DIS
DIS continues to trade robustly with a deliberate focus on profitability over volume.
Growth in higher-margin value-added services and the benefits of prior optimisation
initiatives are supporting margins, which should be supportive of a positive valuation
outcome in the disposal process.
Comparison
Comparison is benefiting from increasing internationalisation, with France now making
a meaningful contribution to revenues and profitability. Italy and the UK remain in
the optimisation phase, but management sees significant long-term growth potential
outside its core DACH market. Our forecasts reflect the ongoing balance between investment
in expansion and near-term profitability.
Search
Search experienced a year of significant disruption following Google’s discontinuation
of AdSense for Domains (AFD) and the industry’s transition to the Related Search on
Content (RSoC) monetisation framework. With AFD no longer contributing to revenues,
performance is improving as Team Internet optimises RSoC conversion rates and benefits
from competitor attrition. As a result, the business appears to be moving onto more
sustainable footing and is expected to return to profitability in H226.
Estimate changes
At the group level, our EBITDA forecasts are broadly unchanged, albeit with a different
earnings mix and a greater emphasis on profitability rather than scale. We place limited
weight on gross revenue as a valuation metric given the differing economics across
the divisions and the distortion caused by the Search transition. The reduction in
our revenue forecasts primarily reflects a more gradual adoption curve for RSoC than
previously anticipated. However, improving profitability in DIS and stabilising trends
in Search mean that net revenue and EBITDA expectations are largely unchanged, while
margins improve materially.
Below EBITDA, we reduce our adjusted PBT and EPS forecasts and increase year-end net
debt estimates to reflect higher interest costs associated with refinancing activity,
together with the inclusion of non-core costs relating to restructuring, the DIS transaction
process and litigation.
A successful DIS disposal would move the group into a net cash position. We expect
management to optimise the post-transaction balance sheet and potentially return a
portion of excess capital to shareholders.
| Exhibit 2: Estimate changes |
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| Source: Edison Investment Research |
Sum-of-the-parts valuation
Our peer-based SOTP framework continues to indicate meaningful upside from current
levels. Applying conservative peer multiples to Comparison and Search implies a combined
value of 27–34p per share, despite Search only recently emerging from a period of
significant disruption following Google’s withdrawal of AFD. We believe there is scope
for further upside as Comparison demonstrates the benefits of international expansion
and Search establishes a more sustainable growth and margin profile under RSoC.
For DIS, management continues to guide towards a valuation materially above £120m.
Our conservative case assumes proceeds of £144m (58p/share), representing a ‘material’
premium to this level. A peer-based valuation would imply closer to 70p/share, although
this is based on EBITDA that still bears a substantial allocation of central costs,
which would not necessarily transfer to a buyer. Assuming net debt of c $100m (30p/share),
the current share price appears to discount the most conservative outcome for the
disposal while attributing limited value to the remaining business.
We see several potential drivers of further upside, including a stronger-than-expected
DIS valuation, continued operational improvement in Comparison and Search, additional
cost rationalisation following a disposal and potential proceeds from the recently
disclosed litigation claim.
| Exhibit 3: Sum-of-the-parts analysis |
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| Source: Edison Investment Research |
