Isentia’s drop an overreaction
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.
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.
Steve Hu
:
a 35% drop yesterday due to further dissapointment with King content. Is ISentia mispriced by the market again?
Scott Shuttleworth
:
Hi Steve, thanks for your question.
There were other components to the drop than issues out of King Content. We’ll have a blog post out later to describe the issues in more detail.
However relative to our estimate of value, ISD does appear to be in our view undervalued.
All the best,
Scott
dilon
:
do you still hold the view that this company has bright prospects ?
Scott Shuttleworth
:
Hi Dilon, thanks for your question.
Yes we do hold stock in this company and were disappointed with yesterdays result.
Prospects at this time still appear bright, however somewhat less bright than we believed them to be prior.
All the best,
Scott
Jean-Pierre
:
Hi Rogery,
What are your thoughts on today’s results.
Scott Shuttleworth
:
Hi Jean-Pierre,
We were disappointed with the results released yesterday. We will have a blog post up later today to explain our view on the company and what the result means.
All the best,
Scott
yeok loh
:
Hi Roger,
The share price dropped below $1.80 today, is it a good time to buy more to hold for long term? I don’t understand why the shares oversold today with the announcements today.
Scott Shuttleworth
:
Hi Yeok Loh
While we are licensed to provide advice, we are not set up to provide recommendations to which stocks you should buy or not. Please seek and take personal professional advice.
That being said, we will have a blog post up later today to explain our thoughts on yesterdays announcement.
All the best,
Scott
James Hicks
:
Hi Roger,
Do you see todays reaction a further overreaction?
Cheers,
James
Scott Shuttleworth
:
Hi James,
We were disappointed in the result in that it does lower our valuation of the firms however it also does appear likely (in our view) that the price decline was an overreaction.
All the best,
Scott
Konrad
:
Hi Roger,
Mr Market does not seem to share your view with iSentia down again today. For those who bought iSentia at $2.70 after the 25% drop todays 35% drop is looking pretty crappy.
Konrad
Scott Shuttleworth
:
Hi Konrad, thanks for your comment
I’m sure you’re familiar with our approach to Mr Market.
All the best,
Scott
stu
:
You must be very pleased that value is really starting to open up in this company! I look forward to your confirmation of your previous analysis seeing as nothing materially different came through in the half year release, aside from the negligible content division taking a bit longer to turn around? Saas still growing, and on track? thanks
Scott Shuttleworth
:
Hi Stu,
Yesterdays result was unfortunate and it’s never pleasing to us when situations such as this occur.
Reading between the lines, it appears to us that there was some material implications for our longer term thesis. Hence we have reduced our estimate of intrinsic value accordingly.
All the best,
Scott
Lynton
:
Hi Roger
We are keenly awaiting the Montgomery analysis and commentary on Isentia and the outlook on its valuation given today’s results announcement and the price being absolutely savaged as a result – down 35%.
tim clare
:
Hi Roger,
Another view…
“iSentia is a legacy moat business in secular decline.”
Any comment?
Roger Montgomery
:
Thats old and wrong Tim. The business is not in ‘secular’ decline at all.
Paul Tamburro
:
I think isentia’s P/E ratio before the drop in price was approx 29. If we take Benjamin Graham’s advice, a value investor would stay away from a company like that for being overpriced. Why then, did you hold? All it takes is a slight adjustment to earnings from prices to fall from that high level.
Roger Montgomery
:
We don’t follow Ben Graham’s approach – there’d be precise little to ever buy today. The reasons are explained in value.able.
Paul Tamburro
:
I know you don’t follow his approach. I was just making a general point that the share price had very high built-in expectations which made it vulnerable, a point which you haven’t considered in the article or comments.
Roger Montgomery
:
Hi paul, We don’t use P/E ratios to arrive at our valuations (see Value.able). The stock wasn’t overly expensive then and appears to be much less so now.
Greg Scott
:
Hi Roger
Thanks for the well written article. As usual it is very informative. However, you are referring to a drop in price as the basis for the shares being undervalued. As you always remind us, price and value are 2 different things. Is it possible that the price has simply retreated to meet the value?
Using a ROE of 21%, I calculate a value of about $2.40 per share. I would be interested in your estimate?
Roger Montgomery
:
Ah but in this case many of the share price falls have indeed brought the shares below IV, or if they were already below IV, they are even deeper into value territory. We are confident value has emerged in many cases and better value in many others. More importantly we have noticed that some poor quality companies have rallied. That won’t last either. I like David Buckland’s summary of Howard Marks’s rules and observations:
Investment markets follow a pendulum-like swing:
between euphoria and depression;
between celebrating positive developments and obsessing over negatives; and
between overpriced and underpriced.
This oscillation is one of the most dependable features of the investment world, and investor psychology seems to spend much more time at extremes than it does at a “happy medium”.
There are two concepts we can hold to with confidence:
Rule number one: most things will prove to be cyclical
Rule number two: some of the greatest opportunities for gain and loss come when other people forget rule number one.
Nick
:
Hi Roger, interesting views on ISD. Everything you say makes sense, but how do you reconcile the fact that management said that all was good with King Content in their August report and less than 3 months later they say there will be a large EBITDA loss and new management required in that division?
Roger Montgomery
:
Hi Nick, It’s something we are waiting to speak to management about.
upendra Maganti
:
Do you think it’s a good time to accumulate Isd now for long term.
Roger Montgomery
:
Hi Upendra, While we are licensed to provide advice, we are not set up to do so for you. Please seek and take personal professional advice.
Adam
:
Hi Roger,
I am Stoked! I just finished your book on Sunday night, wow, loved it! and love your investment style! I have since restructured my portfolio and booted out all the average crap. I am reasonably new to the share market and your book pointed out how ignorant I was to some things.
Since reading your book, I am now having trouble finding any value in the market which I guess is not a bad thing, but yesterday when I read about the Isentia share price dropping and looked into the company, the intrinsic valuation came up higher than the price for once and at a small discount. I read that ‘King Content’s revenue only accounted for 7% too and thought wow the market must be overreacting, the prospects still seem great and I like how the management were really quick to act and make changes needed to make King Content work. Very exciting. Then today I read this article…
Thank you! Your book is the best $49 I have ever read.
Adam :)