Infomedia: Loss of Superservice Menus contract
On 6 January 2015, Infomedia (ASX: IFM) announced the loss of a Superservice Menus contract with Jaguar and Land Rover Limited (Jaguar Land Rover). After discussions with management, we feel confident that the long-term prospects of Infomedia remain intact.
For those unfamiliar with the company, Infomedia’s primary product is an Electronic Parts Catalogue that enables dealers of major car manufacturers to identify replacement parts. The Superservice Menu is a value-added product that enables the service department to produce accurate service quotations for its customers.
Infomedia has historically enjoyed a very loyal client base, so the loss of a contract with a major customer is disconcerting. However, after contacting management, we are comfortable with their assessment that the matter was an “unusual incident”.
We understand that as part of the contract renewal, Jaguar Land Rover sought access to Infomedia’s Intellectual Property, which was “totally unacceptable” to Infomedia management. This is the first time that Infomedia has had issues regarding access to its Intellectual Property in any negotiations.
The contract generates $2.2 million in annual recurring subscription revenue, which is modest when compared to consensus FY15 revenue estimates of $61 million. However, the margins of this product are considerable – in the case of the Jaguar Land Rover contract, the revenue decline of $1.1 million in FY15 (for the half year) would result in a $0.8 million decline in Net Profit After Tax.
Infomedia has an extensive pipeline of pilot programs for Superservice Menus with its existing client base. We consider the long-term investment case is dependent upon Infomedia achieving its historically high conversion rate on these trials. Management has noted that the pilot programs are not converting as fast as expectations, but this is due to internal politics within the larger car companies and does not involve issues related to Intellectual Property. Importantly, management has confirmed that the pilot program pipeline has been delayed but not contracted.
The share price has fallen 20 per cent since the announcement. Given that Infomedia’s high return on equity is dependent upon a steadfast client base, we consider that it is warranted that the market is asking questions about the strength of Infomedia’s competitive advantage.
Given the highly specific reason for the contract loss, (which appears sufficiently outside the scope of normal operations) combined with its modest contribution to earnings, we consider that the share price has overreacted. We believe the long-term prospects of Infomedia remain intact.
We saw the share price reaction as an opportunity to increase the positions in The Montgomery Fund and the Montgomery Private Fund.
Ben MacNevin is an Analyst with Montgomery Investment Management. To invest with Montgomery, find out more.
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.
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Chris B
:
Profits have been going nowhere for years. I know they’ve sorted out their crap in the last year or two. On a general note, car parts suppliers have been charging massive margins to customers for a long time now and some Japanese companies have been taken to court. It just seems like insurance companies (who have to pay for car parts when there is an accident) and customers are starting to apply the pressure on these fat margins and the squeeze will be felt all the way up to Infomedia. But maybe I am being too general. I value this company at half what they are now even after they’ve fallen 15%. But I really haven’t looked into them because their basic numbers just don’t stack up.
BRONTE DUFFY
:
Why has Montgomery Fund purchased IFM when its current price is 40% above its intrinsic value and its epsg for 15/16 is marginal.
Bronte
Kerrod Thomas
:
Hi Ben,
Thanks for the information on Infomedia above.
Were you able to get a sense from the company, or do you know from other sources, what product Jaguar Land Rover (JLR) have switched to now that they have removed the Infomedia product?
My concern here is that there may be a new (or existing) competitor with a new (or improved) product that is superior to the Infomedia product.
Infomedia is essentially a “single product business” which places substantial risk on the business when faced with new or improved competition or aggressive pricing from competitors.
If the Infomedia product is as deeply embedded into businesses as the company suggests (and therefore difficult to remove once embedded) then JLR would not have taken this decision lightly.
Thanks.
Kerrod.
Roger Montgomery
:
Hi Kerrod, we understand that the contract may have been awarded to Clifford Thames, a UK competitor.
BRONTE DUFFY
:
IFM is currently 40% above its intrinsic value,and its epsg for 15/16 is marginal.
How do you justify purchase?
Ben Wortley
:
Hi Ben,
After analysing the company using the guide from Value-Able I believe the business is worth $0.44 at the moment, increasing to $0.57 in a few years time. On this basis I do not see it as an opportunity to buy. What are your thoughts on this? Do you believe the business’s intrinsic value is above $1?
Scott T
:
Thanks for update Ben. When I read the ASX announcement , it was the margins that jumped out at me. $1.1m in revenue produces $800,000 in NPAT?? A pretty special business. It appears that now the product is built, every additional client is massively profitable. Hope they get 100’s more.
All the best
Scott T