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Adapting to circumstance and opportunity

Ebiquity 28 September 2020 Update
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Ebiquity

Adapting to circumstance and opportunity

Interim results

Media

28 September 2020

Price

21.5p

Market cap

£17m

Net debt (£m) at end August 2020, excluding lease liabilities

7.0

Shares in issue

78.4m

Free float

94.8

Code

EBQ

Primary exchange

AIM

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

(17.3)

(27.1)

(61.6)

Rel (local)

(14.6)

(24.0)

(52.9)

52-week high/low

54.0p

21.5p

Business description

Ebiquity is a leading independent marketing and media consultancy, working for 70 of the world’s 100 leading brands to optimise their media investments.

Next events

Capital markets day

November 2020

Analyst

Fiona Orford-Williams

+44 (0)20 3077 5739

Ebiquity is a research client of Edison Investment Research Limited

Ebiquity is set for a stronger H220, after a difficult H1 (£26.8m revenue; down 24% y-o-y) when some clients paused or cancelled their marketing activity due to COVID-19. Most of the H120 £1.4m operating loss should be recouped by the year-end. FY21 prospects are further lifted by new client wins, partly from Accenture’s withdrawal from media audit. Newly installed CEO Nick Waters (ex Dentsu) is developing his vision for Ebiquity as a data-driven media solutions provider, augmented with consultancy services. This will be expounded at a capital markets day on 10 November.

Year end

Revenue (£m)

PBT*
(£m)

EPS*
(p)

DPS
(p)

P/E
(x)

Yield
(%)

12/18

69.4

5.2

3.5

0.7

6.1

3.3

12/19

68.7

5.3

3.6

0.0

6.0

N/A

12/20e

57.0

(0.5)

(0.8)

0.0

N/A

N/A

12/21e

60.0

3.1

2.6

0.5

8.3

2.3

Note: *PBT and diluted EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments.

Improving prospects in H220

Media segment revenues (FY19: 79% of group) were down by 21%. Those of Analytics & Tech were 36% lower, but the underlying decrease here, stripping out Stratigent (wound down from August 2019), was closer to that of Media. Digital Decisions, bought in January this year, has made good progress, adding eight new clients, and looks on track to meet deferred consideration targets. Group underlying operating costs were down 12%, including use of government support schemes. With deferred assignments coming through and some significant new client wins, including Verizon, Daimler and Dubai Tourism, prospects for H220 and FY21 are better. The withdrawal of Accenture from the Media audit market has enabled Ebiquity to expand its client base and further opportunities are being pursued.

Financial headroom

In light of the H120 performance and the company’s indication for improved revenues in H220, we have trimmed our FY20 revenue forecast from £59.5m to £57.0m. Based on this, our pre-tax number moves from a £3.3m profit to a £0.5m loss. The reported underlying H120 loss before tax was £1.9m, so this implies a good H2 recovery, with momentum into FY21, where we introduce our forecasts. No management guidance for FY21e has been issued. These projections assume no further economic disruption. End June net debt was £5.1m, from £5.6m at the year end, assisted by working capital inflow. Net debt had extended to £7.0m by end-August, with cash balances of £12.6m and gross debt of £19.8m (the difference being rounding). £5m of bank facilities remain undrawn, with covenants renegotiated to a simple monthly liquidity test to December 2021.

Valuation: Below peers and DCF

Earnings forecasts remain highly subjective to assumptions on the success of the new CEO’s strategic plans, as well as on general economic recovery. On our current modelling, parity with peers across averaged P/E and EV/EBITDA for FY19 and FY21e suggest a share price of 36p, a little below that derived from a DCF. The upcoming capital markets day (CMD) may be a catalyst to close that discount.

H120 looks to have been the low point

H120 included the months most affected by the effect of COVID-19 on advertising spend, although the impact varied considerably by market sector and by media type, as has been widely reported. Automotive, travel and tourism, and (traditional) retail have suffered the heaviest downwards pressure, with FMCG and tech spend comparatively healthy. A summary of the income statement, in underlying terms, is shown below:

Exhibit 1: Summary underlying income statement

Income statement

H119 (£m)

H120 (£m)

Change (£m)

% change

Revenue

35.3

26.8

(8.6)

(24%)

Operating expenses

(32.0)

(28.1)

(3.8)

(12%)

Operating (loss)/profit

3.4

(1.4)

(4.7)

Operating margin

9.5%

(5.1%)

Finance costs

(0.5)

(0.5)

0.1

16%

(Loss)/profit before tax

2.9

(1.9)

(4.8)

Underlying (loss)/EPS (p)

2.6

(2.7)

(5.4)

Source: Company accounts

As the pandemic spread, Ebiquity transitioned its team to remote working with minimal disruption, utilising government support schemes where appropriate, and pay and hiring freezes to help control costs. Central overheads of £3.0m compared to £4.0m in the prior period, with total operating costs trimmed from £32.0m in H119 to £28.1m. This helped to partly offset a 24% y-o-y reduction in revenues to £26.8m. Although the company has swung into losses in the first half, on our updated estimates, we expect the H120 £1.4m operating loss to be recouped by the year-end on the back of the improving top line performance, as indicated by management.

Exhibit 2: Working forecast assumptions

Previous FY20 assumption

H120 actual

Revised FY20 assumption

FY21e assumption

Media revenue growth

-17%

-21%

-17%

5%

Analytics & Tech revenue growth

-10%

-36%

-17%

5%

Operating margin:

 

Media

20.8%

10.7%

15.5%

20.2%

A&T

8.5%

-14.8%

-1.5%

7.0%

Source: Edison Investment Research

The balance sheet at end June showed net debt of £5.1m (excluding leases), from £5.6m at the previous year-end. This was made up from £14.5m of cash, with £19.0m of bank debt and a £0.8m US payment protection programme loan, which is expected to convert into a grant. There remains £5.0m undrawn within the Revolving Credit Facility. The group has agreed modified covenants on this RCF that run through to December 2021. These involve a monthly liquidity test, requiring a minimum of £5.0m (in cash plus any undrawn facility) to be available at the end of each month.

Media revenues set to lift through H2

The results from the Media segment are themselves a blend of the audit practice (Ebiquity Performance and Management) and the contract compliance practice (FirmDecisions).

The former delivered revenues that declined 19% on prior year, although this also varied considerably by region. It has picked up substantial new business from Accenture’s withdrawal from media auditing, with the team in Spain doing particularly well on this front. Along with projects deferred from H120, this gives a strong underpinning to a rebound in H220.

Within Media, Contract Compliance (c10% of Media revenues), which has historically involved physical examination of records, has now reached agreement with agencies on remote access to information required for its audits. This should enable the backlog to be tackled, with deferred projects set to proceed or already in action benefiting H220. Revenue from this practice was down 42% in the period. Clients in the period included Amazon and Dubai Tourism.

Digital Decisions, bought in January (see Edison’s Flash note), has put in an encouraging performance, winning eight clients, and looks likely to hit its targets. Its dashboards and analyses are central to Ebiquity’s plans to build out its digital service and product offerings.

As shown above, our model assumes a lower rate of year-on-year decline in H220 as the deferred work comes through and work for new clients builds through H220 and into FY21. We have made provisional assumptions that this results in a 10% revenue uplift in FY21e, with a recovery in operating margin, as shown.

Analytics & Tech more affected than expected

As highlighted by the exhibit above, the Analytics & Tech segment had a tougher period than might have been expected, given that it had previously been the higher growth segment, but much of this is down to its sector vertical exposure, particularly to the automotive industry. Major projects were deferred or cancelled by some of its largest clients in the airline, retail and automotive sectors. The year-on-year revenue comparison is also disadvantaged by the inclusion of Stratigent in H119, without which the decline would have been closer to that posted by Media. The Advanced Analytics practice was down by just 4%, while AdTech retrenched 41%. MarTech was down by 81%, but only by 41% if Stratigent is excluded. MarTech now solely consists of Digital Balance in Australia (but working globally). AdTech assists in evaluating in-housing decisions and the selection of advertising partners. Delays to large client purchase approvals, due to COVID-19, held the AdTech practice back in H120. New client wins in the US and Italy should help through the rest of the year and into FY21.

Our model assumes that Analytics & Tech revenue growth is roughly in line with that of Media in FY21 and that margins start to recover.

First thoughts from new CEO

Nick Waters, previously executive chairman of Dentsu in the UK and Ireland, has been in place since 1 July. In conversations with key clients he has confirmed that one of Ebiquity’s key strengths is its independence. Its advice is not compromised by the incentive of selling other products or services. Competitors tend to be either the large global consultants, such a PWC or Deloitte, which have a shallower understanding of the advertising industry and potential conflicts such as that acknowledged by Accenture, or local market specialists, which may lack the global perspective and the data that supports Ebiquity’s advice.

While more detailed plans will be presented at the planned CMD in November, Waters has already established that the group needs:

To be evolved into a data-driven solutions company, with an overlay of consultancy services.

To develop scalable, repeatable productised solutions in Programmatic, search, social and ecommerce.

To build on the approach established by Digital Decisions, with source data monitoring on a scalable and repeatable basis.

None of this needs to involve heavy technology investment, but Ebiquity does need to move from offering services on a point solution basis to delivering integrated solutions, more embedded in client workflows.

As digital continues to grow as a percentage of advertising spend, advertisers’ concerns with issues of ad fraud, viewability, wastage and brand safety will only grow. A trusted and independent partner to help navigate and drive return on investment will be of even greater value.

Valuation

With earnings forecasts for the current year across the sector so heavily affected by the commercial repercussions of the pandemic, the more potentially reliable metrics are those relating to FY19 and FY21e, although the latter remain very subjective to assumptions on the speed and scale of recovery. Parity with peers, averaged across P/E and EV/EBITDA for those two years, implies a share price of 36p, well ahead of current levels.

Exhibit 3: Peer comparative ratings

Name

Price (p)

Market cap (£m)

Ytd perf (%)

P/E last
(x)

P/E 1FY
(x)

P/E 2FY
(x)

EV/sales 1FY (x)

EV/EBITDA last (x)

EV/EBITDA 1FY (x)

EV/EBITDA 2FY (x)

Kin and Carta

66.3

112

-33.4

7.2

12.4

10.9

1.2

7.7

8.5

7.9

M&C Saatchi

63.3

73

-49.0

2.7

5.6

5.6

0.4

3.2

3.3

3.1

The MISSION Group

57.5

52

-27.2

6.4

143.8

7.4

1.1

4.3

27.0

6.1

Next Fifteen

476.0

432

-11.5

13.7

13.8

12.2

1.9

8.7

9.0

8.1

Average

-30.3

7.5

43.9

9.0

1.2

6.0

12.0

6.3

Ebiquity

23.1

19

-37.3

6.5

(37.2)

9.0

0.4

2.8

14.2

4.7

Discount

14%

N/A

0%

61%

53%

-19%

25%

Source: Refinitiv, Edison Investment Research. Note: Prices as at 24 September 2020.

As previously, we have looked at the DCF at varying margin assumptions and at varying revenue growth rates across FY22–28e, on fixed assumptions of an 8.5% WACC and terminal growth of 2%. An EBITDA margin of 12%, below the 13.4% achieved in FY19, derives an implied share price of 37p, on flat revenues through FY22-28e. Lifting the medium-term revenue assumption to the average global ad spend revenue growth since 2000, 3.4%, lifts the implied valuation to 43p, ahead of the level derived from parity with peers, above.

A successful implementation of the new CEO’s strategy could lead to faster growth in revenues as the group builds market share, particularly in digital media-related services. It could also deliver margin expansion, which would suggest an upside risk to our current valuation.

Exhibit 4: Financial summary

£000s

2017

2018

2019

2020e

2021e

31-December

IFRS

IFRS

IFRS

IFRS

IFRS

INCOME STATEMENT

31-Dec

31-Dec

31-Dec

31-Dec

31-Dec

Revenue

 

 

64,228

69,368

68,733

57,000

60,000

EBITDA

 

 

10,840

7,761

9,203

1,801

5,432

Operating Profit (before amort. and except.)

 

 

8,992

6,342

6,167

375

4,006

Amortisation of acquired intangibles

(1,231)

(1,240)

(1,169)

(1,112)

(1,112)

Exceptionals

(3,405)

(6,233)

(9,044)

(914)

0

Share-based payments

(578)

(223)

(117)

1,651

(150)

Reported operating profit

3,778

(1,354)

(4,163)

(0)

2,744

Net Interest

(1,044)

(1,151)

(898)

(875)

(925)

Joint-ventures & associates (post tax)

0

0

0

0

0

Exceptionals

0

0

0

0

0

Profit Before Tax (norm)

 

 

7,948

5,191

5,269

(500)

3,081

Profit Before Tax (reported)

 

 

2,734

(2,504)

(5,061)

(875)

1,819

Reported tax

(1,753)

(1,985)

(1,931)

130

(739)

Profit After Tax (norm)

5,531

3,413

3,338

(370)

2,341

Profit After Tax (reported)

981

(4,489)

(6,538)

(745)

1,079

Minority interests

(384)

(489)

(451)

(250)

(250)

Discontinued operations

1,467

(845)

(1,018)

0

0

Net income (normalised)

4,951

3,551

2,875

(619)

2,093

Net income (reported)

2,064

(5,334)

(7,556)

(995)

829

Average Number of Shares Outstanding (m)

77.9

78.6

79.5

79.5

80.2

EPS - normalised (p)

 

 

6.4

3.7

3.6

(0.8)

2.6

EPS - normalised continuing diluted (p)

 

 

6.2

3.5

3.6

(0.8)

2.6

EPS - basic reported (p)

 

 

2.7

(7.4)

(10.1)

(1.3)

1.0

Dividend per share (p)

0.71

0.71

0.00

0.00

0.50

EBITDA Margin (%)

16.9

11.2

13.4

3.2

9.1

Normalised Operating Margin

14.0

9.1

9.0

0.7

6.7

BALANCE SHEET

Fixed Assets

 

 

75,771

45,400

47,060

45,743

43,861

Intangible Assets

72,440

43,251

35,172

34,931

33,793

Tangible Assets

1,829

1,170

10,902

9,458

8,714

Investments & other

1,502

979

986

1,354

1,354

Current Assets

 

 

37,241

65,935

35,822

35,023

37,010

Stocks

0

0

0

0

0

Debtors

32,509

29,408

27,586

24,205

25,479

Cash & cash equivalents

4,732

8,793

8,236

10,818

11,530

Other

0

27,734

0

0

0

Current Liabilities

 

 

(24,549)

(27,539)

(21,195)

(19,044)

(18,984)

Creditors

(20,066)

(18,150)

(14,659)

(12,862)

(13,068)

Tax and social security

(1,598)

(1,681)

(4,424)

(3,812)

(3,812)

Short term borrowings

(1,572)

(2,314)

36

45

45

Other

(1,313)

(5,394)

(2,148)

(2,415)

(2,149)

Long Term Liabilities

 

 

(35,481)

(36,282)

(23,047)

(28,562)

(28,119)

Long term borrowings

(32,000)

(33,965)

(13,868)

(19,706)

(19,706)

Other long term liabilities

(3,481)

(2,317)

(9,179)

(8,856)

(8,413)

Net Assets

 

 

52,982

47,514

38,640

33,160

33,768

Minority interests

1,040

992

1,179

1,179

1,179

Shareholders' equity

 

 

51,942

46,522

37,461

31,981

32,589

CASH FLOW

Op Cash Flow before WC and tax

10,840

7,761

9,203

1,801

5,432

Working capital

(2,002)

(367)

(1,302)

1,710

(1,068)

Exceptional & other

(890)

(6,233)

(2,244)

(914)

0

Tax

(2,207)

(1,952)

(1,345)

(1,870)

(739)

Operating Cash Flow

 

 

5,741

(791)

4,312

727

3,624

Capex

(2,231)

(1,784)

(3,235)

(814)

(1,500)

Acquisitions/disposals

(3,082)

(858)

23,862

(3,354)

(486)

Net interest

(921)

(1,068)

(718)

(875)

(925)

Equity financing

160

252

253

612

0

Dividends

(495)

(791)

(1,256)

(1,315)

0

Other

(46)

0

0

0

0

Net Cash Flow

(874)

(5,040)

23,218

(5,019)

713

Opening net debt/(cash)

 

 

28,024

28,840

27,486

5,596

8,843

FX

58

(91)

(204)

380

0

Other non-cash movements

6,485

(1,124)

1,392

0

Closing net debt/(cash)

 

 

28,840

27,486

5,596

8,843

8,131

Source: Company accounts, Edison Investment Research


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 research department of Edison 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.

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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 research department of Edison 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 2020 Edison Investment Research Limited (Edison).

Australia

Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Crown Wealth Group Pty Ltd who holds an Australian Financial Services Licence (Number: 494274). This research is issued in Australia by Edison AU and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. Any advice given by Edison AU is general advice only and does not take into account your personal circumstances, needs or objectives. You should, before acting on this advice, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. If our advice relates to the acquisition, or possible acquisition, of a particular financial product you should read any relevant Product Disclosure Statement or like instrument.

New Zealand

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

This document is prepared and provided by Edison for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.

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.

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

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

1185 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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