US momentum

Ebiquity 25 September 2018 Update
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Ebiquity

US momentum

Interim results

Media

25 September 2018

Price

40p

Market cap

£30m

£1:US$1.32

Net debt (£m) as at 30 June 2018

25.7

Shares in issue

74.4m

Free float

99%

Code

EBQ

Primary exchange

AIM

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

(17.5)

(39.9)

(65.2)

Rel (local)

(16.8)

(39.3)

(66.4)

52-week high/low

115.0p

38.0p

Business description

Ebiquity is an independent marketing analytics specialist providing a range of business-critical data, analysis and consultancy services to advertisers and media owners on an international basis. It operates across three divisions: Analytics & Tech, Media and Intel (which is being disposed of).

Next events

Pre-close update

End January 2019e

Final results

March 2019

Analysts

Fiona Orford-Williams

+44 (0)20 3077 5739

Neil Shah

+44 (0)20 3077 5715

Ebiquity is a research client of Edison Investment Research Limited

Ebiquity’s interims are as indicated in July’s update, with good performance from the Media and Analytics & Tech segments. The strong new business pipeline underpins improving revenue and profit in H218 and our forecasts are unchanged. Management expects the Phase 2 CMA investigation on the Intel disposal to be concluded by this December. Once the situation is resolved, the shares can be appraised on fundamentals again. The continuing structural shifts in marketing should make for a fertile trading environment for an independent, trusted partner to guide decision-making. The current rating reflects uncertainty, rather than value.

Year end

Revenue (£m)

EBIT* (£m)

PBT*
(£m)

EPS*
(p)

DPS
(p)

P/E
(x)

Yield
(%)

12/16

83.6

13.0

11.8

11.3

0.65

3.5

1.6

12/17

87.4

12.0

11.0

9.4

0.71

4.3

1.8

12/18e

91.2

10.5

9.3

8.0

0.75

5.0

1.9

12/19e

96.5

12.1

11.3

9.7

0.78

4.1

2.0

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

Good pipeline and H2 bias to profits

Transparency remains a major concern to brand advertisers and is partly fuelling increased levels of in-housing of functions such as media buying. Measurement of ROI is becoming more sophisticated and taking into account broader business aspects than straightforward returns on digital advertising campaigns. The spate of media reviews by larger brands is also positive. Ebiquity has been stepping up its offering in contract compliance, advanced analytics and tech advisory, spending £1.5m in the period, implying a short-term cost to margin. Advanced analytics and Tech has good momentum (like-for-like revenue growth near-30%), especially in the UK where management reports significant new business wins. The Media business in the US similarly reports strong trading, while a new leadership team in China should help drive improved H2 profitability.

Strong cash performance

Tight working capital control in H118 led to 168% conversion of operating profit to cash and net debt reduced by £3.2m to £25.7m. Post the period end, EBQ has renegotiated its debt facilities. Its existing term loan matures on 30 September 2018. The revolving credit facility of £34.0m (H117: £29.0m) has now been extended to 30 June 2020 on unchanged terms, including covenants. The agreed price for the Intel disposal to Nielsen is £26m gross (£20m net).

Valuation: Reflects uncertainty, not value

The share price has reduced from 100p in mid February 2018 on the Intel disposal announcement, to 64.5p in June on news of the referral, dipping to 40p on the July trading update. The clear catalyst for a rerating will be the CMA’s report, expected by December. This will either approve the disposal (with or without mitigation) or Intel will be retained, an outcome that has also been planned for. At this juncture, the shares can be valued with regard to the ongoing activities and balance sheet position. Smaller marcomms businesses currently trade on an FY18 P/E of 12.2x.

Operating margin to rebuild

The group revenue increase of 1.9% equates to a gain of 3.4% on a like-for-like basis, adjusted for acquisitions and currency. Without the Intel division, like-for-like revenues were ahead by 7%. Group operating margins were depressed by three key elements:

The impact of the reduced Intel margin, as the impending putative change of ownership affected management time and new business acquisition on this relatively high fixed-cost business;

Investment in scaling up the remaining business practices and operational capability; and

Increased central costs, including new client account management teams

These last two investments are identified as costing £1.5m in the period (central costs are £0.5m higher than H117). This meant that, excluding Intel, the operating margin was 10.5%, below the group target level of 12-13%, reflecting this investment. Our estimates are unchanged on this announcement, with FY18 estimates adjusted at the time of the trading update. FY19e numbers were maintained at that time and are again unchanged. For FY18e, our model suggests a stronger H2 performance, lifting the full year operating margin to 11.5%, building to 12.5% in FY19e (12.6% without Intel) and 13.0% in FY20e as the top line builds and overhead recovery improves.

The results by segment are shown below.

Exhibit 1: Interim results by division

(#m)

Media

% ch/ prior yr

Analytics & Tech

% ch/ prior yr

Subtotal

% ch/ prior yr

Intel

% ch/ prior yr

Total

% ch/ prior yr

Central costs

% ch/ prior yr

Group total

% ch/ prior yr

Revenue

27,994

5%

7,347

16%

35,341

7%

10,110

-13%

45,451

2%

45,451

2%

Operating profit

7,203

-8%

422

-53%

7,625

-13%

512

-64%

8,137

-20%

(3,972)

15%

4,165

-38%

Operating margin

25.7%

29.5%

5.7%

14.2%

21.6%

26.5%

5.1%

12.1%

17.9%

22.8%

9.2%

15.1%

Source: Company accounts

Media practice (61.6% H118 revenue)

Like-for-like revenue were ahead 5.9% as the US business recovered from a difficult FY17, winning some good new business under its new leadership team. Its contract compliance practice continues to benefit from the trust deficit between the advertising industry and its customers. Outside the US, the European business was less buoyant as decision-making dragged, weighting revenues more heavily to H2. China should also be more H2 weighted as the new team finds its feet, with the Singapore operation performing well.

Analytics & Tech (16.2% H118 revenue)

While technically two segments, these are bundled together for reporting purposes. Here the UK business was the strongest performer, while the US lagged. The US Digital Analytics business (was Stratigent) is now being reviewed to ascertain the best way forward. Investment in growing Analytics outside the UK and in building up the Tech practice weighed particularly on the margin in this segment.

Intel (22.2% H118 revenue)

As outlined in the July trading update and reiterated here, the uncertainty over the ownership of this operation has had repercussions in terms of new business to counter the inevitable client churn, particularly in the UK. With relatively high fixed costs, this has a significant impact on operating margin, which fell from 12.1% to 5.1%, half-year on half-year.

Cash performance stronger than anticipated

While the indicated taxation was slightly higher than expected at the half-year, we expect this to correct over H2 and our modelled rate for the full year remains at 24%. The outstanding element of these figures is, in our view, the working capital performance. A drive to improve receipts in Q218 pushed cash from operations up from £6.0m in H117 to £7.0m in H118 on an underlying basis, representing cash conversion of 168%.

Remaining contingent consideration for previous acquisitions is now at just £1.8m, of which £1.0m falls in the next 12 months. With net debt having reduced by £3.2m over the first half to £25.7m and the renewed facilities in place, there should be no issue in meeting the cash requirements of the group. The position obviously dramatically ameliorates with the Intel disposal proceeds (£26m gross, £20m net) if, as, and when they are received. We will update our model with respect to this divestment in due course.

Exhibit 2: Financial summary

£000s

2016

2017

2018e

2019e

31-December

IFRS

IFRS

IFRS

IFRS

INCOME STATEMENT

31-Dec

31-Dec

31-Dec

31-Dec

Revenue

 

 

83,569

87,374

91,200

96,464

EBITDA

 

 

14,574

14,035

12,743

14,458

Operating Profit (before amort. and except.)

 

 

12,959

12,026

10,500

12,058

Amortisation of acquired intangibles

(1,865)

(1,952)

(1,950)

(1,900)

Exceptionals

(2,777)

(3,801)

(1,600)

0

Share-based payments

(560)

(738)

(1,000)

(1,000)

Reported operating profit

7,757

5,535

5,950

9,158

Net Interest

(1,132)

(1,044)

(1,200)

(808)

Joint ventures & associates (post tax)

0

0

0

0

Exceptionals

0

0

0

0

Profit Before Tax (norm)

 

 

11,827

10,982

9,300

11,250

Profit Before Tax (reported)

 

 

6,625

4,491

4,750

8,350

Reported tax

(2,230)

(2,043)

(2,232)

(2,700)

Profit After Tax (norm)

9,257

8,085

7,068

8,550

Profit After Tax (reported)

4,395

2,448

2,518

5,650

Minority interests

(245)

(384)

(585)

(600)

Discontinued operations

0

0

0

0

Net income (normalised)

9,012

7,701

6,483

7,950

Net income (reported)

4,150

2,064

1,933

5,050

Average Number of Shares Outstanding (m)

77.2

77.9

78.1

78.9

EPS - normalised (p)

 

 

11.7

9.7

8.3

10.1

EPS - normalised fully diluted (p)

 

 

11.3

9.4

8.0

9.7

EPS - basic reported (p)

 

 

5.4

2.7

2.5

6.4

Dividend per share (p)

0.65

0.71

0.75

0.78

EBITDA Margin (%)

17.4

16.1

14.0

15.0

Normalised Operating Margin

15.5

13.8

11.5

12.5

BALANCE SHEET

Fixed Assets

 

 

75,855

75,771

74,978

73,878

Intangible Assets

72,079

72,440

71,947

71,197

Tangible Assets

2,438

1,829

1,529

1,179

Investments & other

1,338

1,502

1,502

1,502

Current Assets

 

 

35,078

37,241

39,945

47,305

Stocks

0

0

0

0

Debtors

19,291

20,978

21,607

22,256

Cash & cash equivalents

6,662

4,732

6,807

13,519

Other

9,125

11,531

11,531

11,531

Current Liabilities

 

 

(25,912)

(24,549)

(24,771)

(25,000)

Creditors

(17,809)

(20,066)

(20,288)

(20,517)

Tax and social security

(1,850)

(1,598)

(1,598)

(1,598)

Short term borrowings

(4,476)

(1,572)

(1,572)

(1,572)

Other

(1,777)

(1,313)

(1,313)

(1,313)

Long Term Liabilities

 

 

(32,728)

(35,481)

(34,231)

(34,231)

Long term borrowings

(30,210)

(32,000)

(30,750)

(30,750)

Other long term liabilities

(2,518)

(3,481)

(3,481)

(3,481)

Net Assets

 

 

52,293

52,982

55,921

61,953

Minority interests

761

1,040

1,040

1,040

Shareholders' equity

 

 

53,054

54,022

56,961

62,993

CASH FLOW

Op Cash Flow before WC and tax

14,574

14,035

12,743

14,458

Working capital

(2,835)

(2,002)

(407)

(420)

Exceptional & other

(957)

(4,085)

(1,600)

0

Tax

(166)

(2,207)

(2,232)

(2,700)

Net operating cash flow

 

 

10,616

5,741

8,504

11,339

Capex

(2,351)

(2,231)

(2,500)

(2,600)

Acquisitions/disposals

(4,431)

(3,082)

(900)

(600)

Net interest

(1,074)

(921)

(1,200)

(808)

Equity financing

26

160

0

0

Dividends

(838)

(495)

(579)

(619)

Other

(1,017)

(46)

0

0

Net Cash Flow

931

(874)

3,325

6,712

Opening net debt/(cash)

 

 

28,661

28,024

28,840

25,515

FX

(633)

58

0

0

Other non-cash movements

339

0

0

Closing net debt/(cash)

 

 

28,024

28,840

25,515

18,803.2

Source: Company accounts, Edison Investment Research

Edison is an investment research and advisory company, with offices in North America, Europe, the Middle East and AsiaPac. The heart of Edison is our world-renowned equity research platform and deep multi-sector expertise. At Edison Investment Research, our research is widely read by international investors, advisers and stakeholders. Edison Advisors leverages our core research platform to provide differentiated services including investor relations and strategic consulting. Edison is authorised and regulated by the Financial Conduct Authority. Edison Investment Research (NZ) Limited (Edison NZ) is the New Zealand subsidiary of Edison. Edison NZ is registered on the New Zealand Financial Service Providers Register (FSP number 247505) and is registered to provide wholesale and/or generic financial adviser services only. Edison Investment Research Inc (Edison US) is the US subsidiary of Edison and is regulated by the Securities and Exchange Commission. Edison Investment Research Pty Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison. Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com

DISCLAIMER
Copyright 2018 Edison Investment Research Limited. All rights reserved. This report has been commissioned by Ebiquity and prepared and issued by Edison for publication globally. 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. Opinions contained in this report represent those of the research department of Edison at the time of publication. The securities described in the Investment Research may not be eligible for sale in all jurisdictions or to certain categories of investors. This research is issued in Australia by Edison Investment Research Pty Ltd (Corporate Authorised Representative (1252501) of Myonlineadvisers Pty Ltd (AFSL: 427484)) and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. The Investment Research is distributed in the United States by Edison US to major US institutional investors only. Edison US is registered as an investment adviser with the Securities and Exchange Commission. Edison US 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. As such, Edison does not offer or provide personalised advice. We publish information about companies in which we believe our readers may be interested and this information reflects our sincere opinions. The information that we provide or that is derived from our website is not intended to be, and should not be construed in any manner whatsoever as, personalised advice. Also, our website and 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 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. This document is provided 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.
Edison has a restrictive policy relating to personal dealing. 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. Edison or its affiliates may perform services or solicit business from any of the companies mentioned in this report. The value of securities mentioned in this report can fall as well as rise and are subject to large and sudden swings. In addition it may be difficult or not possible to buy, sell or obtain accurate information about the value of securities mentioned in this report. Past performance is not necessarily a guide to future performance. 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. 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 (ie 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. To the maximum extent permitted by law, Edison, its affiliates and contractors, and their respective directors, officers and employees will not be liable for any loss or damage arising as a result of reliance being placed on any of the information contained in this report and do not guarantee the returns on investments in the products discussed in this publication. FTSE International Limited (“FTSE”) © FTSE 2018. “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.

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

295 Madison Avenue, 18th Floor

10017, New York

US

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

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Edison is an investment research and advisory company, with offices in North America, Europe, the Middle East and AsiaPac. The heart of Edison is our world-renowned equity research platform and deep multi-sector expertise. At Edison Investment Research, our research is widely read by international investors, advisers and stakeholders. Edison Advisors leverages our core research platform to provide differentiated services including investor relations and strategic consulting. Edison is authorised and regulated by the Financial Conduct Authority. Edison Investment Research (NZ) Limited (Edison NZ) is the New Zealand subsidiary of Edison. Edison NZ is registered on the New Zealand Financial Service Providers Register (FSP number 247505) and is registered to provide wholesale and/or generic financial adviser services only. Edison Investment Research Inc (Edison US) is the US subsidiary of Edison and is regulated by the Securities and Exchange Commission. Edison Investment Research Pty Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison. Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com

DISCLAIMER
Copyright 2018 Edison Investment Research Limited. All rights reserved. This report has been commissioned by Ebiquity and prepared and issued by Edison for publication globally. 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. Opinions contained in this report represent those of the research department of Edison at the time of publication. The securities described in the Investment Research may not be eligible for sale in all jurisdictions or to certain categories of investors. This research is issued in Australia by Edison Investment Research Pty Ltd (Corporate Authorised Representative (1252501) of Myonlineadvisers Pty Ltd (AFSL: 427484)) and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. The Investment Research is distributed in the United States by Edison US to major US institutional investors only. Edison US is registered as an investment adviser with the Securities and Exchange Commission. Edison US 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. As such, Edison does not offer or provide personalised advice. We publish information about companies in which we believe our readers may be interested and this information reflects our sincere opinions. The information that we provide or that is derived from our website is not intended to be, and should not be construed in any manner whatsoever as, personalised advice. Also, our website and 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 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. This document is provided 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.
Edison has a restrictive policy relating to personal dealing. 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. Edison or its affiliates may perform services or solicit business from any of the companies mentioned in this report. The value of securities mentioned in this report can fall as well as rise and are subject to large and sudden swings. In addition it may be difficult or not possible to buy, sell or obtain accurate information about the value of securities mentioned in this report. Past performance is not necessarily a guide to future performance. 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. 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 (ie 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. To the maximum extent permitted by law, Edison, its affiliates and contractors, and their respective directors, officers and employees will not be liable for any loss or damage arising as a result of reliance being placed on any of the information contained in this report and do not guarantee the returns on investments in the products discussed in this publication. FTSE International Limited (“FTSE”) © FTSE 2018. “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.

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

295 Madison Avenue, 18th Floor

10017, New York

US

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

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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