000

8.1%

81,200

8.3%

Operating profit

Media

14,037

15.8%

12,073

-14.0%

13,400

11.0%

14,223

6.1%

Analytics

1,646

-56.0%

1,401

-14.9%

1,300

-7.2%

1,799

38.4%

15,683

-1.1%

13,473

-14.1%

14,700

9.1%

16,022

9.0%

Central costs

(6,691)

-1.7%

(7,131)

6.6%

(8,600)

20.6%

(9,030)

5.0%

8,992

6,342

-29.5%

6,100

-3.8%

6,992

14.6%

Divisional operating margin

Media

27.3%

22.3%

22.9%

22.5%

Analytics

12.9%

9.2%

7.9%

10.0%

Group operating margin

post central costs

14.0%

9.1%

8.1%

8.6%

Source: Ebiquity accounts, Edison Investment Research

This breakdown clearly shows the extent of the disruption from the sale process on the continuing business; the impact on Ad Intel itself is no longer relevant to Ebiquity, as the sale was completed at the price originally struck with Nielsen, despite the delay.

The 8.0% growth delivered for FY18 is inevitably a blend of divergent underlying performances, with the Media segment’s contract compliance operations, FirmDecisions, ahead by 12%. Geographically there was also variance, partly explained by the relative maturity of the business units, with the UK (29% of group) up by 5%, while the US (20% of group revenue) grew by 26%.

Given the underlying markets, the Analytics and Tech operations should be capable of greater growth than we have modelled, particularly as they are more suitable for productisation and therefore more potentially scalable. Double-digit revenue growth should be achievable. The Media operations are more mature, with growth likely to come from geographic expansion and through increasing revenue per client through selling additional products and services.

Achieving sufficient scale in the US market with the right products and services would make the difference between delivering respectable growth and strong growth.

Investment impact on earnings

Operating margins clearly retrenched in FY18. Gross margin on continuing business slipped from 49.2% to 45.8% with higher external partner and production costs and direct partner staff costs. We have assumed some further slippage here to 44.0%, although this may prove overly cautious.

Exhibit 8: FY18 income statement

Before highlighted items

Highlighted items

Total

Revenue

69,368

69,368

Cost of sales

(37,600)

(37,600)

Gross profit

31,768

 

31,768

Administrative expenses

(25,426)

(7,695)

(33,121)

Operating profit / (loss)

6,342

(7,695)

(1,353)

Finance income

25

25

Finance expenses

(1,176)

(1,176)

Net finance costs

(1,151)

 

(1,151)

Profit / (loss) before tax form continuing operations

5,191

(7,695)

(2,504)

Taxation (charge) / credit – continuing operations

(1,778)

(207)

(1,985)

Profit / (loss) for the year – continuing operations

3,413

(7,902)

(4,489)

Net profit / (loss) from discontinued operations

644

(1,489)

(845)

(Loss) / profit for the year

4,057

(9,391)

(5,334)

Source: Ebiquity accounts. Note: Highlighted items broken out below.

At the operating level, financial performance was affected by increased investment in people and systems across the year which was then not recouped by sufficient top-line progress. The destabilising influence of the extended sale process for Ad Intel on the rest of the group was likely also to have been a factor. The investment should not be regarded as a negative, though. Some was directed towards improving efficiency; the rollout of new tools to increase the amount of automation and standardisation, as well as improving data security, together with a new shared service centre in Spain. The balance of investment (not quantified) was in people/talent within contract compliance and advanced analytics, plus a new UK Tech advisory team, as well as funding directed at raising the group’s profile and brand prominence and putting in a team of client managers to drive revenues in the largest trading partners.

For FY19, the group will need to carry some of the contractual costs relating to servicing the Ad Intel business until the support element is fully extracted and there are then also the elements of spreading the central costs over a smaller base. There may be some reconfiguration of the allocation of cost between the divisions and the centre to enable a more accurate picture to be presented. Our modelling shows the operating leverage starting to kick in from FY20e as the top line progresses, leading to a steady recovery in margin. Given the degree of uncertainty over timings, management is reluctant to issue meaningful guidance at this point.

Exhibit 9: Highlighted costs – continuing business

£m

FY18

FY17

Share-based payments

(0.2)

(0.6)

Purchased intangible asset amortisation

(1.2)

(1.2)

Severance and reorganisation costs

(1.2)

(2.3)

Acquisition & integration costs

(0.2)

(1.1)

Impairment of goodwill of China unit

(2.6)

N/A

Ad Intel disposal costs

(2.0)

N/A

Onerous lease provision

(0.3)

N/A

Tax charge (Credit)

(0.2)

0.7

Total

(6.5)

(2.7)

Source: Ebiquity accounts

Highlighted costs in the accounts for FY17 and FY18 were as shown in the table above. We have split off the share-based payments and acquired intangible amortisation as these are shown separately within our financial summary, Exhibit 11, below. The goodwill associated with the Chinese operation was written down as it had not performed as had been hoped. A new manager has been appointed who is focused on driving growth and profitability. Costs relating to the Ad Intel disposal totalled £2.0m. Severance payments included those relating to senior management changes in Europe, while the onerous lease payments relate to offices in Hamburg and Sydney vacated by Ad Intel.

The reduction of the debt position post receipt of the Ad Intel proceeds should lead to a saving in interest costs, which we have quantified at just short of £500k in the current year, with a further reduction the following year.

The underlying tax rate charged in FY18 was 28%, compared to 32% in the prior year, reflecting lower corporation tax rates. The group should benefit from further reductions in rates in the UK and the US in the current year and FY20e. Our model therefore indicates EPS growing by 16% in FY19e and 24% in FY20e, on a PBT number rising 5% in the current year and 20% the year after.

The dividend for FY19 was held at 0.71p and we model an increase to 0.85p in FY19 and to 0.95p for FY20, which would be covered 5.0x, then 5.6x, by earnings.

Inherently strong cash flow

As primarily a consultancy business, albeit one with a technical and data-driven input basis, the requirement for funding large-scale infrastructure projects is limited.

Exhibit 10: Summary cash flow split

FY18

FY17

£m

Continuing

Discontinued

Total

Total

Cash generated from operations

4.4

3.2

7.6

7.9

Interest & Tax

(2.4)

(0.6)

(3.0)

(3.1)

Net cash generated from operating activities

2.0

2.6

4.6

4.8

Net cash used in investing activities

(2.4)

(0.2)

(2.6)

(5.3)

Net cash generated by financing activities

0.2

0.0

0.2

0.2

Net increase / (Decrease) in cash

(0.2)

2.4

2.2

(0.3)

Transfer to continuing business

2.4

(2.4)

0.0

Cash balance at beginning of year

4.3

0.0

4.3

4.6

Exchange loss

(0.1)

(0.1)

Cash balance at end of year

6.4

0.0

6.4

4.3

Source: Ebiquity presentation

The £6.4m cash balance shown in this table is net of bank overdrafts of £2.4m, thus tallying with the £8.8m shown on the balance sheet. The £4.4m cash generated from continuing activities includes the highlighted items in Exhibit 8 and, on an underlying basis (adding back the non-cash elements) was £8.8m, representing cash conversion of operating profit of 138%.

In forecast years, the cash flow will be lifted by a lower interest charge post the reduction in debt and we have modelled a slightly lower underlying capex cost of £1.8m, inflated in FY19 to £3.6m by planned property moves associated with reconfiguration for the continuing business.

Strengthened balance sheet

As at the balance sheet date, net debt stood at £27.5m. This figure was reduced by £20.0m (net of tax and costs) in early January, hence our use of £7.5m in calculating the group’s enterprise vale for the valuation section, above. Our modelling indicates a year-end figure of £7.2m, coming down to £4.3m by end FY20. The disposal proceeds have been used in part to repay £17.0m of the revolving credit loan facility.

As might be expected in what is primarily a ‘people’ business, the bulk of the group’s assets are goodwill and other intangibles.

Exhibit 11: Financial summary

£000s

2016

2017

2018

2019e

2020e

Year end 31 December

IFRS

IFRS

IFRS

IFRS

IFRS

INCOME STATEMENT

Revenue

 

 

83,569

64,228

69,368

75,000

81,200

EBITDA

 

 

14,574

10,840

7,761

7,519

8,411

Operating Profit (before amort. and except.)

 

 

12,959

8,992

6,342

6,100

6,992

Amortisation of acquired intangibles

(1,865)

(1,231)

(1,240)

(1,300)

(1,300)

Exceptionals

(2,777)

(3,405)

(6,233)

0

0

Share-based payments

(560)

(578)

(223)

(223)

(223)

Reported operating profit

7,757

3,778

(1,354)

4,577

5,469

Net Interest

(1,132)

(1,044)

(1,151)

(663)

(444)

Joint ventures & associates (post tax)

0

0

0

0

0

Exceptionals

0

0

0

0

0

Profit Before Tax (norm)

 

 

11,827

7,948

5,191

5,437

6,547

Profit Before Tax (reported)

 

 

6,625

2,734

(2,504)

3,914

5,024

Reported tax

(2,230)

(1,753)

(1,985)

(1,468)

(1,702)

Profit After Tax (norm)

9,257

5,531

3,413

3,969

4,845

Profit After Tax (reported)

4,395

981

(4,488)

2,446

3,322

Minority interests

(245)

(384)

(472)

(600)

(625)

Discontinued operations

0

1,467

(845)

0

0

Net income (normalised)

9,012

4,951

4,057

3,369

4,221

Net income (reported)

4,150

2,064

(5,334)

1,846

2,697

Average Number of Shares Outstanding (m)

77.2

77.9

78.6

78.8

79.5

EPS - normalised continuing (p)

 

 

11.3

6.4

3.7

4.3

5.3

EPS - normalised continuing fully diluted (p)

 

 

11.3

6.2

3.5

4.1

5.0

EPS - basic reported (p)

 

 

5.4

2.7

(7.4)

2.3

3.4

Dividend per share (p)

0.65

0.71

0.71

0.85

0.95

EBITDA Margin (%)

17.4

16.9

11.2

10.0

10.4

Normalised Operating Margin

15.5

14.0

9.1

8.1

8.6

BALANCE SHEET

Fixed Assets

 

 

75,855

75,771

45,400

45,895

44,976

Intangible Assets

72,079

72,440

43,251

41,661

40,457

Tangible Assets

2,438

1,829

1,170

3,255

3,540

Investments & other

1,338

1,502

979

979

979

Current Assets

 

 

35,078

37,241

65,935

42,132

46,234

Stocks

0

0

0

0

0

Debtors

19,291

32,509

29,408

30,524

31,725

Cash & cash equivalents

6,662

4,732

8,793

11,608

14,509

Other (including assets held for sale)

9,125

0

27,734

0

0

Current Liabilities

 

 

(25,912)

(24,549)

(27,539)

(28,102)

(28,770)

Creditors

(17,809)

(20,066)

(18,150)

(18,713)

(19,381)

Tax and social security

(1,850)

(1,598)

(1,681)

(1,681)

(1,681)

Short term borrowings

(4,476)

(1,572)

(2,314)

(2,314)

(2,314)

Other

(1,777)

(1,313)

(5,394)

(5,394)

(5,394)

Long Term Liabilities

 

 

(32,728)

(35,481)

(36,282)

(18,782)

(18,782)

Long term borrowings

(30,210)

(32,000)

(33,965)

(16,465)

(16,465)

Other long term liabilities

(2,518)

(3,481)

(2,317)

(2,317)

(2,317)

Net Assets

 

 

52,293

52,982

47,514

41,143

43,658

Minority interests

761

1,040

992

992

992

Shareholders' equity

 

 

51,532

51,942

46,522

40,151

42,666

CASH FLOW

Op Cash Flow before WC and tax

14,574

10,840

7,761

7,519

8,411

Working capital

(2,835)

(2,002)

(367)

(552)

(534)

Exceptional & other

(957)

(890)

(6,233)

0

0

Tax

(166)

(2,207)

(1,952)

(1,468)

(1,702)

Net operating cash flow

 

 

10,616

5,741

(791)

5,499

6,174

Capex

(2,351)

(2,231)

(1,784)

(3,600)

(1,800)

Acquisitions/disposals

(4,431)

(3,082)

(858)

19,959

0

Net interest

(1,074)

(921)

(1,068)

(663)

(444)

Equity financing

26

160

252

0

0

Dividends

(838)

(495)

(791)

(879)

(1,029)

Other

(1,017)

(46)

0

0

0

Net Cash Flow

931

(874)

(5,040)

20,315

2,901

Opening net debt/(cash)

 

 

28,661

28,024

28,840

27,486

7,171

FX

(633)

58

(91)

0

0

Other non-cash movements

339

6,485

0

0

Closing net debt/(cash)

 

 

28,024

28,840

27,486

7,171

4,270

Source: Ebiquity accounts, Edison Investment Research

Contact details

Revenue by geography

CityPoint
1, Ropemaker Street
LONDON EC2Y 9AW
UK
+44 (0) 20 7650 9600
www.ebiquity.com

Contact details

CityPoint
1, Ropemaker Street
LONDON EC2Y 9AW
UK
+44 (0) 20 7650 9600
www.ebiquity.com

Revenue by geography

Management team

Chairman: Rob Woodward

CEO: Michael Karg

Rob was appointed chairman in May 2018. Prior to joining Ebiquity, he was CEO of STV Group plc for over 10 years, where he led its successful digital transformation. He was previously commercial director at Channel 4 for four years and before that was an MD with UBS Corporate Finance and the lead partner for Deloitte’s TMT Industry Group in Europe. He is chairman of AIM-listed data services provider Blancco Technology Group plc.

Michael became CEO in January 2016. He was previously CEO international for Razorfish, the digital business transformation agency of Publicis Groupe, and held senior international leadership positions with both Razorfish and Digitas over a 15-year career. He advised clients globally across industries on marketing and digital strategies, worked closely with technology partners, and led the integration of acquired businesses.

CFO & COO: Alan Newman

Alan was appointed CFO/COO in January 2019, succeeding interim CFO Kevin McNair. He has extensive plc experience having spent almost 10 years as CFO of YouGov plc, the AIM-listed global market research and data analytics group. He is currently chair of the audit committee of Future plc and deputy chair of the Quoted Companies Alliance. Prior to YouGov plc, Alan was a partner at EY and previously at KPMG where he provided board level advisory and consulting services specialising in the TMT sector. He is a chartered accountant.

Management team

Chairman: Rob Woodward

Rob was appointed chairman in May 2018. Prior to joining Ebiquity, he was CEO of STV Group plc for over 10 years, where he led its successful digital transformation. He was previously commercial director at Channel 4 for four years and before that was an MD with UBS Corporate Finance and the lead partner for Deloitte’s TMT Industry Group in Europe. He is chairman of AIM-listed data services provider Blancco Technology Group plc.

CEO: Michael Karg

Michael became CEO in January 2016. He was previously CEO international for Razorfish, the digital business transformation agency of Publicis Groupe, and held senior international leadership positions with both Razorfish and Digitas over a 15-year career. He advised clients globally across industries on marketing and digital strategies, worked closely with technology partners, and led the integration of acquired businesses.

CFO & COO: Alan Newman

Alan was appointed CFO/COO in January 2019, succeeding interim CFO Kevin McNair. He has extensive plc experience having spent almost 10 years as CFO of YouGov plc, the AIM-listed global market research and data analytics group. He is currently chair of the audit committee of Future plc and deputy chair of the Quoted Companies Alliance. Prior to YouGov plc, Alan was a partner at EY and previously at KPMG where he provided board level advisory and consulting services specialising in the TMT sector. He is a chartered accountant.

Principal shareholders

(%)

Artemis IM

19.88

JO Hambro Capital Mgmt

11.27

T Rowe Price Global Inv

9.37

Kabouter Mgmt

8.80

Legal & General IM

6.23

Herald IM

5.47

Canaccord Genuity Wealth Mgmt

4.32

Fidelity Intl

4.24


General disclaimer and copyright

This report has been commissioned by Ebiquity and prepared and issued by Edison, in consideration of a fee payable by Ebiquity. Edison Investment Research standard fees are £49,500 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

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This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document (nor will such persons be able to purchase shares in the placing).

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Germany

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United Kingdom

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1,185 Avenue of the Americas

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United States of America

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Level 4, Office 1205

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NSW 2000, Australia

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1,185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

General disclaimer and copyright

This report has been commissioned by Ebiquity and prepared and issued by Edison, in consideration of a fee payable by Ebiquity. Edison Investment Research standard fees are £49,500 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the Edison analyst at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

Exclusion of Liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note.

No personalised advice: The information that we provide should not be construed in any manner whatsoever as, personalised advice. Also, the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The securities described in the report may not be eligible for sale in all jurisdictions or to certain categories of investors.

Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report, subject to Edison's policies on personal dealing and conflicts of interest.

Copyright: Copyright 2019 Edison Investment Research Limited (Edison). All rights reserved FTSE International Limited (“FTSE”) © FTSE 2019. “FTSE®” is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under license. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent.

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The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (i.e. without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision.

United Kingdom

Neither this document and associated email (together, the "Communication") constitutes or form part of any offer for sale or subscription of, or solicitation of any offer to buy or subscribe for, any securities, nor shall it or any part of it form the basis of, or be relied on in connection with, any contract or commitment whatsoever. Any decision to purchase shares in the Company in the proposed placing should be made solely on the basis of the information to be contained in the admission document to be published in connection therewith.

This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document (nor will such persons be able to purchase shares in the placing).

This Communication is being supplied to you solely for your information and may not be reproduced by, further distributed to or published in whole or in part by, any other person.

United States

The Investment Research is a publication distributed in the United States by Edison Investment Research, Inc. Edison Investment Research, Inc. is registered as an investment adviser with the Securities and Exchange Commission. Edison relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a) (11) of the Investment Advisers Act of 1940 and corresponding state securities laws. This report is a bona fide publication of general and regular circulation offering impersonal investment-related advice, not tailored to a specific investment portfolio or the needs of current and/or prospective subscribers. As such, Edison does not offer or provide personal advice and the research provided is for informational purposes only. No mention of a particular security in this report constitutes a recommendation to buy, sell or hold that or any security, or that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person.

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Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1,185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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