Ebiquity — Strong uplift in operating margin

Ebiquity (AIM: EBQ)

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Research: TMT

Ebiquity — Strong uplift in operating margin

Ebiquity has delivered strong first half results, with 7% organic revenue growth boosted to a 16% gain including acquisitions. An increasing proportion of revenues from the higher-margin digital media solutions and rigorous control of costs in the existing business drove a substantial uplift in underlying operating margins from 7.1% in H121 to 13.3% in H122. Full year results are expected to be in line with market expectations and we have reinstated FY22 and FY23 forecasts including the H122 acquisitions. The shares have outperformed peers and the sector, but the valuation remains at a discount.

Fiona Orford-Williams

Written by

Fiona Orford-Williams

Director, TMT

TMT

Ebiquity

Strong uplift in operating margin

Interim results

Media

28 September 2022

Price

51p

Market cap

£59m

Net debt (£m) at end June 2022

12.9

Shares in issue

116.0m

Free float

82.4%

Code

EBQ

Primary exchange

AIM

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

(6.5)

(4.7)

(13.7)

Rel (local)

0.0

0.1

(7.8)

52-week high/low

71.5p

50.0p

Business description

Ebiquity is a leading, independent global media consultancy, working for over 70 of the world’s 100 leading brands to optimise their media investments.

Next events

Trading update

Jan 23

Analyst

Fiona Orford-Williams

+44 (0)20 3077 5739

Ebiquity is a research client of Edison Investment Research Limited

Ebiquity has delivered strong first half results, with 7% organic revenue growth boosted to a 16% gain including acquisitions. An increasing proportion of revenues from the higher-margin digital media solutions and rigorous control of costs in the existing business drove a substantial uplift in underlying operating margins from 7.1% in H121 to 13.3% in H122. Full year results are expected to be in line with market expectations and we have reinstated FY22 and FY23 forecasts including the H122 acquisitions. The shares have outperformed peers and the sector, but the valuation remains at a discount.

Year end

Revenue (£m)

PBT*
(£m)

EPS*
(p)

DPS
(p)

EV/EBITDA
(x)

P/E
(x)

12/20

55.9

(1.3)

(1.9)

0.0

40.1

N/A

12/21

63.1

4.1

2.7

0.0

10.5

19.3

12/22e

77.0

8.1

5.3

0.0

5.3

9.6

12/23e

89.0

11.5

7.0

0.0

4.1

7.3

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

Acquisitions boost operations and performance

Improvements in the group’s operating efficiency are underpinned by the GMP365 technology platform acquired with MediaPath earlier in the year (see our April flash note), which has significantly enhanced the scalability of the business. The other sizeable H122 acquisition, MMi, has resulted in a step change in the group’s traction with major US corporate advertisers, opening further opportunities both for existing activities and for cross-selling. North America and Asia-Pacific are the key regions of focus for growth. The increasing scale of Ebiquity’s operations and the use of shared service provision in lower-cost geographies like Spain and India should offset much of the industry-wide pressure on people costs, with margins also supported by increasing digitisation both within the external service offering and internally.

Circumspection on the backdrop

Prospects for the overall advertising sector are dampened by the deteriorating economic backdrop, but this can boost the requirement for advertising spend to be focused on areas with the strongest return on investment. Our reinstated forecasts are cautious for H222 and FY23, reflecting this uncertainty. We do expect good underlying growth from the focus on growing key client accounts and selling the newer digital media products, which will support further margin expansion. Net bank debt was £12.9m at H1, reflecting the acquisitions and associated fund raise, but also a working capital outflow because of invoice phasing. Our year-end projection is for net debt of £8.0m, increasing to £13.0m by end FY23 post earn-out payments.

Valuation: Discount remains despite outperformance

The share price is broadly in line with where it started the year, unlike UK-quoted marketing services peers, which have retrenched by an average of 46% over the year-to-date. Nevertheless, the valuation remains at a discount to those peers. Parity across averaged FY22e and FY23e P/E, EV/EBITDA and EV/EBIT would suggest a value of 86p, well ahead of the current price.

Good progress in H122

Summary segmental results are shown below, alongside the comparative operating margins.

Exhibit 1: Summary segmental results

£’000

Media

% change/ H121 margin

Analytics & Tech

% change/ H121 margin

Reportable segments

% change/ H121 margin

Unallocated costs

% change/ H121 margin

Total

% change/ H121 margin

Revenue

32,519

+21

4,726

-9

37,245

+16

37 ,245

+16

Operating profit/(loss)

7,640

+45

544

+26

8,184

+43

(3,224)

-6

4,960

+117

Operating margin (%)

23.5

19.7

11.5

8.3

22.0

17.8

13.3

7.1

Source: Ebiquity. Note: Operating profit/(loss) before highlighted items (see below).

Of the revenue growth reported for the first half, 7% was organic, which of itself represents a good performance, particularly against comparatives that were recovering post COVID-19 lockdowns. £2.8m of revenue was added by acquisitions made in the period, with both the MediaPath and MMi deals completing in April.

With a maiden contribution from the acquisitions to operating profits of £0.8m, effectively for Q2, the operating profit before highlighted items for ‘old’ Ebiquity was £4.2m, with an operating margin of 12%, well ahead of the 7% posted in H121. This reflects the benefit of the growth in the digital media solutions offered by the group to its clients, which are inherently higher margin, as well as the tight control of costs. In the existing business, the uplift in operating expenses was limited to 4%. Revenues in the Analytics and Tech practice were down year-on-year, mostly through a more rigorous approach to pricing and project selection, which also led to a step up in achieved operating margin as shown in the table above.

The operating margin of the acquired businesses in the period was over 32%, with the bulk of revenue and profits falling within Ebiquity’s Media reporting segment. Project costs were also reduced by the third (smaller) acquisition made in H121, that of Forde & Semple in Canada, which had previously been an external supplier.

Central costs were down 6%, benefiting from tight control but also with a forex tailwind.

Highlighted items mostly acquisition-related

Highlighted items of £5.6m comprise:

£3.4m accrual for post-date remuneration payable for Digital Decisions. The current estimate of the deferred contingent consideration here is £14.0m, of which £11.8m has already been accrued over this and previous reporting periods, discounted to a fair value of £11.4m. The final accrual will be taken in H222.

£1.7m for acquisition and integration costs, including costs relating to the £14.4m net equity fundraise (at 53p) and bank finance renegotiations.

£0.4m impairment on the value of Ebiquity Russia (negotiations are ongoing for the divestment of the majority stake).

£0.4m of acquired intangible amortisation.

£0.2m share-option charge.

Working capital outflow set to reverse in H222

There was an underlying cash outflow in the first half of £1.6m, with a working capital outflow of £8.8m, with the phasing of billing in the existing business and the novation of MMi’s client contracts to Ebiquity Inc., causing a short-term increase in receivables. Net bank debt at the half year was £12.9m, being cash of £9.3m less bank debt of £22.5m (the balancing item being prepaid loan arrangement fees). By end August, collections had reduced the net bank debt balance to £10.7m. Our forecast for the year-end is for net bank debt of £8.0m.

Progress against strategy

Management has identified four key strands. The progress against each is summarised below.

Develop higher-value strategic relationships with more clients

The group now works with 28 of the world’s 30 largest advertisers, with senior account directors focused on cementing and growing each relationship. Notable new business wins in the reporting period have included Brown-Forman Corporation (the major wine and spirits company, with an extensive portfolio of brands including Jack Daniels) in the United States and PepsiCo in India, an important win given that India is already the 10th largest advertising market globally and set to move up the rankings.

Agency selection work remains a highly competitive market but is attractive because of the opportunities it presents for continuing revenue generation. Here, Ebiquity has won the multinational agency selection programmes for Jaguar Land Rover and for BMW. It is worth pointing out that although automotive advertising has been under pressure from industry supply chain issues and from consumers being more circumspect in their spending, brand campaigns remain important, and promotion of electric vehicles is a high priority.

Develop productised solutions for the digital market

Revenue from the seven products now in the market was £2.9m in the period, so is already making a meaningful impact, particularly given that they deliver operating profit margins around 50%. The group is ahead of target on the number of digital ad impressions being analysed and the number of countries where the solutions are offered.

New solutions are being developed for Advanced TV, where the rule books are only now starting to be written, and for Retail Media, which is developing rapidly across multiple channels. The Advanced TV solution is set to be piloted in the United States in Q422. The Responsible Media Solution is now being rolled out and is currently available in 11 countries, with Scope 3 data now incorporated across all digital advertising – an increasingly important feature.

Creating a more efficient business

As described above, the Madrid-based service and support functions are reducing duplication and freeing up other teams for more revenue-generating activities, with the potential to develop and increase in India to support the growing Asia-Pacific business. The introduction of the BMP365 platform acquired with MediaPath means adapting to new ways of working, with the efficiency benefits likely to be coming through from H123 and more strongly in H223. The digital media solutions are inherently more scalable than the traditional consultancy, with the benefit already being reflected in group operating margin.

Growing the regional presence

The MMi acquisition has provided a major step up for the group’s US-based activities. This is the world’s largest market and there is obviously considerable potential for expansion. Management is also focused on growing the scale of activities in Asia-Pacific, notably China, India, Singapore and Australia, with the first three the likely priorities. Performance in Continental Europe is also worth noting, as revenues were ahead by 13% in what are perceived to be relatively mature markets for the group. This is both with national clients (Italy, France, Spain) and with some good international and global accounts being added to the roster.

Exhibit 2: Financial summary

£000s

2020

2021

2022e

2023e

Year end 31 December

IFRS

IFRS

IFRS

IFRS

INCOME STATEMENT

31-Dec

31-Dec

31-Dec

31-Dec

Revenue

 

 

55,907

63,091

77,000

89,000

Cost of Sales

(31,219)

(32,652)

(39,655)

(45,657)

Gross Profit

24,687

30,439

37,345

43,343

EBITDA

 

 

1,797

6,833

13,583

17,470

Operating profit (before amort. and excepts.)

 

 

(334)

4,737

8,900

12,800

Amortisation of acquired intangibles

(1,122)

(1,065)

(1,250)

(1,105)

Highlighted items

(3,325)

(8,431)

(6,043)

(3,436)

Share-based payments

1,906

(319)

(380)

(380)

Reported operating profit

(2,875)

(5,078)

1,227

7,879

Net Interest

(875)

(862)

(1,056)

(1,337)

Joint ventures & associates (post tax)

0

0

0

0

Forex

(137)

229

250

0

Profit Before Tax (norm)

 

 

(1,346)

4,104

8,093

11,463

Profit Before Tax (reported)

 

 

(3,887)

(5,711)

420

6,542

Reported tax

150

(1,206)

(1,961)

(2,866)

Profit After Tax (norm)

(1,372)

2,367

5,469

8,597

Profit After Tax (reported)

(3,737)

(6,917)

(1,540)

3,676

Minority interests

(186)

(117)

(26)

61

Discontinued operations

220

0

0

0

Net income (normalised)

(1,557)

2,250

5,446

8,662

Net income (reported)

(3,703)

(7,032)

(1,566)

3,737

Average Number of Shares Outstanding (m)

81.6

82.6

106.5

120.3

EPS - normalised (p)

 

 

(1.9)

2.7

5.5

7.2

EPS - normalised fully diluted (p)

 

 

(1.9)

2.7

5.3

7.0

EPS - basic reported (p)

 

 

(4.8)

(8.5)

(1.5)

3.1

Dividend per share (p)

0.00

0.00

0.00

0.00

EBITDA Margin (%)

3.2

10.8

17.6

19.6

Normalised Operating Margin

-0.6

7.5

11.6

14.4

BALANCE SHEET

Fixed Assets

 

 

44,322

40,297

67,507

76,592

Intangible Assets

34,698

32,700

58,876

68,381

Tangible Assets

8,199

6,054

7,249

6,829

Tax, receivables, Investments & other

1,425

1,543

1,382

1,382

Current Assets

 

 

35,610

35,214

46,248

41,573

Stocks

0

0

0

0

Debtors

24,318

21,934

29,627

29,952

Cash & cash equivalents

11,121

13,134

16,340

11,340

Other

171

146

281

281

Current Liabilities

 

 

(22,189)

(29,146)

(34,414)

(37,183)

Creditors

(15,986)

(25,875)

(31,687)

(33,259)

Tax and social security

(1,953)

(764)

(1,516)

(1,516)

Short term borrowings (incl. positive loan fees)

45

59

96

96

Other incl lease liabilities

(4,295)

(2,566)

(1,307)

(2,504)

Long Term Liabilities

 

 

(26,997)

(23,361)

(34,669)

(34,669)

Long term borrowings

(19,675)

(17,960)

(24,436)

(24,436)

Other long term liabilities

(7,322)

(5,401)

(10,233)

(10,233)

Net Assets

 

 

30,746

23,004

44,673

46,313

Minority interests

442

269

290

290

Shareholders' equity

 

 

30,304

22,735

44,383

46,023

CASH FLOW

Op Cash Flow before WC and tax

1,797

6,833

13,583

17,470

Working capital

4,171

2,768

(7,257)

1,248

Exceptional & other

(3,325)

784

(3,000)

(4,572)

Tax

(2,285)

(2,492)

(1,961)

(2,866)

Operating Cash Flow

 

 

358

7,893

1,365

11,280

Capex

(1,316)

(1,200)

(2,071)

(2,000)

Acquisitions/disposals

(2,118)

(1,971)

(16,525)

(12,859)

Net interest

(550)

(619)

(1,056)

(1,337)

Equity financing

0

34

14,360

0

Dividends

(444)

(157)

(280)

(300)

Other

0

134

0

0

Net Cash Flow

(4,070)

4,114

(4,207)

(5,216)

Opening net debt/(cash)

 

 

5,610

8,509

4,767

8,000

FX

117

(372)

662

0

Other non-cash movements

1,055

0

312

216

Closing net debt/(cash)

 

 

8,509

4,767

8,000

13,000

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 £60,000 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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1185 Avenue of the Americas

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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 £60,000 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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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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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

1185 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

1185 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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1Spatial — Making GIS data useable for a variety of verticals

1Spatial (SPA) delivered another period of robust results in H123, with annualised recurring revenue (ARR) up 29% y-o-y, revenues growing 11% and EBITDA rising 10%. 1Spatial’s success in driving transformational growth was marked by several contract wins with significant amounts of recurring revenue, the expansion of smart partnerships and further penetration of the US market. We maintain our FY23 and FY24 estimates and watch for catalysts that signal 1Spatial’s plan is continuing to bear fruit. Although 1Spatial trades at a discount to peers, we expect there could be a reduction in the gap if management continues successfully executing its growth strategy.

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