London-based content and media services Dods (Group) Plc (LON:DODS) issued a rather bleak profit warning today, citing challenging macroeconomic pressures and reducing their profit forecasts, with the expectation of a loss before tax for FY19. Market reaction was fairly predictable, with the price down 40% in early trade:
The share price has been gradually declining over the past year, and with no divdends for a long time, there are virtually no investors who have had a good time with this share – it could be a case of duds rather than dods.
Dods describe themselves as a market leading business intelligence, data, media, training and events company. This is quite a broad-sounding mouthful, but they specialise in political and public sector coverage, delivered across a range of brands for which they can charge subscription fees. They have recently acquired a social media tech company (Social360) which allows a synergy of sorts: a blend of data allows them to sell business intelligence and consultancy services.
This is a niche sector, and potentially a growing one: Big Data is still a relatively new concept, and any company that could effectively find ways to harness would be well in demand. Another important point about Dods is that Lord Ashcroft is the single largest shareholder, holding in excess of 40% of its shares. This would do it no harm in gaining new contracts for its services.
A warning came in a morning RNS. Whilst not mentioning the ‘Brexit’ word explicity, the implications are obvious:
The Group has experienced challenging trading conditions in the UK over the past three months given its political and policy focus in both the UK and Europe. Whilst trading in October and November was broadly in line with our expectations, December closed significantly behind in response to unprecedented political uncertainty.
December must have been a really poor month, as the next lines read:
With fourth quarter revenues forecast to be lower than anticipated, against a backdrop of increased costs of delivery due to long lead time contracts, the Group has revised its expectations for the current financial year. The Board now expects significantly lower than forecasted adjusted EBITDA and a loss before tax (excluding non-cash impairments) for the year ending 31st March 2019.
This appears to be a massive miss: for FY18 the adjusted EBITDA figure was £3.5m and profit before tax was £1.3m.
It appears that worse news might be to follow in the year-end results as some investments might be written down:
With lower than expected new product revenues and contribution from the 30% Associate investment of £1.7m in the previous year, the Board is undertaking a review of the software, infrastructure, product offering, investments and intangibles to assess any further impairment impact for the year.
A reassuring note is struck for investors:
The Group continues to hold material cash reserves and has no debt. As at 31st December 2018 the Group held £7.3m cash at bank, including restricted cash of £1.27m.
The restricted cash appears to be monies held as a deposit for a landlord. It does appear that Dods will be deploying their cash in some ways soon:
The Board is cognisant that the current hiatus in political decision making could continue to adversely affect our business beyond the current financial year end. With this in mind we remain focused on deploying the Company’s robust balance sheet to generate growth through potential merger and/or acquisitions in related market sectors whilst continuing to preserve and invest in the Group’s heritage brand and assets.
Whilst the market is challenging, the Board remains confident that, in conjunction with potential investments, the Group is capable of sustainable profit streams in the longer term.
Dods is quite an interesting business, although data analytics companies have large operational leverage: selling additional products involves relatively low costs of production – success relies in getting as many contracts and subscribers as they can, which means they have to offer a high quality product.
Over the most recent period, this has been a reasonable business. Adjusted EBITDA is the metric of their choice which isn’t that useful, as it cuts out non-recurring costs (which seem to recur fairly regularly).
That said, they are generating cash, and they are investing that in business combinations. The balance sheet shows that the majority of their assets are comprised by goodwill and intangibles, which outweigh cash and receivables. Their depreciation policy is as follows:
Some of these periods appear a tad long, especially in an environment where things are changing rapidly, but obviously a gentler depreciation policy allows a bigger profit figure to be reported.
Given the figures today, there does not appear to be any real immediate risk to the company: liabilities are well covered, there is no external debt and the cash in the bank stated by the warning is almost the same as what it was in the interims.
One thing to note is that quality of receivables has taken a dive this year:
This is a large jump from the previous year: no doubt related to the contract wins mentioned in the interims. Whilst it may mean nothing, the prepayments relate to services which have been paid in advance, and there will be costs incurred in delivering these services. Given the note regarding increased costs of delivery, it may be worth being cautious around these.
I would have thought that company like this would actually benefit from political uncertainty: at this point companies are in the greatest need of insight. So to blame political uncertainty in December sounds a bit off to me – and possibly more to do with the product, or competitors fulfilling the needs. Whilst this is in a niche market, there are other firms providing data.
Given recent developments, it appears that this political uncertainty will continue for some time even if the UK leaves Europe on 29 March. And with the potential of a General Election in the near future, this should provide some good opportunities for the political publishing titles.
Whilst the group still has cash, I would expect it to be acquisitive in the digital segments which make up the bulk of its income (roughly £8m of its turnover comes from subscriptions). That means the non-recurring costs will continue recurring. On a backdrop of losses, that means that there will be a strain on cash: it is likely that without further financing there cannot be too many more acquisitions. In fact, the reverse could well end up being true and the company, or part of it gets acquired. Sir Martin Sorrell’s new venture could be a potential suitor.
Ownership could benefit or hinder the company. There seems to be little danger in the company becoming a failure with Lord Ashcroft behind so many shares, but equally at such a low valuation there could be the possibility of him simply taking it off the market at a cheaper price.
Hard to know how to value the company – the market capitalisation has dropped to £20m which doesn’t strike me as particularly expensive if affairs are turned around. But the puzzle is that uncertainty should be an opportunity for them, not a threat, but today’s warning has not been presented as such. No real feeling on this, so it is rated 3/5.