With the disposal of Ad Intel INTC completed, Ebiquity (LON:EBQ) is now focused on building its business as an independent adviser to global advertisers on measuring and optimising their media spend. The recently strengthened management team aims to improve margins from FY18 levels, but the need to adjust overheads to suit the size of the continuing operations will weigh on current year profitability. The unbundling should, however, set up the group for stronger progress thereafter. The balance sheet is significantly stronger, yet the rating is not recognising the improved investment case.
Market complexity a bonus
Ebiquity’s business model centres on analysing advertisers' media and marketing spend data to measure marketing performance, and to help brand owners improve the returns on investment and business impact from their spend. Ebiquity is also increasingly advising marketers on media management, including the selection of media agency partners and the use of adtech. Because of its independent positioning, the group has access to its clients’ data, not available to others, and has developed the infrastructure and toolset to process data quickly and efficiently. In a growing market where complexity and speed are business issues, Ebiquity is well-placed to be a trusted expert advisor to CMOs.
Rightsizing the overhead
The continuing business, comprising the Media and Analytics and Tech practices, is now free of the distraction of the disposal and can focus on building up the client base and increasing the average revenue generated. The strengthened balance sheet also provides it with greater financial freedom. In the short term, the group’s profitability will still be constrained by the need to carry over some of the cost associated with the disposed business during the transition and the need to carry an element of fixed cost over a smaller enterprise. We expect the profitability to start to recover more strongly from FY20e.
Valuation: Deeply discounted
Ebiquity trades at a considerable discount to other smaller marketing services groups, albeit that they have markedly different business models. Parity on EV/EBITDA across FY1 and FY2 suggests a share price of 81.3p, nearly double the current price. A DCF calculation based on a 10% EBITDA margin (which would be a very disappointing scenario) and factoring in no revenue growth at all (highly unlikely) suggests a share price of 75.4p. Some discount may be appropriate to reflect execution risk.
