Isentia’s drop an overreaction

Roger Montgomery

Isentia recently caused the market price for its shares to stumble by more than 25%. So is this an overreaction? Isentia expanded sideways last year buying an online content business called King Content. At that time Isentia told media & marketing website Mumbrella: “For quite some time now, Isentia has been looking at how we can work across owned, earned and paid media. Our clients are already getting a lot of information from us in this space, but they are also asking us to help with their strategy…King Content are the market leader” adding, “we still see a real growing need from major brands to connect with their audiences through content marketing.” The deal, with vendors – to be paid out over a five-years – would total $48 million if all targets are hit.

On the 17 of November, Isentia held its AGM and provided a trading update. In short, Content Marketing will report an EBITDA loss of $2 million for 1H17. However, management expects a positive contribution for the 2017 financial year after a restructuring. This will result in ISD’s Group 1H17 EBITDA to be below the prior corresponding period.

The announcement of the half-year loss of $2 million in the content business triggered a $175 million reduction in the Group’s market capitalisation. This seems, at first blush, disproportionately large given the group’s Australia and New Zealand Software-as-a-Service (SaaS) and Value Added Services (VAS) amount to 93% of EBITDA for 2016 and are performing in line with management’s previous guidance.Nevertheless, prior Group guidance was for revenue, and EBITDA growth of between 11-15%, guidance for revenue and EBITDA growth has now been revised lower to high single digits.

The drivers of the downgrade appear temporary, the restructure will include the implementation of a new organisational structure and CEO for King Content as well as merging the ISD & King Content sales teams.

It’s worth noting that King Content represents <10% of our valuation for ISD, hence even a permanent impairment of the division’s prospects would not be significant. In this context, you can see why we view the 27% decline in Isentia’s share price as an overreaction. The primary driver of our valuation is growth in the company’s SaaS/VAS divisions. The most recent updated guidance confirms that these business units are operating in line with management’s expectations and therefore there is little impact on our valuation/recommendations for ISD.

The current market condition, however, is to hammer the shares of companies that miss a beat. For value investors, it is often when that which is considered temporary is treated as permanent that opportunities are presented.

Contributed by Montgomery Investment Management: (VIEW LINK)


Roger Montgomery

Roger Montgomery founded Montgomery Investment Management, www.montinvest.com in 2010. Roger brings more than two decades of investment, financial market experience and knowledge. Roger also authored the best-selling investment book, Value.able.

Expertise

Longform ASX:ISD

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