Management track record is maybe the most important factor is stock selection
Companies: Amerisur Resources, Tremor International Ltd.
Thank you for your feedback following my previous piece on Amerisur. Some of the feedback echoed my focus on Management track record. Therefore this week I am expanding on this theme and just how critical it is when selecting stocks by looking at another portfolio company of ours, namely Taptica.
But first a quick comment on Amerisur...
The feedback I received following my Amerisur piece was much appreciated, especially the detailed comment posted on the blog itself from Mr Whitbourne. Please do put your thoughts in the comments sections, they are most certainly read, and when possible/suitable will be responded to.
In response to Mr Whitbourne's points I would say they are well made, the only pushback I would have was with the last point around Management burning cash rather than his preference of seeking to return cash to investors via a dividend or buybacks. I see the endgame for a company like Amerisur as building a portfolio of assets that are attractive enough to be acquired by a much bigger player.
Oil majors have underinvested in recent years and are looking at inorganic ways to replace reserves. Therefore I would prefer that Management at Amerisur focus on building out the potential in their blocks rather than returning capital to me at this stage. However, as I said, many thanks for your thoughtful response.
Back to Taptica
Every active fund manager will tell you how important company management is in their stock selection process. Today we’d like to highlight a company where we believe management have added very significant value, and yet the share price multiple on the stock doesn’t seem to particularly reflect this. The company is Taptica.
A bit of backstory...
The current CEO, Hagai Tal, arrived in 2010 as a major shareholder (it was a private company at that point) and became CEO in 2013. Prior to his appointment, he held a series of roles and ownership stakes in young technology companies.
In 2013 Taptica was then called Marimedia and had a turnover of $43m. It was IPO’d on AIM in May 2014 raising U$30m and was almost entirely focused on display advertising on desktops (think banner advertising).
The AdTech sector has been a particularly harsh and fast moving world in the last decade and quoted businesses in both the US (especially Nasdaq) and Europe have often been a complete minefield for investors with significant loss of shareholder money.
This background is important when considering that Marimedia had a tough start as a quoted business with its share price halving in 2015 as their business in online advertising on desktops came under heavy pressure and shrank significantly.
Acquisition 1 - Taptica acquisition highly value accretive
However, management correctly understood the need to enter the mobile market which they did in September 2014 with a brilliant and sizeable pivot, through the acquisition of Taptica for U$13.8m which gave them a significant leg up in the relatively new mobile performance advertising area, initially in-app games advertising.
Through internal R&D/development and skills/contacts previously built up in desktop advertising, the business developed through 2015 and mobile boomed. In September 2015 the business was renamed Taptica and effectively became 95% mobile. This was a textbook acquisition and pivot for the whole company.
That $13.8m acquisition price likely now contributes substantially more than that price tag in expected 2018 EBITDA (the Group-wide estimate for 2018 is c.$40m). Hence this was an excellent acquisition that is paying for itself several times over now.
Acquisition 2 - AreaOne acquisition gave Management an Asian footprint
As an Israeli founded technology business Taptica recognise that they really need local staff around the world to build the local relationships with advertisers that provide Taptica’s revenue base. In 2015 they paid $15.6m for AreaOne, a business that provided an office in China with several important online household names as clients, a relationship with Facebook and a significantly beefed up Asian presence.
China revenues in 2018 are likely to be over $32m and significantly profitable, making this both a cheap financial deal and strategically important to the whole business.
Acquisition 3 - Adinnovation acquisition help with Japan
Similarly in July 2017 TAP acquired 57% of Adinnovation in Japan for only U$5.7m with further ownership coming via earn outs in subsequent years. Adinnovation is likely to make over $3m EBITDA in 2019, again proving an excellent and cheap acquisition allowing Taptica to make a clear success of entering an important new large geography.
Acquisition 4 - Tremor VideoDSP a big deal
However the biggest deal to date was undoubtedly the August 2017 acquisition of US-based Tremor VideoDSP. The headline price was $50m but the acquisition came with c.$20m of Working Capital/cash so the net price was more like U$30m, for a business with $150m of Sales in 2017 and a little below break even.
To understand the relative scale of this acquisition, note that Taptica’s revenue in 2016 was only $126m. There are few management teams willing to take on a deal that is the same size as their existing business as it usually brings all sorts of risks and issues.
Tremor provides a whole new division to Taptica, focused on brand advertising. More specifically, it brings programmatic video brand advertising which is serving up video adverts on any mobile device. It targets very specific audiences and often coinciding with traditional TV advertising to match up timing and targeting.
This is a rapidly growing niche and Tremor has some unique skills and partnerships. Through basic cost cutting, such as renegotiating all existing agreements, and new management practice, the business rapidly moved past break even and we can see no reason why margins can’t expand to at least 10% or more over time.
A 10% EBITDA margin on, say, a $180m of Sales is U$18m (maybe in 2020 but it could come faster). Therefore, the net acquisition price of $30m again looks like a real bargain.
What other upside does Tremor offer?
Tremor might turn out to be a lot more than our back-of-an-envelope numbers over the next 2+ years as it gives Taptica 170 US-based employees, a strong sales force and existing relationships and infrastructure that can cross-sell Taptica’s mobile performance-based advertising expertise into the US market.
Taptica can also take Tremor’s very strong US pedigree in video brand advertising and internationalise it. These sales and technology synergies are currently unquantified and should all come on top.
Are Analysts too conservative on margins?
It’s worth noting that Taptica, ex TremorVideo, had a first half 2017 EBITDA margin of 20.8% on a gross margin of 39.4%.
Tremor also has a gross margin of c.40% and if cross-selling and management action/cost control really bear fruit, EBITDA margins on the whole business could move towards 17%+ over the next few years.
Note analysts have total EBITDA margins in 2019 of 12.3%.
Recent finnCap reports:
19th June 2018 - Taptica powers on as Tremor margins strengthen
26th March 2018 - Taptica’s transformational time
It looks to us like management have pulled off another amazing acquisition with Tremor and that in 3 years after the deal it might have paid less than 2x EBITDA (using the net figure of $30m as the acquisition price) for a leading US market position.
Thus we’ve outlined how the current management has very profitably entered the US, China and Japan for a total aggregate outlay of c.$52m, through 4 different international acquisitions.
Overlooked in an unloved sector
Like so many small cap listed names Taptica has a limited following with only two analysts covering the stock. There’s also a large element of suspicion brought about by Marimedia’s initial poor post-IPO share price performance, many other adtech blow-ups in recent years, a volatile share price history and, more recently, a large placing in January 2018 where the CEO sold a portion of his stock and Taptica raised new primary money for further acquisitions.
As with my comments on Amerisur the other week, this is by no means a low risk sector. Disruption, regulation and the success of the twin giants of Google and Facebook has created much uncertainty. This however reinforces the importance of backing good Management. Companies that can see how the landscape is shifting, and act accordingly are the ones that will survive and prosper.
Management recently tried to provide more information on the business with a CEO Q&A on the website:
Also, yesterday's Capital Markets Day showcased its two main divisions and technology credentials. I would link to the slide deck but for some reason the company haven't put it up on their site yet...
We would also advocate investors read the most recent annual report that gives a good understanding of the business.
The reality is that Taptica has had continual earnings upgrades for the last 3 years, executed on a series of value-enhancing acquisitions alongside steady organic growth and increasing global diversity at scale for the business which should help reduce risk.
Revenues have gone from $25.3m in 2012 to c.$330m in 2018e whilst maintaining good profitability levels. In short we think Taptica is an excellent example of management adding very considerable value for shareholders.
To apply some simple metrics to the shares, based on current 2018 estimates Taptica trades on a PE of 11x 2018 and EV/EBIT of c.7.5x, including the recent cash raised.
It’s hard to know an organic growth rate given the acquisitions discussed previously but if we use 10-20% levels going forward, and if we bake in some EBITDA margin expansion as Tremor is bedded in to the business (not in analyst forecasts), profit growth of 20%+ would result. If you were to put TAP on a 15x 2019 PE multiple of the consensus EPS of 36p, that equates to 540p.
Share have risen from 60p in 2016 to 360p today. I'm not writing this to recommend the shares as that is something I do not, and will not do. The reason for the write-up is to showcase what good Management can achieve in a tough and competitive landscape.
To read a brief outline of how I think about stocks, and what I aim to achieve in this blog, please check out my first blog where I set out my stall.
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Please Note: To be clear, I do not and will not ever give any advice. I will rarely mention individual stocks but when I do these will not be recommendations, instead just my thoughts at that point in time.