Value the Quality
Isentia (ASX: ISD) is a top three position across the Montgomery domestic funds and investors in The Montgomery Fund and The Montgomery [Private] Fund should be pleased to see the company’s shares reaching all time highs.
For those of you not familiar with Isentia the company was established in 1982 as a traditional press-clippings business. Isentia today holds a dominant position in the circa $US430 million APAC media monitoring market. Isentia holds circa 90 per cent market share in Australia & New Zealand and circa 28 per cent market share across APAC, which has only more recently launched its services. Isentia is now focused on increasing penetration into Asia via its standard media monitoring offerings as well as value added services (VAS) which includes social media monitoring and analysis.
Isentia was formerly known as Media Monitors and the company offered to track the print, radio and TV press on behalf of companies who wanted to track media mentions of themselves and competitors. The company has maintained its top clients for decades but the emergence of digital and social media, has given the company a fillip.
If, for example, Alan Joyce is asleep in Sydney and a Qantas aircraft landed on broken landing gear in some far-off jurisdiction, the first people that would know about it, and perhaps respond even faster than the emergency crews, would be the Facebook, Instagram and Twitter followers of the individual who was recording the landing on his iPhone. By subscribing to Isentia’s essential services, Mr Joyce and his team would be alerted to the event in real time and be able to respond.
The emergence of social media as a global communication and advertising platform now means that Isentia’s services are not only more popular but the company can charge more. Many of you know that our definition of a high quality company is one that can retain large amounts of capital on which it can generate very high returns. An even higher quality version is the ability to increase earnings without the need to retain capital. In both cases a competitive advantage is usually required in order for the characteristic to be sustained. The most valuable competitive advantage is then an ability to raise prices, in the face of excess supply, without disruption to unit sales volume.
Isentia’s penetration statistics reveal an increase in the numbers of customers it is serving in Australia and Asia. And its Average Revenue Per Client is also rising. Combining these two observations, it appears the most valuable competitive advantage inheres in Isentia.
Social media is also changing the way advertisers can measure the effectiveness and value of advertising. Advertising during major sporting events, for example, will always be competitive thanks to the limited airtime available during a game, but a rebasing of rates is certainly possible if advertisers begin to focus on measures of consumer engagement rather than just eyeballs.
As Andy Macken noted in his April blog post, the trend toward measuring engagement over ratings is underway and “this trend is very positive for Isentia. One of the company’s most recent additions to its Media Portal was its Social functionality. Isentia now tracks millions of sources across multiple social platforms to provide a comprehensive view of social engagement and trends for its clients. We therefore believe Isentia has an opportunity to play a role in the rapidly evolving TV advertising space.”
The information that the firm collates is vast in terms of scale. Isentia has coverage of 10,000 media outlets, tags 2.6 million press articles per month, watches and records 2,000 television & radio programs daily, produces 10,000 broadcast summaries every day and monitors 250 million social media conversations every month from 600,000 online sources across 17 languages.
Social media monitoring (SMA) is a circa $US100 million market and has grown by circa 60 per cent per annum over the last 5 years. The growth is driven by firms recognizing the value of their social image, their desire to manage their costs and advertising effectiveness, as well as the marketing opportunities that emerge from the new medium.
Isentia’s business model benefits greatly from economies of scale due to its relatively high fixed cost base. We don’t expect incremental margins such as those achieved in the 2015 financial year (circa 140 per cent) to continue, however we do expect that as the firm continues to increase penetration of its media monitoring services, incremental returns will be high.
For as long as the company remains high quality, its prospects bright and its share price rational on either an absolute or relative basis, Isentia will remain a fixture in Montgomery portfolios.
Roger Montgomery is the founder and Chief Investment Officer of Montgomery Investment Management. To invest with Montgomery domestically and globally, find out more.
Roger Montgomery is the Founder and Chairman of Montgomery Investment Management. Roger has over three decades of experience in funds management and related activities, including equities analysis, equity and derivatives strategy, trading and stockbroking. Prior to establishing Montgomery, Roger held positions at Ord Minnett Jardine Fleming, BT (Australia) Limited and Merrill Lynch.
This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.
David
:
Hi Roger Interested in your view on the ISD half year results and the resulting impact on its share price. Thanks
Justin Carroll
:
ISD is a fine company and I was happy to be a holder for the last 2 years until it recently broke above $4. But at that level it is trading at a very high trailing multiple. Not much would need to go wrong to see it plummet. And what could go wrong?
Consensus estimates are for it to earn around 0.17 cents per share next year. That’s almost a 60% increase in 2015 NPAT. That is optimistic in my view.
Roger Montgomery
:
Hi Justin,
Great point. No doubt even the very best companies will see there prices swing from levels reflecting exuberance, to depression. Take advantage of the market rather than listen to it, is a great way to operate.
Justin Carroll
:
ISD is a fine company and I was happy to be a holder for the last 2 years until it recently broke above $4. But at that level it is trading at a very high trailing multiple. Not much would need to go wrong to see it plummet. And what could go wrong?
Consensus estimates are for it to earn around 0.17 cents per share next year. That’s almost a 60% increase in NPAT. That is optimistic in my view.