[Held; recent top up @ $1.78 puts EGG at ~3% of our portfolio]
I tuned in yesterday to observe proceedings and ask a few questions (only one of which was ultimately asked by the moderator). I'll provide some of my observations/takeaways.
The session opened with a short intro by Chairperson Ann Sherry, followed by a group overview from group CEO Brent Scrimshaw (who yesterday was reappointed for another 3 year term), then most of the CEOs of Enero group's businesses (OBMedia, BMF, Orchard, ROI DNA, Hotwire) presented a short spot, then the group CFO spoke and finally some Q+A with all the speakers. Everything was pretty tightly choreographed and some of the session felt a little bit robotic, though this shouldn't be a surprise given the group's professional familiarity with PR + comms. They were clearly trying to sure-up investors alarmed at the tanking share price and/or drum up new investor interest.
OBMedia
For obvious reasons given their significant financial contribution to Enero's overall financials, OBMedia was the focus of a majority of attendee questioning. It was the first time I've seen OBMedia's management in person and unlike the business performance, CEO/co-founder Raja Gupta was pretty uninspired and unconvincing as a presenter. He seemed to be on a very tight leash and often answered questions with very politician like non-answers and appeared to me to be reading from some sort of script or talking points. CTO/co-founder Mike Lynn was a bit better but perhaps came across that way because he got to talk more about the techie stuff. Their presentation slot starts at 27:00 into the meeting and questions were answered during Q+A towards the end.
I asked "Re OBMedia: Can someone please speak in general terms about whether OBMedia customers commit to contracted minimum spends or any other sort of ongoing spend arrangement, or is customer spend determined minute to minute and could theoretically drop to zero if they chose to pull their spend for any reason?" which was edited by the moderator to "Re OBMedia: Can someone please speak in general terms about whether OBMedia customers commit to contracted minimum spends or any other sort of ongoing spend arrangement".
Raja responded that there is no committed spend, and their earnings are all tied to performance metrics i.e. client OBMedia spend can fluctuate dynamically day to day and is contingent on them hitting undisclosed performance metrics. Not quite the answer I was hoping for, but then the business results are clearly impressive and satisfying to their customers.
Their value add seems largely to be detection and removal of robot-generated clicks combined with click data augmentation that increases the value of each click to the advertisers. They rely on first party data + don't rely on cookies for the click data augmentation and assert that they are well placed to avoid/mitigate impact from the increasing focus on web privacy and associated war on cookies and user tracking which makes sense to me given the way they operate. They also assert a moat around their deep relationships with Google and Bing in particular.
Main risks appear to be borking or losing an edge in robot detection or their application of big data and AI to augment their click stream, but this is one of those businesses that the more data they get their hands on, the better they can be and this builds significant competitive advantage + barrier to entry.
Other businesses
All the other CEOs who spoke were decent and their businesses seem pretty traditional in the way the operate and generate revenue. There's also a good mix of business-to-consumer and business-to-business focus across the group which is good for diversification of revenue opportunity and increases TAM.
BMF in particular has received a good amount of positive industry recognition:
Q+A
Q+A started at 1:23:00 into the meeting. A selection of the more interesting questions:
- A few questions probing the individual business CEOs on what value they feel their particular business gets from being part of the Enero group. Geographic reach to help growth and overall corp culture were key positives.
- Should OBMedia be spun off as a separate public company? No.
- Asked about the buy back and what the board feels the business should be valued at given their assertion the business is currently undervalued, Brent and Ann were a bit cagey but Ann ultimately said she felt "$3 was undervalued, so north of $3 per share" was closer to fair value.
- How will macro affect OBMedia revenue? Cagey; not really answered.
- OBMedia's biggest competitor? Most visible is System 1
Parting thoughts
Useful session, I like the mix of businesses within the group and feel pretty content as a shareholder.
Following on from my "Humpty Dumpty" straw, I've spent some more time with EGG's half yearly report to try determine if I should be worried or happy to have an opportunity to increase my holding. I've picked a few themes of potential concern to provide some commentary on.
"Brand transformation" EBITDA margin crunched from 27% in 1H22 to 17% in 1H23
As best I can tell, the bulk of the damage here was done by an increase in employee expenses which don't appear to be permanent/structural in nature and the report notes:
During the half year ended 31 December 2022, the Group started a restructuring process to mitigate costs across the Brand Transformation segment. This is largely related to redundancy costs in Hotwire UK, which continued to further integrate its communication and marketing services businesses into a single account management team.
Something to keep an eye on going forward, but feeling ok about this at this stage as they continue to digest their acquisitions and streamline operations.
Debt position
The $50M facility from which they drew $36.3M to fund the ROI DNA purchase was partially repaid down to a balance of $26.0M and they have $38.0M cash.
No concerns here for me.
Cash flow/conversion
At the end of 1H23 they had $99M in receivables and $91M in payables on the balance sheet, of which ~$5-6M were expected by management to be recognised in 1H but payment slipped until early in the new year per their "adjusted" 74% cash conversion percentage i.e. if we attribute the late payments to 1H23, they entered 2H23 with ~$95M receivables.
My take: "Oh well", but not a concern at this stage.
Results by geography
The US market is driving all the growth mostly thanks to OBMedia and a nice FX-cherry-kick on top. All in all, the acquisitions and diversification in the business appear to be paying off handsomly. I'm a little surprised to see AU/Asia going backwards, though without deeper insight that's mostly a curiosity rather than a concern. Given the size of the US market contribution to the group, the primary short term risk is US economic deterioration hammering their US businesses.
How recession proof is clients' OBMedia spend? I find it hard to imagine clients completely turning off the tap, but it could certainly shrink substantially or become more lumpy for an extended period. Given how hard OBMedia has been firing though it seems to be sufficiently resilient at the moment in the face of I guess what you could call "storm clouds on the horizon".
General thoughts
At a SP of $2.30, TIKR tells me the forward PE is 6.6 on a FY23 EPS estimate of 35c. That estimate seems a little too bullish given the 1H results and commentary, but given their current run rate it looks like they shouldn't go backwards (FY22 EPS were 30c) so if we say they'll manage EPS of 31-32c they're trading on a forward PE of ~7.3 which is certainly low by EGG's historical standards.
They're paying out 35-40% of earnings in dividends, and with the retained 60-65% of earnings they've been generating increasingly good returns on equity and capital as well:
My sense is that while there's plenty of short term risk here, I'm still pretty comfortable with how the group as a whole is executing and do not see any reason to panic.
I'll probably be pretty cautious about topping up between here and the end of FY reporting as there may well be more camel and less rocket to come, but still feeling pretty good about it as a long term hold and easing into topping up over the coming months.
[Held IRL; edited to add the cash flow/conversion slide I forgot to include]
EGG had a great fall today and sustained a few cracks after announcing their not too shabby 1H23 results + 6.5c FF dividend, but management's trading update and outlook commentary presumably spooked folks and sent them heading for the exits. A few choice excerpts:
- While still early in calendar 2023, the first six weeks of H2 has delivered a continuation of the macroeconomic headwinds experienced in FY23 H1.
- The Brand Transformation segment has experienced a slow start to the calendar year. The segment continues to see the impact of slower client decision making and conservatism across all geographies and in some cases, constrained client budgets.
- Enero remains focused on managing near team margins and will continue to take appropriate steps to address current macroeconomic headwinds while positioning the business to capture client demand.
High level looks ok but masks some interesting segment level zigging and zagging + cash flow/conversion issues:
I need to do some more digesting of all the results, but I'm not currently feeling at all spooked like everyone else seems to be. Perhaps I should be?
Barring any revelations that lead me to panic too, I'll probably start gradually DCAing to top up at these levels until Humpty Dumpty can be patched up and placed back on the wall... or a rocket... or any mode of transport suitable for getting the share price north bound instead of smelling like the south end of a north bound camel.