Emitch profit clicks

One of the standout characteristics of the broking community in Australia is the lack of attention given to internet-related stocks.

An exception is the online recruitment company Seek.com (SEK), which relatively widely covered. The company is partly owned (25%) by Publishing & Broadcasting (PBL) and one of the major local competitors in the field of online classifieds for the likes of John Fairfax Holdings (FXJ) and News Corp (NWS).

Another is the online holiday and accommodation service Wotif.com (WTF), which has attracted some attention from the financial community post the ASX-listing three months ago.

And that's pretty much it.

Companies such as Melbourne IT (MLB), which used to be on every broker's radar during the new technology bubble of the late 1990s and early 2000s remains out of sight for the major equity researchers in Australia these days.

Resources have picked up the baton from IT and internet-related companies as an easy-to-sell, potentially high growth story. The side-effect of this is that outside the top 200, there's little to no room left for anything outside metals and mining. (Just ask biotechnology companies).

The downside of this is that Australian investors are arguably missing out on the local internet maturing into the next phase.

A few months ago I argued Australian internet companies were poised to benefit from several years of high growth that lay ahead. Unfortunately, and as proven by the recent results of hosting companies WebCentral (WCG) and Hostworks (HWG), this doesn't mean investors can blindly assume a guaranteed strong profit growth and thus share price appreciation for every company involved.

One company that seems to have no problem in translating the booming internet developments into strong financial growth figures is online ad agency emitch (EMI). We first highlighted emitch in May this year when its share price was about 60¢. Even though we only know of two smaller brokerages that actively cover the stock, investors have had so far little problem in acknowledging the company's strong potential. Emitch shares crossed the $1 mark last week, after which they retreated to 90¢.

On Select Equities and Intersuisse calculations, this implies the shares are currently trading on a forward earnings multiple of about 30 times, which is more than double the market's average.

Does this mean investors have already pushed the shares to a level far too high? Select Equities and Intersuisse are divided in their opinion; Select Equities rates emitch shares Marketperform for the short term and Outperform for the longer term. Intersuisse is keeping emitch on its Buy list (along with a truly bullish Continue to Buy recommendation).

One thing is certain though: this company should continue to record very high growth figures over the next few years. FN Arena had the opportunity to attend a presentation by the company's management on Monday. We could not help but notice how our positive view turned even more positive.

As far as the short term goes, chairman Stuart Simson said the company believed it had continued growing faster than the total general online advertising market in the June quarter and so far this had been maintained in the September quarter.

To put these statements in perspective: the online advertising market (all categories included) grew by 61% in the year to June 2006. Emitch recorded growth of 79% over the period. The figures are even more impressive over the first six months of calendar 2006: 67% for the market versus 100% for emitch.

The online advertising market consists of general advertising, online classifieds and search engine ads but emitch only measures itself against the general advertisement category. It doesn't do classifieds and only has a very small portion related to search engine ads at the moment. This does not alter the story: general ads online grew by 59% over the year to June 2006. Industry watchers expect them to grow 60% over the second half of 2006.

Large companies in Australia are either switching part of their ad spend from traditional media to the internet or are talking about it right now. Emitch is at the forefront of this development. The company is the largest media planner and buyer online in both Australia and New Zealand. It believes it has market shares of 20% and 40% respectively.

As such, emitch has secured strong market positions among early online ad adopters in the finance, communication and computers and travel industry. The travel industry, particularly, in the past year or so has embraced the internet as a way of building and promoting brands and acquiring new customers and emitch believes most of the industry’s most important players became customers in that time: Flight Centre (FLT), Virgin Blue (VBA) and Tourism NT are just a few examples.

The real shift has yet to happen, though, with major consumer brands still spending nearly all their budgets offline. Emitch believes this will change over the next two years with increasing parts of total ad budgets by companies in sectors such as retail, media and cars being relocated to the internet. It's still early days, management cautions, but this also implies the real growth for online advertising has yet to kick in.

Woolworths (WOW), for instance, has only just started to experiment on the net. George Weston Foods had a trial last year and intends to initiate a cautious switch soon. The same applies to traditional media companies such as Seven Network (SEV) and Hoyts.

The early adopters of online advertising were the more acquisitive oriented type of advertisers, management explains, while those predominantly seeking brand awareness stayed loyal to TV, radio, newspapers, magazines, cinemas and billboards. Until now, that is. This group represents 60% of all ad spend in Australia.

It goes without saying that the switch to online advertising goes hand in hand with the growing uptake of broadband internet services in Australia and the parallel shift in media consumption.

Emitch reported a net profit increase of 85% to $2.574 million in 2005-06. Management refrains from giving too specific forecasts but both brokers covering the company believe profits will more than double this year to $5.5 million. So far, they forecast this will grow to $8.1 million in 2007-08, but given the acquisitive nature of the business, this figure is bound to turn out too conservative.

In addition to the overall favourable industry conditions, emitch has secured strong inhouse growth options through acquiring email service OneMail and The Internet Bureau in New Zealand, setting up an inhouse creative division and establishing the Columbus brand as a local integrated search engine ad specialist. Forecast growth for Columbus this year is 150%.

Above all, the company has already started to look beyond its future growth peak by setting up a joint venture with French media giant Havas. Emitch now also has the Media Contacts brand to which it can direct customers that may have a conflict with it also serving a competitor. (The company is effectively setting up a "friendly" competitor).

Stuart Simson knows exactly where the next high growth figures will come from: mobile telephony.

The beauty of the emitch story is also that most of the offline peers have only now started to wake up to the online opportunity.

Many of these potential competitors, management said during the presentation, have already drawn the conclusion it's probably easier not to go into direct competition with emitch. Others are still offering their customers the internet option for free (which can only last as long as the switch only consists of small budgets).

They had better not wait too long if they are serious in going online, because emitch intends to grow its dominance in the Australian online ad market fast and aggressively over the coming year. Online ad spending is expected to pass $1 billion this year.

Australia's ad buying heavyweight Harold Mitchell owns 29% of the company.