RNTS Media — Update 6 March 2016

RNTS Media — Update 6 March 2016

RNTS Media

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RNTS Media

Inneractive acquisition puts RNTS on the map

Acquisition

Media

7 March 2016

Price

€2.02

Market cap

€231m

Net debt (€m) FY15e

14

Shares in issue

114.5m

Free float

61%

Code

RNM

Primary exchange

FRA

Secondary exchange

NA

Share price performance

%

1m

3m

12m

Abs

0.0

0.0

2.9

Rel (local)

(9.9)

2.5

23.2

52-week high/low

€3.8

€3.5

Business description

RNTS Media is a mobile advertising technology company. Its core operating divisions are Fyber, Heyzap and, subject to completion, Inneractive. Its services provide app developers and publishers with solutions to help them monetise their audiences more effectively.

Next events

Full year results

April 2016

Analysts

Bridie Barrett

+44 (0)20 3077 5700

Dan Ridsdale

+44 (0)20 3077 5729

RNTS Media is a research client of Edison Investment Research Limited

The proposed acquisition of Inneractive, a rapidly growing mobile SSP, will put RNTS firmly on the map among the larger listed ad tech groups. By connecting with the Fyber platform, it can offer a significantly wider audience reach to advertisers and deeper demand to publishers. With the first €100m of last year’s €150m convertible bond issue fully deployed, the EV/Sales valuation is becoming easier to digest.

Year end

Revenue (€m)

EBITDA continuing (€m)

EBIT continuing (€m)

PBT continuing (€m)

PBT reported (€m)

EV/
Sales (x)

12/14 PF

63.9

0.4

(2.5)

(3.1)

(12.1)

3.5

12/15e

73.5

(16.3)

(19.0)

(22.5)

(31.3)

3.3

12/16e

151.5

(14.1)

(17.8)

(23.9)

(32.4)

2.2

12/17e

228.7

(7.4)

(11.8)

(18.7)

(23.9)

1.6

Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items, BSG and share-based payments.

Inneractive acquisition: Scale and reach

RNTS has announced the proposed acquisition of Inneractive for $46m (initial cash payment) and up to $72m inclusive of retention payments and potential earnouts. Inneractive is a mobile ad tech company; headquartered in Tel Aviv, it operates a mobile supply side platform (SSP) and advertising exchange. It has 630m monthly active users (MAUs), doubled in size to $43m of revenues in FY15 and was profitable at the EBIT level. Revenue growth remains strong and Inneractive’s CEO, who will join RNTS’s executive board, believes it can double revenues again over the coming two years.

Forecasts: Revenue and MAUs doubling up

The proposed acquisition closely follows the Heyzap deal announced in January and is in line with RNTS’s strategy to add scale and reach in the fragmented mobile ad tech ecosystem. These two deals could potentially double RNTS’s annualised revenue run-rate and reach over one billion MAUs. As well as being a fast growing company in its own right, the acquisition of Inneractive should benefit the RNTS ecosystem by extending its overall reach to a much wider audience by linking the platforms together, which should promote exchange liquidity and network effects.

Valuation: On the map

On a pro forma revenue basis, RNTS Media is now one of the larger listed ad tech companies and with the proceeds of July 2015’s €100m bond issue deployed, the valuation is becoming easier to digest. The FY17e EV/Sales multiple of 1.6x is now within the peer group range (0.5x to 2.1x). In addition to evidence of ongoing strong revenue growth across all platforms, the share price performance and valuation will depend on the level of revenue synergies and user growth stimulated by the network effects of working these exchanges together, which could accelerate the group’s path to break-even.

Implications of the proposed Inneractive acquisition

A global mobile SSP and ad exchange

Inneractive runs a mobile supply side platform (SSP) and RTB (real time bidding) based advertising exchange. It has over 630m MAUs across its network of publishers in 180 countries and across a range of verticals. In addition to aggregation via a single software development kit (SDK), the technology includes publisher tools such as analytics and yield optimisation and offers a complete range of ad formats (display, native, rewarded video, interstitials and offer walls) across both its open exchange and private marketplace.

Inneractive was founded in Tel Aviv in 2007 by Ziv Elul and Offer Yehudai, and also has offices in New York, San Francisco and London. It has grown rapidly – doubling revenues during 2015 to reach $43.2m. The company is profitable at the EBITDA level (c 5% margin in FY15) and so far it has continued its strong growth trajectory in 2016 – management is aiming to double revenues again over the next two years – and the earnouts are geared towards reaching this target. Subject to shareholder approval, Mr Elul (CEO of Inneractive) will join the RNTS Media board on completion.

Financed with the proceeds of the first €100m placed from last year’s €150m convertible bond issue, RNTS will pay an initial consideration of $46m. In addition, it will pay up to $26m over the next three years in earnouts (growth-triggered) and retention payments. In our forecasts we have assumed that RNTS is liable for the full earnout (ie revenues are doubled over the next two years). Based on the initial $46m payment, this implies an EV/Sales multiple of approximately 1.1x, and 0.6x sales for the earnout element (or 0.8x combined) – at the bottom end of the deal values achieved in this sector over the last 12 months. The acquisition of Inneractive is expected to complete in Q216 and RNTS has committed to pay a break fee of US$8m.

Deal puts RNTS Media on the map

The acquisition is in line with RNTS Media’s strategy to create a leading mobile advertising technology group. As well as bringing a fast-growing company into the RNTS group, the acquisition has considerable strategic merit:

Reach: Inneractive is used by publishers in a wide range of verticals: entertainment, productivity, news, messaging, social networking and utilities. This takes RNTS’s reach and addressable market beyond the predominantly gaming audiences of Fyber. Similarly on the demand side, Inneractive connects with the DSPs (Demand Side Platforms), while Fyber is stronger with the ad networks, adding additional sources of demand.

Scale: Inneractive will be run as a separate company for the foreseeable future. However, its platform will be connected to Fyber’s. In doing so, the group can offer advertisers reach to over 1bn MAUs (we assume c 10% overlap between Fybers c 500m MAU’s and Inneractive’s c 630m). Exchange liquidity is a key value driver in this industry and this combination should increase the relevancy of both platforms to advertisers, which in turn should help it to improve CPMs1 and fill rates for publishers, promoting important network effects. Given the overlapping technologies between Fyber and Inneractive, we believe a full integration makes sense and could add to the overall synergies of the deal in the future.

  Cost per thousand impressions.

Significance: With a combined monthly audience of over 1bn, across its exchanges, RNTS is now one of the largest SSPs in the mobile ecosystem. Direct MAU comparisons with other exchanges are complicated by the fact that the companies do not publish the same KPIs. However, using revenues as a simple benchmark, compared to other listed ad tech groups in Europe and the US, RNTS is now one of the larger groups in the mobile ecosystem, Exhibit 1.

Exhibit 1: Comparison of FY16 forecast revenues for listed ad tech companies

Source: Bloomberg, Edison Investment Research

Forecasts – revenue and gross profit doubling up

We assume the proposed Inneractive deal completes as of 1 May 2016, with organic revenue growth of 40% this year and 35% in FY17e, slightly ahead of Fyber given the stronger relative performance in FY15. We assume a gross margin of 30% typical of SSPs. Despite the strong top line growth, we have assumed Inneractive’s EBITDA margin remains at 5% as the company continues to invest in building its market share. We also factor in €3.1m of restructuring charges, and we have assumed that RNTS issues the remaining €50m convertible bond during 2016.

We present a summary of our forecasts to EBITDA below (Exhibit 2), with full forecasts on page 5 of this report. Given the strategic review being undertaken at RNTS’s non-core BSG division, we have also taken the opportunity to re-classify this as a discontinued operation, which we believe gives a more accurate impression of the group’s strategic direction. The impact at the EBITDA level is slight positive.

Exhibit 2: Summary divisional forecasts

€000s

2014 PF

2015e

2016e

2017e

Dec

Revenues

Fyber

63,900

73,485

99,541

129,404

Inneractive

36,667

74,250

Heyzap

15,300

25,000

Total gross revenues

63,900

73,485

151,508

228,654

Total revenue growth

55%

15%

106%

51%

Gross profit - Fyber

24911

24250

29887

36233

Gross profit - Inneractive

11000

22275

Gross profit - Heyzap

4896

7000

Gross profit

24,383

24,250

45,783

65,508

Gross margin

38.2%

33.0%

30.2%

28.6%

EBITDA - Fyber

(2,089)

(18,955)

(16,113)

(13,053)

EBITDA - Inneractive

1,833

4,400

EBITDA - Heyzap

(2,304)

(200)

other

2,449

2,700

2,500

1,500

EBITDA - continuing operations

360

(16,255)

(14,084)

(7,353)

Source: Edison Investment Research

Overall, as Inneractive is profitable, the acquisition means a reduction to our forecast group EBITDA losses of €1.8m in FY16 and €4.4m in FY17. While the notion of improved exchange liquidity should drive top line revenues growth across the platforms, given the volatility in the market over the last year, for now, we are erring on the side of caution and we make no changes to our forecast growth rates at Fyber. However, as outlined above, the network effects that come with a larger MAU base across a wider publisher set should stimulate growth across all three of RNTS’s platforms – this represents upside potential to our revenue estimates.

On the current pro forma cost base, while we forecast EBITDA losses to come down, we do not forecast breakeven within the next two years. However, as well as integrating the platforms, we understand that management views the updating and streamlining of systems and procedures as a priority in order to accelerate the time to breakeven. For instance, RNTS, which to date has focused on building the platform technology, is now also working on the implementation of a strong and scalable back office operations, eg by investing into a new ERP environment. Once fully implemented and integrated into the platform, these measures are expected to significantly increase operational efficiency allowing it to add more business without expanding the cost base further. Again, this represents upside potential to our estimates.

Valuation: Brings RNTS more into line

With the proceeds of the €100m capital now deployed, management has executed on its strategy to increase its revenue run rate to over €150m, and the group now has a better overall structure and growth profile.

The three platforms: Fyber, Heyzap and Inneractive are growing strongly and once integrated, will have a more powerful offering for both publishers and advertisers. The group’s valuation, in terms of EV/Sales multiples is also becoming easier to digest: Post this proposed deal (and using forecast net debt in order to capture the earnouts), RNTS is trading on an EV/ Sales of 2.2x and 1.6x in FY16e and FY17e, respectively. On this basis, its valuation no longer looks anomalous when compared to other listed ad tech companies (0.5x to 2.1x FY17 EV/Sales) or recent deal values.

Management’s priorities now are to integrate the platforms and to ensure that it has the appropriate systems and procedures in place to manage the growth. In doing so, it expects to extract both revenue synergies and cost savings in order to move the group towards breakeven. Our forecasts currently do not explicitly forecast for these synergies, and so evidence to their effect would represent upside potential.

Exhibit 3: Financial summary

 

 

€000s

2014

2014

2015e

2016e

2017e

Dec

 

 

IFRS

Pro forma

IFRS

IFRS

IFRS

PROFIT & LOSS

Revenue

 

 

17,907

63,900

73,485

151,508

228,654

Cost of Sales

(9,449)

(39,517)

(49,235)

(105,725)

(163,146)

Gross Profit

8,458

24,383

24,250

45,783

65,508

EBITDA - continuing

 

(1,771)

360

(16,255)

(14,084)

(7,353)

Operating Profit (before amort. and except.)

(2,812)

(2,505)

(19,005)

(17,817)

(11,828)

Intangible Amortisation

(796)

(2,617)

(2,700)

(2,700)

(2,700)

Exceptionals

(5,839)

(3,439)

(3,500)

(3,318)

0

Other

(7,396)

(3,021)

(2,600)

(2,500)

(2,500)

Operating Profit

(16,843)

(11,582)

(27,805)

(26,336)

(17,028)

Net Interest

(690)

(549)

(3,500)

(6,050)

(6,900)

Profit Before Tax (norm)

(3,502)

(3,054)

(22,505)

(23,867)

(18,728)

Profit Before Tax (FRS 3)

(17,533)

(12,131)

(31,305)

(32,386)

(23,928)

Tax

715

225

3,464

0

0

Profit After Tax (norm)

(2,787)

(2,487)

(19,041)

(23,867)

(18,728)

Profit After Tax (FRS 3)

(16,818)

(19,302)

(27,841)

(32,386)

(23,928)

Average Number of Shares Outstanding (m)

114.5

114.5

114.5

114.5

114.8

EPS - normalised (c)

 

(2.4)

(2.2)

(16.6)

(20.8)

(16.3)

EPS - normalised fully diluted (c)

(2.3)

(2.1)

(15.4)

(18.2)

(13.8)

EPS - (IFRS) (c)

 

(14.7)

(16.9)

(24.3)

(28.3)

(20.9)

Dividend per share (p)

0.0

0.0

0.0

0.0

0.0

Gross Margin (%)

47.2

38.0

33.0

30.2

28.6

EBITDA Margin (%)

-9.9

0.6

-22.1

-9.3

-3.2

Operating Margin (before GW and except.) (%)

-15.7

-3.9

-25.9

-11.8

-5.2

BALANCE SHEET

Fixed Assets

 

173,152

173,152

177,398

235,731

255,228

Intangible Assets

159,729

159,729

164,191

222,324

241,768

Tangible Assets

674

674

458

658

711

Investments

12,749

12,749

12,749

12,749

12,749

Current Assets

 

51,423

51,423

105,784

77,271

54,150

Stocks

556

556

556

556

556

Debtors

17,246

17,246

15,100

26,981

37,587

Cash

21,078

21,078

74,121

33,727

0

Other

12,543

12,543

16,007

16,007

16,007

Current Liabilities

 

(33,518)

(33,518)

(112,789)

(172,495)

(189,163)

Creditors

(24,606)

(24,606)

(24,789)

(34,495)

(45,617)

Short term borrowings

(8,912)

(8,912)

(88,000)

(138,000)

(143,546)

Long Term Liabilities

 

(19,042)

(19,042)

(16,173)

(16,173)

(16,173)

Long term borrowings

(2,869)

(2,869)

0

0

0

Other long term liabilities

(16,173)

(16,173)

(16,173)

(16,173)

(16,173)

Net Assets

 

 

172,015

172,015

154,220

124,334

104,042

CASH FLOW

Operating Cash Flow

 

(12,985)

(12,844)

(17,426)

(19,577)

(6,837)

Net Interest

N/A

N/A

(3,500)

(6,050)

(6,900)

Tax

N/A

N/A

0

0

0

Capex

N/A

N/A

(3,500)

(4,600)

(5,309)

Acquisitions/disposals

N/A

N/A

(10,750)

(60,167)

(20,227)

Financing

N/A

N/A

0

0

0

Dividends

N/A

N/A

0

0

0

Net Cash Flow

N/A

N/A

(35,176)

(90,394)

(39,273)

Opening net debt/(cash)

2,553

2,553

(9,297)

13,879

104,273

HP finance leases initiated

0

0

0

0

0

Other

580

(11,803)

12,000

0

0

Closing net debt/(cash)

 

(9,297)

(9,297)

13,879

104,273

143,546

Source: Edison Investment Research, RNTS Media accounts. Note: Pro forma includes Fyber as if for a full year and excludes discontinued items including BSG.

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Athersys — Update 3 March 2016

Athersys

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