Update on Isentia
Following our earlier comments on the Isentia (ASX:ISD) result, we have now met with management, of Isentia as well as major competitor, Meltwater, and formed a view on our holding. Our view may change as new information comes to hand over time, but for the time being we have settled a position, and can outline our decision and rationale.
As noted last time, we see a number of issues, including the performance of King Content, the competitive position of the domestic monitoring business, and damage to management credibility. Of these, we see the competitive position of the domestic monitoring business as the central issue for valuation. King Content is too small to figure much in the broader picture, and the main concerns relating to valuation appear to be issues over which management has limited control.
In simple terms, ISD’s domestic monitoring business faces challenges on two fronts. Firstly, to access the media content it provides to clients, ISD must pay copyright fees to the owners of that content, and in Australia the copyright owners are permitted to negotiate collectively. In the past, copyright costs have risen in an orderly fashion, but in 2016, copyright owners put through more aggressive price rises, particularly for the print content that has been a differentiating feature of ISD’s client offerings.
In the ordinary course of business, ISD would look to pass this cost increase through to clients, but in 2016 found itself in an awkward position relative to Meltwater. To begin with, Meltwater enjoyed an extra 6 months of the “old” copyright pricing, so time was on its side. Also, Meltwater faced smaller cost increases than ISD due to its focus on online content over print, and finally, Meltwater appears to have capitalised on its position by offering discounts to new (but apparently not existing) clients. As a result, ISD’s attempts to re-price were met with firm client resistance.
So, the half year result introduced some issues that should resolve themselves over time, being the 6-month contract timing difference and Meltwater’s tactical exploitation of that timing. However, we also have some lasting issues, being the recognition that copyright holders have significant power to influence ISD’s economics, and the potential that Meltwater may see further discounting as an attractive path to gain market share in future. ISD has a dominant (and very valuable) share in the domestic market, and vulnerability to price competition presents real downside risk.
These issues add uncertainty to the ISD outlook and make valuation fairly challenging. When combined with the King Content and management credibility concerns, it would not be surprising to see a lot of investors placing ISD in the “too hard” basket, possibly resulting in the market price diverging from fair value.
The right thing to do in these circumstances of course is to try to objectively gauge value and compare this with the share price, and when we weigh the strengths and weaknesses of the business, our assessment is that value lies above the current share price. Accordingly, we recently added a small amount to our ISD holding. We certainly do not expect ISD to recover all the market value it has lost, and in view of the future uncertainty, it will remain a small part of the portfolio. However, looking at the information we have today, we don’t see a case to sell.
You can read our previous post here.
The Montgomery funds own shares in Isentia.
Tim joined Montgomery in July 2012 and is a senior member of the investment team. Prior to this, Tim was an Executive Director in the corporate advisory division of Gresham Partners, where he worked for 17 years. Tim focuses on quant investing and market-neutral strategies.
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.
mark thompson
:
Do you have your holding in Isentia? The share price has continued to plummet beyond any ones predictions?
Where to from here
Thankyou
Mark
Roger Montgomery
:
Sold a long time ago Mark
Dylan
:
Hi Tim,
Now over 12 months since your article and the permanent change in business model, closure of King Content, resignation of CEO etc i would be interested in understanding your thoughts on ISD after the group’s Feb 2018 half year announcement.
My calculations of intrinsic value is $1.15 – $1.25, shares trading (on a down day) $0.915
I understand the fund has likely sold off its holdings in the stock but interested to know your thoughts?
Thank you for taking the time to read
Cheers Dylan
Nick Wilson
:
Hi Tim
Would be great to get your views on the quality and value ISD presents since March 17.
Regards
Nick
Chris Z
:
Hi Tim,
Eager to hear your thoughts on iSentia following its recent update. I think it’s fair to say that management made a costly error with the King Content acquisition. The big question mark is whether they were smart enough to acknowledge their mistake and promptly move on from it by rethinking their strategy.
Thanks,
Chris
Matthew Graham
:
Hi Tim, as the King Content risk has eventuated and the associated down grade announced to the market, what is the Team’s revised view on Isentia going forward?
Tim Kelley
:
Hi Matthew. Our estimate of value is not far from the current market price. We had been reducing the position ahead of the recent announcement, but are not inclined to sell at the current level.
Matthew Graham
:
ISD $1.335 18/4/2017
The share price looks to be on a downward spiral. Where does Roger Montgomery see value?
Chris
:
Now the CFO has resigned – so soon after the disappointing result. This does NOT look good for the company.
Steve Hu
:
Hi Tim, Thank you for the update to ISD. Are you able to provide an update to Sirtex Medical? The share price has been punished recently due to CEO sell down, and leaving, with now legal action.
Cheers
Steve
Justin Carroll
:
A position in ISD is certainly safer at $1.40 where we bought in than it was at $3, let alone at $4.50 where it was trading at the beginning of last year.
If it is able to earn 0.15 cents per share for FY 2017 (a very conservative full year estimate), it still has around a 10% earnings yield on a $1.50 per share investment.
Ray Ellice
:
Hi Tim
Many thanxs for the update. I know you have a completely different set of criteria when evaluating a company to that of say Skaffold, which Roger still has some input with, but I can’t help but note that ISD receives a quality rating of C2 in Skaffold, not investment grade.
In addition another key plank of the investment strategy is about your “moat” and pricing power which both appear to be under considerable threat reading your summary above. Maybe I am not reading it correctly.
I can only conclude that additional information was forth coming in your respective meetings with both companies for you to conclude that the current situation is only “temporary”. Can you shed anymore light on this?
Must say I was very surprised that you have in fact added to your position when some of the key indicators that you use would suggest the opposite action.
Regards
Ray
Tim Kelley
:
Hi Ray. There have certainly been permanent changes to our assessment of ISD’s quality and value, which on their own would point to a sell decision. However, the business is still of reasonable quality, and our current assessment is that the share price more than factors in the deterioration to quality and potential earnings.