Ebiquity — Update 30 March 2016

Ebiquity is an independent marketing performance specialist and a leading provider of business-critical media and marketing analytics to advertisers and media owners on an international basis. Its strategy is to become the leading and most respected independent provider of data-driven actionable insights to the global marketing community. Over the past six years, the group has made a series of significant acquisitions, which have established it with a global media presence. The group operates from 21 global offices plus an extensive partner and franchise network, and provides services to over 1,100 clients across 85 countries, including 80 of the world’s 100 largest advertisers. It benefits from one of the largest international media cost databases, plus the largest and one of the most comprehensive in the UK, which have been built over the past decade and represent a significant barrier to entry. The business is structured into three reporting segments:

Although some level of discount might be expected against larger-cap companies, Ebiquity is trading at a significant discount to all our suggested metrics when compared to selected proxy comparators. We believe that in the medium term, Ebiquity can grow EPS at 10+% pa through organic growth, economies of scale and further acquisitions, although this could be affected by c two-thirds of group revenue being subject to currency fluctuations.

Net debt at end CY15 stood at £28.7m, up from £26.4m at 30 April 2015, after acquisition payments of £4.1m. We anticipate that net debt will decline to £26.0m at end CY16 and to £21.4m at end CY17. We believe that estimated deferred consideration of £4.85m outstanding at end CY15, plus consideration relating to the two acquisition events completed in early CY16 can be comfortably satisfied by operating cash inflow, available banking facilities and current cash resources.

The major sensitivities, for which a material change in any of these could surprise either on the upside or the downside for the group, include:

Following the change in the group’s its financial year-end to 31 December from 30 April, audited results for the eight month to 31 December have been reported – it should be noted that this excludes the group’s busiest period from the statutory results and has a significant impact on reported performance. Providing further insight, management has presented relevant unaudited pro forma data for CY15 and CY14. This report focuses on this data and provides the basis for our calendar year estimates going forward. CY15 group revenue rose 10.8% (7.9% l-f-l,1 10.5% l-f-l CC,1 13.5% CC1) and underlying operating profit after central costs rose 55.9% (50.8% l-f-l,1 64.3% CC1) versus CY14.

Segmental revenue and operating profit analysis

MVM, the group’s largest segment, achieved 15.4% revenue growth (15.0% l-f-l CC,1 20.1% CC1) and saw an unprecedented level of activity during CY15 with high levels of engagement. With close control of costs, the underlying operating profit margin rose to 28.7% (CY14: 21.8%).

MPO, the group’s newest and fastest-growing segment, continued to record significant momentum, with 49.2% revenue growth (38.4% l-f-l CC,1 44.4% CC1). Continued investment in MPO, to enable growth to be sustainable over the longer term, resulted in an expected decline in underlying operating margin to 28.2% (CY14: 33.0%).

The MI segment declined 5.4% (-3.6% l-f-l CC,1 -3.6% CC1), being negatively affected by a slowdown in project work, though its dominant Platform division stabilised showed l-f-l CC1 growth of 0.4% and is now showing signs of improvement. This change in revenue profile, combined with ongoing cost efficiencies within the group’s data centres, positively affected underlying operating profit margin in CY15 to 14.9% (CY14: 13.2%).

Foreign currency impact turning positive

The eight month results to December 2015 reflect the continued impact of foreign exchange on the group’s recent performance. CY14 and CY15 average rates moved from €1.240 to €1.377, offset by US$1.648 to US$1.528. A 10% strengthening in sterling against the US dollar and the euro would increase PBT by £0.12m and £0.10m respectively. With c two-thirds of group revenue (HY Oct 2015: €29%; US$:24%; and other: 11%) being subject to currency fluctuations, sterling’s weakness if maintained in 2016 (24 March 2016: €: 1.266; US$ 1.413) should reverse the currency headwinds of the past two years to positive and provide added comfort to our CY16e estimates.

This January, Michael Karg was appointed CEO. He replaces Michael Greenlees, who was CEO for eight years and decided that, having built Ebiquity into a world-leading international marketing analytics company, it was the right time for new leadership to take the business to the next stage of its development. Michael Karg was previously with Razorfish, the digital business transformation agency of Publicis Groupe (PUB.PA), where he was most recently CEO, international. He has worked globally over a 15-year career with Razorfish and Digitas, advising some of the world's largest companies on their omni-channel marketing strategies. While at Razorfish, he was responsible for growth and development in Europe, India, China, South-East Asia and Australia. Michael Greenlees will remain on the board as an executive director until an orderly handover and transition has been completed, and will serve the company in an advisory capacity for two years from 30 April 2016.

Over the past six years the group has made a series of significant acquisitions, which has established it with a global media presence with one of the largest international media cost databases. Most of these have been purchased with an initial cash payment followed by multi-year earn-out payments based on the performance of the acquired business. Acquisitions in earn-out mode at 31 December 2015 had an estimated remaining deferred consideration totalling £4.85m, of which £3.42m is due in FY16. Since then, on 11 March 2016 the group acquired outstanding 50% interest in its Irish media associate, Fairbrother Marsh for an initial cash consideration of €0.15m with a maximum consideration of €2.0m, payable in cash, based on performance to December 2020. In addition the group has extended management incentivisation at its August 2013 acquisition Stratigent by increasing the total cap on consideration by US$1.5m, payable 25% cash and 75% shares. With the available banking facilities (see below), current cash resources and our estimated strong operating cash inflow, we believe the prospective deferred consideration earn-out payments can be comfortably satisfied.

In July 2014, the group refinanced its banking facilities. The committed facility, totalling £40m, comprises a term loan of £10m, of which £6.25m was outstanding at 31 December 2015, and a revolving credit facility (RCF) of £30m, of which £29.0m was drawn down at 31 December 2015. Both the term loan and the RCF have a maturity date of 2 July 2018. The £10m term loan is being repaid on a quarterly basis to maturity. These facilities may be used for deferred consideration payments on past acquisitions, to fund future potential acquisitions, or for general working capital requirements. In addition, the group has an accordion option to increase these banking facilities by a further £20m.

There are no quoted companies that are directly comparable competitors to Ebiquity’s business. In the MVM division, we regard the main competitors as Accenture Media Management, part of the Accenture group (ACN.N), and media agencies themselves. For the MI segment, which operates in a highly competitive and mature market, we believe that the main competitors are Nielsen Media Research, owned by Nielsen Holdings (NLSN.N) and Kantar, a subsidiary of WPP (WPP.L), plus smaller local market service providers.

We have identified a selection of companies that have interests in businesses with similar disciplines, eg media research, marketing analytics/intelligence, consultancy and advertising. While these proxy group companies are significantly larger, Exhibit 2 provides some benchmarks for a realistic rating that investors could attribute to Ebiquity.

Ebiquity’s management suggests that the potential addressable market for the group’s products and services is c $30bn within an estimated $600bn global media marketing and advertising market. In addition, management expects that the potential addressable market for the group’s products could reach $100bn by 2018. This implies a significant growth opportunity for Ebiquity, especially as the group has positioned itself well to scale its business globally following the series of acquisitions over the past six years. We believe that Ebiquity has the expertise and capability to grow revenue c 5-10% pa over the medium term, with the main growth drivers being MVM, where the group benefits from the scale of its media cost databases, which are significant barriers to competitive entry, and MPO, which is the group’s fastest growing area and where management expects to invest substantially to promote future growth.

Although some level of discount might be expected against larger-cap companies, Ebiquity is trading at a significant discount to all our suggested metrics when compared to selected proxy comparators. While CY16e and CY17e normalised underlying EPS growth is likely to be affected by a rise in the tax charge due to the benefit of available tax losses now being almost exhausted, we believe that in the medium term, Ebiquity can grow EPS at 10+% pa through organic growth, economies of scale and further acquisitions, although this could be affected by c two-thirds of group revenue being subject to currency fluctuations.