When identifying promising stocks, this column often starts with powerful industry, demographic or social trends. Bottom-up analysis is still critical, but it’s amazing how many times a good industry beats a bad company, and vice versa.
Take media as an example. Investors who decided almost a decade ago to back online media and avoid traditional providers would have bought Seek and sold Fairfax Media. One is still benefiting from a huge tailwind in online global advertising; the other is still struggling.
The same applies to business intelligence. The proliferation of online media; emergence of niche print publications; and the rise of content marketing (where companies pay to write stories, or have stories written about them) will surely increase demand for media-monitoring services.
Also, globalisation and tougher regulatory and disclosure legislation is forcing listed companies to pay even greater attention to what is said about them online or in print. The media has become so big and fast-moving that is impossible to monitor without sophisticated technology and specialist services.
These are strong trends for iSentia Group, the media-monitoring company that listed on ASX in June 2014 through an Initial Public Offering, after raising $284 million at $2.04 a share. iSentia quickly rallied to $3.14 and now trades at $2.80, making it one of the year’s best floats.
Share price chart: iSentia Group
iSentia provides media monitoring, social-media monitoring and analysis, media management and analysis, contract management services around communication strategies, and media-release distribution. Although its business is media, iSentia is essentially a fast-growth technology company with valuable, scalable software and systems.
Companies, governments, media agencies and industry bodies, across Australia, New Zealand and Asia, use its software-as-a-service offering to a) understand what is being said about them, and b) better understand how to tailor messages and create more effective communication, media and media strategies in real time to different target markets.
Founded in 1982 and later called Media Monitors, iSentia has come a long way from the tiny business that used to scan newspapers and provide “clippings” when a client was mentioned. I recall receiving its clippings each day in the ‘90s while working for a global investment bank.
Even then, its clippings were a potential source of disruption to the business media. I know many executives who effectively “read” the morning papers via online clippings services, rather than through the real thing.
iSentia has five main attractions. First, like all good software companies, its business model is highly scalable. The business can move to new market segments, or geographies, without huge extra costs or capital investment. That can be a precursor to high, rising return on equity as more profits are made from each dollar of shareholder funds invested.
Second, iSentia is also the clear market leader in its industry, about five times bigger than the nearest rival. This creates a considerable barrier to entry to new rivals, and enhances iSentia’s sustainable competitive advantage and long-term pricing power. It’s one of those “sticky” businesses with high switching costs: the bigger iSentia becomes, the better the service, and the harder it is for clients who become used to its service to switch to a rival. That also creates opportunities to cross-sell services and get a higher spend per client.
Third, iSentia has gained a strong foothold overseas. About 18 per cent of revenue comes from Asia and is growing rapidly. It has a leading position in the Philippines, Malaysia, Indonesia, Thailand, Singapore and Vietnam, and a growing presence in China, It has more than 1,100 staff in the region in 18 offices, and delivers services in 12 languages, according to the prospectus.
This Asia presence is particularly valuable given the expected emergence of another two billion extra middle-class consumers in the region by 2030. The signing of three free-trade agreements in a year by the Federal Government means more Australian businesses, especially service ones, will be looking to expand in Asia. They will need media-monitoring services with a strong Asian presence.
The fourth attraction is the changing nature of marketing. Not so long ago, marketing students were taught to segment markets, choose a target market, understand its needs and wants, tailor a message, and find the best way to reach it. Clever marketers these days realise marketing is often about building communities, listening, learning and responding in real time.
To do so, companies must know what’s said about them in forums, social media and other online platforms, and take advantage of “big-data” algorithms to understand how to tailor messages to individuals – not mass markets – in rapid time. This blurring of media and marketing, while not to everyone’s taste, is a lucrative trend for iSentia.
The final attraction is performance. Although it’s early days, iSentia has done everything it said it would since listing, and then some. It slightly exceeded the FY14 prospectus earnings forecast, and at the Annual General Meeting reaffirmed its FY15 prospectus forecast.
Some important milestones have also been reached since listing: negotiation of a licence to access online news, including the paywalled content of both News Corp Australia and Fairfax Media. This will help iSentia drive more of its revenue base away from print media and help create more subscription services. The rollout of its Mediaportal in South East Asia and Hong Kong is another good stgelopment.
The market is aware of iSentia’s strengths. It trades on forecast Price/Earnings (PE) of 20 times FY15 earnings – a hefty multiple, given its six-month history as a listed company.
After rallying 40 per cent on the issue price, iSentia is due for a longer pause or share-price pullback ($2.80 on the chart is an important support level). More consolidation is inevitable before the next move higher. With a $560 million valuation, iSentia suits investors who are comfortable with small-cap stocks, the technology sector, and the risks (and opportunities) of expanding rapidly in Asia.
Don’t expect iSentia to provide anywhere near the same returns in the next 12 months as it did this year. Still, there’s a lot to like about a tech company that provides software to help clients monitor and understand media – rather than back those providing the content – and is expanding rapidly in Asia.
Tony Featherstone is a former managing editor of BRW and Shares magazines. The column does not imply any stock recommendations. Readers should do further research of their own or talk to their adviser before acting on themes in this article. All prices and analysis at November 26, 2014