Media-monitoring provider iSentia Group this year joined a long list of Australian companies that destroyed shareholder wealth through offshore acquisitions. A disappointing push into content marketing crunched iSentia’s share price and made it a takeover target.
Newspapers speculated in June that suitors had approached iSentia, eager to privatise the company and fix it up. iSentia denied the reports and did not issue an ASX company announcement, suggesting any takeover approach was little more than market speculation.
If there were suitors at the time, they will be glad they waited. iSentia stock shed another 20% from its June high after a disappointing FY17 result. Three consecutive downgrades have shattered market confidence in iSentia; any recovery will take time.
To recap, iSentia raised $284 million through an Initial Public Offering (IPO) and listed on ASX in June 2014. The shares, issued at $2.04, hit $2.45 at the opening on iSentia’s first trading day, such was the interest in its IPO and its leverage to social-media trends.
The market could not get enough of iSentia in its first year after listing. The shares peaked at $4.93 in late December as the market bet more companies would spend more money to know what was said about them in print and online media – and that iSentia would expand in the booming Asia region.
iSentia’s acquisition in August 2015 of King Content, the cause of much of its share-price collapse, looked sound on paper. Corporate content-creation and the use of “native journalism” in markets (where advertisements are presented as stories) is booming. Content marketing seemed a strong fit with iSentia’s media-monitoring services.
In hindsight, the King Content acquisition should have rung alarm bells. The $48-million purchase was a big deal given iSentia’s size. It took it into a new market and came just a year after listing. All too often, Australian companies make bold acquisitions when their share price is flying, overpay for assets and destroy shareholder wealth.
iSentia in August 2017 announced it was closing King Content because of poor performance and folding the assets into iSentia’s remaining content-marketing business. King Content’s value was written down to zero – a $48-million acquisition worthless within two years.
Compounding the writedown was a third consecutive profit downgrade. Revenue of $155.1 million for FY17 was below earlier company guidance of $162 million. Underlying earnings (EBITDA) of $41.5 million were below guidance of $44 million.
The market was unimpressed, iSentia shares tumbling 23% on the news. Investors underestimated the extent of the company’s problems and the challenges ahead.
A stock that traded at $4.93 about 20 months ago – and for a time was one of the market’s best small-cap IPOs in years – fell to $1.69 or about 15% below the issue price.
I wrote favourably on iSentia for the Switzer Super Report in late 2014, nominating the stock as one of 10 top IPOs from that year when it traded at $2.70. I maintained a favourable view on iSentia in early 2015 and cooled off as it approached $5 and became expensive.
In January 2017, I nominated iSentia in this report as an oversold small cap when it was $2.65, with a caveat that the stock held support around $2.50 based on its price-chart patterns. That view was misguided and assumed the damage to iSentia’s price had been done.
Investors hoping for a quick recovery in iSentia from the current price ($1.69) will be disappointed. The company needs time to rebuild market confidence after its downgrades. Closing King Content is a good first step, but FY18 at best looks like a year of consolidation.
Macquarie Equities’ 12-month price target of $1.66 suggests iSentia is fully valued at the current price. A consensus of five broking firms (the sample is too small to rely on) is a $1.77 valuation.
Predators might view iSentia differently. Short term, the company appears to have stabilised its customer churn, having won back customers in the second half of FY17. Cost-saving initiatives are underway and King Content’s closure will allow greater focus on core activities.
Longer term, iSentia has latent value. For all the recent problems, it remains the market leader in media intelligence in the Asia Pacific. It services more than 5,000 clients across 11 countries in the region – a valuable position as demand for media intelligence grows.
Growth in social media is another driver of media-monitoring intelligence. More than ever, companies need to understand and influence online conversations about their brands and products. Media monitoring has rapidly become an essential service for more organisations.
Like other successful software-as-a-service providers, iSentia has an attractive business model and can scale its technology, which does not require high additional investment, to service more clients. About 85% of client subscriptions to its service are now fixed, meaning higher recurring revenue and strong cashflow.
My hunch is a United States or European corporate predator would be prepared to pay more for iSentia to get its hands on its Asia-Pacific footprint. For all its recent mistakes, iSentia has done a better job of growing in tough Asian markets than many ASX-listed small-cap companies.
A private-equity firm might see an opportunity to take a fundamentally solid business, solve its problems away from the sharemarket’s glare, and return it to ASX at a fat profit.
Either way, there’s long-term value in iSentia for predators at the current price, but it might take a year or two before any recovery gains real traction. Risks are high. It would not take much for further price falls in iSentia, such is the market’s wariness after recent problems.
Another consideration is whether technology one day makes media-monitoring services obsolete; that is, companies do media monitoring in-house without paying specialist providers. That looks unlikely for now given the complexity of media monitoring in the social-media landscape, but it’s something for long-term investors in iSentia to consider.
Chart 1: iSentia Group
Source: ASX
Early signs of recovery at 3PL
From one IPO to another, 3P Learning had a small share-price bounce this month after horrendous falls in 2016. The online-education provider listed on ASX through a $282-million float in July 2014 – a month after iSentia.
Shares in 3PL, issued at $2.50, mostly traded above their issue price in the year after listing. They then plunged to 63 cents in June 2016 after profit downgrades, management changes and fears that the company’s US expansion was struggling.
Like iSentia, 3PL has a lot of work ahead to restore market confidence and it will take time for a more sustainable recovery to unfold. But it is heading in the right direction. Underlying after-tax net profit for FY17 rose $1 million to $6.3 million. Revenue growth in the American business impressed at 31%.
For all the gloom, 3PL’s core strength – its product suite – has not changed. Mathletics and Reading Eggs are fabulous programs for kids and a mainstay in the education efforts of many households in Australia and overseas.
Like iSentia, 3PL is simplifying the business, focusing more on the core and upgrading its sales efforts to attract new clients and reduce churn among existing ones. Often, a return to what the company does best – and the introduction of new management – is needed to help high-potential emerging companies get back on track after they stumble.
I included 3PL in the Switzer Super Report takeover portfolio in late 2015. The stock has disappointed since then, but better signs are emerging in its strategy and operational performance. That might be enough to get predators to look: a bigger player in online education might do more with 3PL’s world-class product suite.
As a micro-cap, 3PL suits experienced investors who take higher risks.
Chart 2: 3P Learning
Source: ASX
Takeover list update
A little house-keeping to the takeover ideas list this month. I decided to pare back the list, more for manageability than any loss of conviction in the takeover prospects of companies on the list. Automotive Holdings Group (AHG), Reckon (RKN), OrotonGroup (ORL), Myer Holdings (MYR), Perseus Mining (PRU), oil explorer AWE (AWE) and Ten Network Holdings (TEN), sold to US broader CBS Corporation, are removed. Each has had a long stay on the list.
Recent highlights include the performance of Flight Centre Travel Group (FLT) and WorleyParsons (WOR). The latter might regain the attention of an offshore predator, amid signs the worst in mining/energy services is over and consolidation in this sector quickens.
iSentia is added to the list.
Source: Morningstar (one-year return), Standard and Poor’s (S&P/ASX 200 total return, S&P Small Ords index). * assumes dividend reinvestment. Prices at Sep 13, 2017.
Tony Featherstone is a former managing editor of BRW and Shares magazines. All prices and analysis at September 13, 2017.
Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.
