Risks rising for iSentia

Market expectations are high – perhaps too high – for iSentia in 2017.

We’re not in the business of predicting profit downgrades. Nevertheless, we’re becoming increasingly concerned that iSentia might miss market expectations for either 2016 or 2017. In early May the company reiterated guidance for earnings before interest, tax, depreciation and amortisation (EBITDA) of $50m-$53m for 2016. Now that the financial year has concluded, a downgrade for 2016 seems unlikely.

More likely is that iSentia fails to meet market expectations of around $59m in EBITDA for 2017. In iSentia’s unfriendly trends, we explained how the company’s core Australia and New Zealand (ANZ) media monitoring business is generating little growth and may in fact end up going backwards as print media publishers slash their workforces.

iSentia is aiming to have 75% of ANZ clients on subscriptions by October 2016. That still leaves clients representing around $23m of revenue who pay according to the volume of media content delivered.

The company is increasingly relying on acquisitions in Asia and elsewhere for growth. If the August 2015 acquisition of King Content doesn’t produce the strong earnings growth expected from it in 2017, then market expectations are certainly at risk.

The market considers iSentia to be a ‘growth’ company, so any interruptions will be treated harshly. If the company produced flat EBITDA in 2017, for example, a 25% fall in the share price from this level would not surprise.

Our concerns mean we have less confidence in our valuation. We’re maintaining our recommendation guide for now, but shareholders should take note of our Medium-High share price risk rating. HOLD.

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