Navigating complexity

Ebiquity 7 October 2019 Update
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Ebiquity

Navigating complexity

Interim results

Media

7 October 2019

Price

52p

Market cap

£39m

£1:$1.23

Net debt (£m) at 30 June 2019
(IFRS 16 basis)

16.8

Shares in issue

75.2m

Free float

99%

Code

EBQ

Primary exchange

AIM

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

(6.4)

(8.1)

(8.1)

Rel (local)

(4.7)

(3.1)

(4.7)

52-week high/low

75.0p

40.5p

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

Est November 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

Ebiquity’s interim figures reflect its transitional phase post the £26m AdIntel disposal, with revenues flat against the prior period on continuing business and a broadly stable operating profit margin (pre-unallocated costs). We have trimmed our FY19 and FY20 revenue expectations but maintained our operating profit forecasts. The focus is now on building operating margin through careful cost management, and consolidating and building on the group’s positioning as a trusted advisor to CMOs. The shares are priced at a clear discount to smaller marcomms companies on an EV/EBITDA basis, nearer parity on P/E.

Year end

Revenue (£m)

PBT*
(£m)

EPS*
(p)

DPS
(p)

P/E
(x)

Yield
(%)

12/17

64.2

7.9

6.2

0.71

8.4

1.4

12/18

69.4

5.2

3.5

0.71

14.9

1.4

12/19e

71.0

5.3

4.0

0.85

13.0

1.6

12/20e

72.3

6.5

5.0

0.95

10.4

1.8

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

Opportunities and challenges from market shifts

In the Media practice, a 1% revenue decrease on the prior period comprised a 3% reduction in Media Performance & Management, partly offset by 15% progress in Contract Compliance (which we estimate at around 20% of the segment). Demand from some market areas, such as FMCG, retail and automotive, reflected economic pressures, while the continuing shift of budgets to digital alters the type of support required by advertisers. However, Ebiquity (EBQ) has been gaining business from large digital players, including Deliveroo and Facebook, who have become large advertising spenders in their own right and use EBQ’s services such as media performance and contract compliance. Analytics & Tech practice revenues grew by 4%. EBQ is increasingly aligning its offering towards forward-looking advice and is focusing on those areas where its expertise can most effectively be leveraged, such as in analytics and digital. Its independence from media buying and trading is a clear advantage in a market where trust issues have been to the fore.

Financially strengthened

The balance sheet was notably strengthened by the AdIntel disposal (net debt of £7.0m from £27.5m at the prior year-end). EBQ is now through most of the cost duplication associated with the decoupling, but still carries additional costs related to property as it prepares to move its London head office. Savings of £1m (mostly from staff costs) are targeted on an annualised basis, largely arising in FY20.

Valuation: Discount to peers

Ebiquity trades at a considerable discount to other smaller marketing services groups on an EV/EBITDA basis, albeit that they have markedly different business models. Parity across FY1 and FY2 suggests a share price of 82p, 58% above the current price. On a 12% EBITDA margin assumption for FY22–27e (a conservative scenario) and factoring in no revenue growth at all (highly unlikely) suggests a share price of 69p. Some execution risk should also be factored in.

Targeting improving margins

Results by segment

Full descriptions of the business activities were given in our outlook note published on 12 April.

Exhibit 1: Summary interims by segment

Media

% change/
prior year

Analytics & Tech

% change/
prior year

Total

% change/
prior year

Revenue

27.7

-1

7.6

+4

35.3

-

Operating profit

6.7

-7

0.7

+57

7.3

-4

Operating margin

24%

26%

9%

6%

21%

22%

Unallocated costs

(4.0)

-

Group operating profit

3.4

-19

Source: Company accounts

The largest element of the £7.0m H119 highlighted items was a £5.9m write-down of goodwill and intangibles relating to the closing of Stratigent, a loss-making marketing technology business in Chicago. We estimate that this was turning over around $4.0m (£3.2m).

Aligning the costs to the ongoing business is not simply a matter of cutting overhead, it is making sure that the costs relate to the right people in the right places, which can be a more protracted exercise. The commitments to support AdIntel post its sale to Nielsen are unwinding, although there continue to be elements of IT support for the remainder of the year. The group is also in the process of moving head office to a more flexible space near Old Street, London, which has involved an element of double running while the new office is fitted out.

Management has identified £1m of cost reduction across the business, which would principally accrue from FY20.

Group margin should also be lifted by the increase in productisation in the media practice in data processing, analysis and reporting, all of which also make the business more scalable. Efficiency in data capture from the agency (providing the benchmarking data) is now being achieved by direct upload through the ‘Connect’ tool. A new tool, "EbiquitySync", for digital benchmarking has also been developed which is being rolled out across the group.

Adjustments to forecasts

H119 revenues were softer than we had been anticipating, but management’s focus on costs has enabled it to deliver operating profits in line and on track to meet expectations for the full year, ie operating margins are head of where we thought they would be. Our revised revenue forecast for FY20 assumes an underlying growth rate of around 6% (this compares to Zenith’s current global ad spend forecast of 4.4%), less the revenue previously contributed by Stratigent.

Our operating margin projections are therefore now for 8.6%, rising to 9.7% for FY20 (previously 8.1%, rising to 8.6%).

Focus on analytics, digital, US

These are the key areas for investment to drive top-line growth and improve margin. Forward-looking analytics coupled with the expertise on markets gives a strong proposition to support and advise CMOs in their decision-making. Revenue growth of the analytics business in this reporting period was held back by a large UK retailer reducing spend (due to its own difficulties) but is expected to return to double digit growth in the second half aided by expansion into France. New client wins, though, have brought some strong new names onto the roster including Volkswagen, a global telecoms group and a leading European airlines group.

Further investment in digital media services is an obvious need and is continuing in response to the shift of advertising away from traditional media platforms. The US is the largest advertising market and Ebiquity is under-represented on the ground. A new MD North America, Jed Meyer, was appointed in May, joining from Google, with previous experience including time at Omnicom and at Nielsen.

Valuation

Using the same approach as in our outlook note, we have looked at Ebiquity’s valuation in comparison to a UK peer set of smaller quoted peers in the sector and also on a DCF basis.

Exhibit 2: Smaller quoted UK marcomms peers

Share
price (p)

P/E last
(x)

P/E 1FY
(x)

P/E 2FY
(x)

Hist EV/Sales last (x)

EV/EBITDA last (x)

EV/EBITDA 1FY (x)

EV/EBITDA 2FY (x)

Div yield last (%)

EBITDA margin last (%)

EBITDA margin 1FY (%)

S4 Capital

139.5

26.3

18.6

2.7

17.6

12.8

0.0

15.3

M&C Saatchi

160

6.8

7.5

7.1

0.6

9.7

4.8

4.4

6.8

13.4

14.2

Huntsworth

85

13.9

10.1

9.1

1.9

13.6

9.2

8.3

2.8

10.3

19.1

Cello Health

127

13.6

12.4

0.8

11.8

7.0

6.7

2.8

8.6

9.8

Kin + Carta

84

9.1

8.9

7.4

0.9

7.1

6.3

5.4

2.3

13.2

15.6

Next Fifteen Comms

510

15.4

13.5

12.2

2.1

13.2

9.9

8.9

1.4

18.6

20.3

The Mission Group

84

10.2

9.0

8.3

0.6

8.4

7.2

6.6

2.2

9.4

14.8

Average

11.1

12.7

10.7

1.4

10.6

8.9

7.6

2.6

12.3

15.6

Ebiquity

14.8

13.1

10.5

0.7

5.9

6.1

5.6

1.4

11.2

10.6

Source: Refinitiv. Note: Prices as at 7 October.

On an EV/EBITDA basis, the shares are trading at a substantial discount in both forecast years. Parity on current year and next, averaged, suggests a share price of 82p.

As previously, we have looked at the DCF at varying margin assumptions and at varying revenue growth rates across FY22–27e, on fixed assumptions of an 8.5% WACC and terminal growth of 2%. An EBITDA margin of 12%, a shade above the 11.5% we forecast for FY20, derives an implied share price of 69p, on flat revenues. As outlined above, we do anticipate further margin expansion and flat revenues would obviously be a very disappointing outturn.

Exhibit 3: Financial summary

£000s

2016

2017

2018

2019e

2020e

31-December

IFRS

IFRS

IFRS

IFRS

IFRS

INCOME STATEMENT

Revenue

 

 

83,569

64,228

69,368

71,000

72,250

EBITDA

 

 

14,574

10,840

7,761

7,519

8,304

Operating Profit (before amort. and except.)

 

 

12,959

8,992

6,342

6,100

7,000

Amortisation of acquired intangibles

(1,865)

(1,231)

(1,240)

(1,300)

(1,300)

Exceptionals

(2,777)

(3,405)

(6,233)

(6,436)

0

Share-based payments

(560)

(578)

(223)

(136)

(136)

Reported operating profit

7,757

3,778

(1,354)

(1,772)

5,564

Net Interest

(1,132)

(1,044)

(1,151)

(764)

(513)

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

5,336

6,487

Profit Before Tax (reported)

 

 

6,625

2,734

(2,504)

(2,536)

5,051

Reported tax

(2,230)

(1,753)

(1,985)

(1,441)

(1,687)

Profit After Tax (norm)

9,257

5,531

3,413

3,896

4,800

Profit After Tax (reported)

4,395

981

(4,488)

(3,976)

3,364

Minority interests

(245)

(384)

(472)

(600)

(625)

Discontinued operations

0

1,467

(845)

0

0

Net income (normalised)

9,012

4,951

4,057

3,296

4,176

Net income (reported)

4,150

2,064

(5,334)

(4,576)

2,739

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

4.2

5.3

EPS - normalised (p)

 

 

11.3

6.2

3.5

4.0

5.0

EPS - basic reported (p)

 

 

5.4

2.7

(7.4)

(5.8)

3.4

Dividend per share (p)

0.65

0.71

0.71

0.85

0.95

EBITDA Margin (%)

17.4

16.9

11.2

10.6

11.5

Normalised Operating Margin

15.5

14.0

9.1

8.6

9.7

BALANCE SHEET

Fixed Assets

 

 

75,855

75,771

45,400

49,037

46,434

Intangible Assets

72,079

72,440

43,251

35,811

34,757

Tangible Assets

2,438

1,829

1,170

12,249

10,700

Investments & other

1,338

1,502

979

977

977

Current Assets

 

 

35,078

37,241

65,935

35,683

39,100

Stocks

0

0

0

0

0

Debtors

19,291

32,509

29,408

30,100

30,630

Cash & cash equivalents

6,662

4,732

8,793

5,583

8,471

Other

9,125

0

27,734

0

0

Current Liabilities

 

 

(25,912)

(24,549)

(27,539)

(28,102)

(28,244)

Creditors

(17,809)

(20,066)

(18,150)

(18,713)

(18,855)

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)

(17,746)

(17,746)

Long term borrowings

(30,210)

(32,000)

(33,965)

(16,465)

(16,465)

Other long term liabilities

(2,518)

(3,481)

(2,317)

(1,281)

(1,281)

Net Assets

 

 

52,293

52,982

47,514

38,871

39,544

Minority interests

761

1,040

992

1,135

1,135

Shareholders' equity

 

 

51,532

51,942

46,522

37,736

38,409

CASH FLOW

Op Cash Flow before WC and tax

14,574

10,840

7,761

7,519

8,304

Working capital

(2,835)

(2,002)

(367)

(129)

(388)

Exceptional & other

(957)

(890)

(6,233)

(104)

0

Tax

(166)

(2,207)

(1,952)

(1,441)

(1,687)

Net operating cash flow

 

 

10,616

5,741

(791)

5,846

6,230

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)

(764)

(513)

Equity financing

26

160

252

60

0

Dividends

(838)

(495)

(791)

(879)

(1,029)

Other

(1,017)

(46)

0

0

0

Net Cash Flow

931

(874)

(5,040)

20,622

2,888

Opening net debt/(cash)

 

 

28,661

28,024

28,840

27,486

6,864

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

6,864

3,976

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 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.

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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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