isentia: Execution will create significant value
About the author:
- Author name:
- By Nick Harris
- Job title:
- Senior Analyst
- Date posted:
- 07 January 2020, 4:34 PM
- Sectors Covered:
- Telecommunications, Technology and Financial Services
- isentia (ASX:ISD) is the dominant Australian media intelligence and insights solutions
provider in ANZ and the largest provider in a fragmented Asian market.
- A series of unfortunate events has decimated the share price. However, a series of
positive events in the last 12 months has put ISD back in the game, in our view.
These are: 1) a major Board refresh; 2) a new CEO, CFO, CTO and CPO who have
reshaped and are delivering the new strategy; and 3) a positive interim copyright
- These changes focus on narrowing ISD’s price and technology gap to peers, which
has caused significant customer (and earnings) losses over the last few years.
Faster response times and lower costs, through automation, are critical
components. Aspirational targets, albeit seemingly softened at ISD’s recent AGM,
are for ~50% EBITDA growth by FY22. Our forecasts sit below these aspirational
targets as even partial achievement would create substantial share price upside.
What ISD does
ISD is the market leader in APAC in media intelligence.
It helps enterprise and government
clients monitor, analyse and action brand-related activities. For example, PR and
communications teams monitor and sometimes react to negative or positive publicity from
TV, newspapers and/or social media.
ISD is the incumbent ANZ operator (a quasi-cash
cow); has a leading position in South Asia (profitable and fast growing); and has a North
Asia presence (which is currently subscale and has room for improvement).
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What went wrong (failure to innovate and a fixed cost base)
Management distraction due to trying to integrate and fix the King Content acquisition
combined with a fixed and inflexible key input price (Copyright costs), as well as
underinvestment in technology, products and processes, allowed competitors to take
Competitors won on quicker response times, cheaper solutions and
debatably better customer service. ISD lost customers and revenue but could not
meaningfully lower its costs.
From FY16 to FY19 ISD lost A$33.5m of revenue (-21%),
A$27.9m of EBITDA (-55%), and -96% of its market cap.
What looks to be going right (automation and a flexible cost base)
ISD’s strategy is to reduce manual costs and invest those savings back into technology
and platforms to drive a faster and better user experience.
The automation of content
collection has virtually tripled in the last 18 months, from ~30% in August 2018 when new
CEO Ed Harrison joined ISD to more than 80% now.
Work is still required but innovation
has meaningfully improved ISD’s response times, narrowing the competitive gap and
lowering its cost base. ISD has also resolved a critical input cost (via a favourable interim
Flexing the cost base allows ISD to invest in quality solutions to generate
the broadest data sets and best relevance models, which should help it regain its leading
position in Australia and commence the full integration of Asia.
Investment view – ADD rating
Management has an aspiration target for ~A$35m of EBITDA in FY22 but recent AGM
commentary suggests this may take longer.
Regardless, a return to growth and even
partial achievement of this aspiration target is sufficient, in our view, to create substantial
share price upside potential.
Our forecast sits below this aspiration target. Our view is
there is limited downside, and if ISD returns to earnings growth, there is material upside.
The competitive landscape and execution are the key risks. We initiate coverage with an
Add rating (Morgans can login to view detailed reports and price targets).
Morgans clients can login to view our detailed report and share price target for isentia Group (ISD). Alternatively, please contact your Morgans adviser or nearest Morgans office for access.
Disclaimer: Analyst may own shares.The information contained in this report is provided to you by Morgans Financial Limited as general advice only, and is made without consideration of an individual's relevant personal circumstances. Morgans Financial Limited ABN 49 010 669 726, its related bodies corporate, directors and officers, employees, authorised representatives and agents (“Morgans”) do not accept any liability for any loss or damage arising from or in connection with any action taken or not taken on the basis of information contained in this report, or for any errors or omissions contained within. It is recommended that any persons who wish to act upon this report consult with their Morgans investment adviser before doing so.