ADmantX stake sold for €7m

Expert System 9 December 2019 Update
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Expert System

ADmantX stake sold for €7m

Sale of non-core business

Software & comp services

9 December 2019

Price

€3.14

Market cap

€125m

Net debt (€m) at end H119

5.7

Shares in issue

39.9m

Free float

73%

Code

EXSY

Primary exchange

AIM Italia

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

4.7

4.7

154.3

Rel (local)

4.8

(1.6)

105.5

52-week high/low

€3.68

€1.15

Business description

Expert System has developed and patented technology that extracts useful information from unstructured text using semantic-based techniques. It applies this technology to a number of verticals including enterprise search, customer experience management and big data analytics.

Next events

FY19 results

March 2020

Analyst

Katherine Thompson

+44 (0)20 3077 5730

Expert System is a research client of Edison Investment Research Limited

Expert System has sold its 60.8% stake in ADmantX for cash proceeds of €7m. ADmantX is a spin-off that has adapted Expert’s Cogito technology for the advertising industry. The disposal price reflects a trailing EV/sales multiple of 8x, well ahead of Expert’s trailing multiple of 4.1x. In our view, the deal highlights the value of Expert’s technology as well as providing welcome funds to support the growth of the business.

Year end

Revenue (€m)

EBITDA*
(€m)

EPS*
(c)

DPS
(€)

P/E
(x)

EV/EBITDA
(x)

12/17

27.8

1.7

(18.3)

0.0

N/A

72.4

12/18

30.5

4.6

(1.4)

0.0

N/A

26.7

12/19e

34.5

5.6

(1.9)

0.0

N/A

22.2

12/20e

38.5

7.6

1.6

0.0

190.5

16.4

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

ADmantX sold to US adtech company

In 2010, Expert System decided to create a separate business, ADmantX, to commercialise its technology within the advertising industry. ADmantX uses Cogito software to help advertisers understand the content on the pages on which they wish to serve ads. By understanding this better, advertisers can improve ad targeting and increase click-through rates. In November 2019, the entire share capital of ADmantX was sold to Integral Ad Science, a US-based adtech company, for an enterprise value of €16m.

Proceeds reduce net debt position

Expert has received proceeds of €7.1m for its 60.8% stake in ADmantX. This stake has always been accounted for as an equity investment as it was deemed to be non-core. We estimate that the company will report a profit on disposal of c €2.3m and by the end of FY19 will shift from a previously forecast net debt position of €6.6m to a net debt position of €1.4m. The valuation equates to a trailing EV/sales multiple of 8x for a business that was substantially break-even at the EBITDA level in FY18.

Valuation: Stronger balance sheet supports upside

The share price has performed well since the fund-raising in April, as the proceeds allowed the company to reduce its debt burden and accelerate investment in growth. The ADmantX disposal should provide further support, strengthening the balance sheet and highlighting the value to a third party of Expert’s IP. Compared to a diverse set of peers, Expert is forecast to grow faster but is less profitable. On an EV/sales basis, Expert is trading at 3.6x FY19 and 3.2x FY20, at a premium to Italian peers and at a discount to all other peer groups, with forecast revenue growth towards the upper end of the group. Evidence that recent investment is accelerating revenue growth would be a key driver of share price upside. Progress towards operating profitability and cash generation should also provide further upside potential.

ADmantX stake disposal

Background to ADmantX investment

The ADmantX subsidiary was created to make use of Expert’s natural language processing capability in the advertising industry. It provides software to advertisers, in 29 languages, that enables them to automatically determine which ads are most suitable for advertising on a given website, based on the content on that website.

In 2010, it was decided that this business needed further investment to develop its full potential, and at that time, management decided to accept external investment. Expert retained a 69.4% stake, Atlante Ventures Mezzogiorno (AVM) took a 20.7% stake and private investors bought the remaining 9.9%. In 2015, the business raised further investment of €2.16m, reducing Expert’s stake to 60.7%, AVM to 18.1% and private investors to 21.2%. This investment was at a pre-money valuation of €15m. By the end of H119, Expert’s stake had increased marginally to 60.8%.

Disposal to Integral Ad Science

On 20 November, Expert announced that ADmantX had been sold to Integral Ad Science, a US-based adtech business owned by Vista Equity Partners. We understand that Integral Ad Science and ADmantX had worked together prior to this deal. The transaction is subject to a price adjustment to be determined by the end of Q120, depending on possible changes in net working capital and the net financial position.

The deal values ADmantX at an enterprise value of €16m, implying a €9.73m valuation for Expert’s stake. After adjustments, Expert received cash proceeds of €7.098m (of which €0.2m is in escrow pending final price adjustments). Expert noted that the enterprise value was at an 8x multiple to FY18 revenues, implying that ADmantX generated revenues of €2m in FY18. The company also noted that ADmantX was substantially break-even at the EBITDA level in FY18.

This investment has been accounted for by the equity method since 2010 as it was deemed to be non-core. At the end of H119, ADmantX was reported as a current investment at a book value of €4.775m, which implies a profit on disposal of €2.323m.

Revision to forecasts

We have reflected the disposal in our forecasts. We have treated the gain on disposal as an exceptional item. We reduce our end FY19 net debt forecast from €6.6m to €1.4m.

Exhibit 1: Changes to estimates

Year end 31 December (€m)

FY19e old

FY19e new

Change

y-o-y

FY20e old

FY20e new

Change

y-o-y

Sales

33.0

33.0

0.0%

14.9%

37.0

37.0

0.0%

12.4%

Other income & grants

1.5

1.5

0.0%

(14.7%)

1.5

1.5

0.0%

0.0%

Total revenues

34.5

34.5

0.0%

13.2%

38.5

38.5

0.0%

11.8%

Capitalised development costs & changes in WIP

5.1

5.1

0.0%

0.9%

5.2

5.2

0.0%

2.0%

Production value

39.6

39.6

0.0%

11.4%

43.7

43.7

0.0%

10.6%

EBITDA

5.6

5.6

0.0%

20.2%

7.6

7.6

0.0%

35.5%

EBITDA margin

16.2%

16.2%

0.0%

0.9%

19.6%

19.6%

0.0%

3.4%

D&A

(5.7)

(5.7)

0.0%

(6.0)

(6.0)

0.0%

Normalised operating profit

(0.1)

(0.1)

0.0%

(84.4%)

1.5

1.5

0.0%

N/A

Normalised operating margin

-0.3%

-0.3%

0.0%

1.9%

4.0%

4.0%

0.0%

4.3%

Amortisation of acquired intangibles

(2.6)

(2.6)

0.0%

(0.9)

(0.9)

Exceptional items

0.0

2.3

0.0%

0.0

0.0

Reported operating profit

(2.7)

(0.3)

(87.0%)

89.2%

0.7

0.7

0.0%

N/A

Normalised net income

(0.8)

(0.8)

(3.7%)

(48.2%)

0.6

0.7

(187%)

Reported net income

(3.1)

(1.0)

(68.5%)

74.3%

(0.2)

(0.1)

88.7%

Diluted normalised EPS (c)

(2.0)

(1.9)

(3.7%)

(37.3%)

1.5

1.6

9.6%

184.6%

Net debt

6.6

1.4

(78.2%)

(88.6%)

6.5

2.2

(65.2%)

56.6%

Source: Edison Investment Research

Exhibit 2: Financial summary

€'000s

2015

2016

2017

2018

2019e

2020e

31-December

IT GAAP

IT GAAP

IT GAAP

IT GAAP

IT GAAP

IT GAAP

PROFIT & LOSS

Revenue

 

 

19,368

25,057

27,783

30,457

34,463

38,545

EBITDA

 

 

1,463

(2,245)

1,711

4,638

5,575

7,554

Operating Profit (before amort. and except.)

(1,226)

(5,941)

(3,189)

(662)

(103)

1,545

Intangible Amortisation

(2,549)

(2,608)

(2,608)

(2,567)

(2,567)

(854)

Exceptionals

0

0

(700)

0

2,322

0

Other

0

0

0

0

0

0

Operating Profit

(3,775)

(8,549)

(6,496)

(3,229)

(347)

691

Net Interest

213

(156)

(2,191)

97

(734)

(814)

Profit Before Tax (norm)

 

 

(1,013)

(6,097)

(5,380)

(565)

(837)

731

Profit Before Tax (reported)

 

 

(3,562)

(8,705)

(8,687)

(3,131)

(1,081)

(123)

Tax

277

579

348

(650)

108

12

Profit After Tax (norm)

(934)

(5,692)

(5,164)

(508)

(753)

658

Profit After Tax (reported)

(3,284)

(8,126)

(8,339)

(3,781)

(973)

(110)

Average Number of Shares Outstanding (m)

22.8

25.8

28.1

35.8

38.6

39.9

EPS - normalised (c)

 

 

(4.1)

(22.0)

(18.3)

(1.4)

(1.9)

1.6

EPS - normalised and fully diluted (c)

 

(4.1)

(22.0)

(18.3)

(1.4)

(1.9)

1.6

EPS - (IFRS) (c)

 

 

(14.4)

(31.5)

(29.6)

(10.6)

(2.5)

(0.3)

Dividend per share (c)

0.0

0.0

0.0

0.0

0.0

0.0

EBITDA Margin (%)

7.6

-9.0

6.2

15.2

16.2

19.6

Adj Operating Margin (%)

-6.3

-23.7

-11.5

-2.2

-0.3

4.0

BALANCE SHEET

Fixed Assets

 

 

20,301

20,379

18,864

16,655

13,719

12,556

Intangible Assets

18,539

18,372

16,944

14,734

12,102

10,967

Tangible Assets

916

915

792

715

702

675

Investments

846

1,092

1,128

1,206

915

915

Current Assets

 

 

42,588

37,012

37,634

38,004

52,022

53,384

Stocks

1,797

627

99

109

609

609

Debtors

10,228

10,233

12,384

15,792

18,003

20,163

Cash

11,249

9,063

11,235

7,883

24,037

23,226

Other

19,314

17,088

13,916

14,220

9,373

9,386

Current Liabilities

 

 

(20,517)

(22,679)

(19,480)

(21,170)

(21,451)

(21,760)

Creditors

(15,082)

(16,459)

(14,104)

(15,511)

(15,792)

(16,101)

Short term borrowings

(5,435)

(6,219)

(5,376)

(5,659)

(5,659)

(5,659)

Long Term Liabilities

 

 

(22,227)

(18,275)

(17,742)

(18,411)

(23,411)

(23,411)

Long term borrowings

(18,240)

(15,252)

(14,683)

(14,811)

(19,811)

(19,811)

Other long term liabilities

(3,987)

(3,023)

(3,060)

(3,600)

(3,600)

(3,600)

Net Assets

 

 

20,145

16,437

19,276

15,077

20,880

20,769

CASH FLOW

Operating Cash Flow

 

 

2,738

2,088

(1,921)

2,583

3,121

5,679

Net Interest

(324)

(155)

(626)

(441)

(710)

(790)

Tax

(1,576)

0

0

0

0

0

Capex

(20,045)

(6,378)

(6,321)

(5,830)

(5,446)

(5,700)

Acquisitions/disposals

3,045

46

1,275

(76)

7,189

0

Financing

6,573

4,418

11,178

0

7,000

0

Dividends

0

0

0

0

0

0

Net Cash Flow

(9,588)

18

3,585

(3,764)

11,154

(811)

Opening net debt/(cash)

 

 

2,839

12,426

12,408

8,824

12,587

1,433

HP finance leases initiated

0

0

0

0

0

0

Other

0

0

0

0

0

0

Closing net debt/(cash)

 

 

12,426

12,408

8,824

12,587

1,433

2,244

Source: Expert System accounts, Edison Investment Research


General disclaimer and copyright

This report has been commissioned by Expert System and prepared and issued by Edison, in consideration of a fee payable by Expert System. 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.

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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.

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London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

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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

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NSW 2000, Australia

General disclaimer and copyright

This report has been commissioned by Expert System and prepared and issued by Edison, in consideration of a fee payable by Expert System. 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 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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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.

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

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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