Shares in Bonhill Group (LON:BONH) shed 30% in early trade today as the data specialist revealed that tough trading conditions had persisted and as such would hit full year profits:
In common with many profit warnings, the share price has been pretty much a disaster zone, and has dipped by more than half this calendar year. Going back even further it looks even worse as the share price was north of 100p for much of 2018.
Bonhill may not be a well-known business. Formerly known as the Vitesse Group, the company specialises in content and data aimed at the financial sector, disseminated through a variety of online and offline publications and events. More recently there has been specialisations in diversity, such as the ‘Women In….’ series focusing on increased representation. Their sites tend to be secondary, lesser known sites which are little more than template-based sites such as What Investment, Small Business and Information Age although this is not necessarily a bad thing: XLMedia showed that traffic is the more important factor.
What’s gone wrong at Bonhill Group?
The bad news comes in a trading update, and its theme is quite a common one nowadays.
In its interim results announcement on 18 September 2019, Bonhill Group plc (AIM: BONH), a leading B2B media business specialising in three key areas: Business Insight, Events and Data & Analytics, announced that Last Word Media had experienced some challenging conditions in the UK and Hong Kong, but more normalised trading patterns had returned at Investment News following a weak couple of months in the first half. The Company announces today that the challenging conditions experienced by Last Word Media in the UK and Hong Kong have continued and, although Investment News’ performance has improved in the second half, the Group’s results for the year ending 31 December 2019 will not reach the levels previously anticipated.
This is helpfully quantified:
Although, on a proforma basis, the Group’s revenues will be flat year-on-year, as a result of the significant investment being made to transform its offering, the Board now expects EBITDA for the year to 31 December 2019 to be approximately £2.5m, being materially below market expectations.
Comparisons are difficult here because of the proforma basis and that the company has rapidly changed.
We then have bad news regarding Investment News and Last Word Media, which has seen a management shake-up with three senior members leaving. This is not pleasing to investors considering these acquisitions have just happened in the past year.
Bonhill Group: A transformational period
Bonhill’s Stockopedia score of 10 does not invoke much confidence here, although we must remember this is a lagging indicator. It’s recent profits scorecard pretty underlines a narrative that this was a marginal publishing group which has suddenly come to life if we look at the projected turnover:
Indeed, as we can see from the company corporate timeline, there was a period between 2007 (when it acquired Information Age) and 2017 (a placing of shares) where nothing happened at all. Since then there have been two large acquisitions: Investment News in 2018 and Last Word Media in 2019. Both of these were on a huge scale relative to the company size and were paid for via the issuance of shares.
Therefore there is plenty of change going on here. The 2018 annual report is already a bit out of date as it does not fully reflect the events of the past year. In some ways, the past events do not matter as much: the company is a much bigger and different one from the one a few years ago. For instance, in the last half year results, revenue jumped from £1.9m to £10.7m.
The bigger question is whether these changes will be profitable for the Group. We have an EBITDA figure of £2.5m which is good in itself, although depreciation and amortisation costs become relevant quickly here due to the considerations paid for the new businesses. And there is quite a bit to do: there are something like £30m of intangible assets on the balance sheet, comprising the majority of the acquisition costs, perhaps no surprise because these businesses are asset light.
The half-year report uses EBITDA as a proxy for adjusted EBITDA – and there will be plenty of adjustments in the first year. Acquisitions costs, reorganisation costs, will likely see the statutory results being negative.
One thing that is correct is that the last equity raise of approximately £10m did go some way to strengthening the balance sheet, as the acquisition as Last Word was at an initial consideration of £7.8m. Cash levels sat at £5.7m at the half-year, however against this are a large deferred tax balance of £2.7m and borrowings of £3.6m (given by the vendor of a previous acquisition). But given that many of the adjusting items will not be seen next year, the business should be cash generative, if things do not get any worse.
It is worth mentioning that despite owning plenty of websites, turnover figures are heavily weighted towards Investment News (£6.8m out of £10.7m turnover) and the United States (£7.1m of £10.7m turnover). Fortunes of the whole company will therefore follow what happens here. Currently, this is the jewel in the crown of the group, with that turnover generating £1.2m of EBITDA. The Investment News website is heavily US focused.
Last Word Media also produced a significant amount of turnover, almost equal to the entire previous Bonhill business although virtually at break-even for EBITDA. More work will have to be done here, and while there are cost savings, it remains to be seen if any of the Investment News popularity can provide synergies.
Are Bonhill Shares good value?
The market cap has dropped quite a lot here, and according to Google it is £18m and this for a business with c.£2m of cash, and perhaps decently profitable after this year means that on a forward price/earnings, this is quite cheap. I think I can understand their rationale for acquisitions, which diversifies their earnings by both country and sector and there is potential for many cross-selling opportunities as the respective client bases are likely to have many mutual interests.
Having said that there are plenty of risks here. A potential scenario may occur that Investment News continues to dominate, and the rest of the business is just overheads. The amortisation curves for the acquired businesses are shallow, perhaps reflecting the confidence in them but may also increase the chances of impairment down the line with another profit warning. The balance sheet is adequate in my own view, not particularly strong or in immediate danger.
Competitive advantage may also be difficult to generate in company terms. Many people would subscribe to websites for content, and that content is written by journalists who can simply transfer to the opposition at a few months notice if they are paid more money. For some of these reasons I do believe the shares will never justify a large earnings ratio unless the events side of the business can pick up and deliver in scale.
It seems that management currently have their hands full and there will not, or should not be any more acquisitions any time soon, meaning that they can concentrate on the issues at hand. At the current share price I don’t view it as a real bargain, but risk and reward seem about in balance. 3/5.