Broker gave RTHM a 75p tp and BUY rating, citing positioning, tech, and financial strength
Companies: Rhythmone
Broker Panmure Gordon initiated coverage of AIM-listed Ad-Tech firm RhythmOne on Tuesday, giving the small-cap a target price of 75p (+64%) and a BUY rating.
In a 70-page report, Panmure explained why it sees RHTM as a potential winner in this space, citing its positioning, technology, and financial strength. It also reviewed the current themes in the constantly evolving ad tech sector.
Growing & fragmented Market
The digital ad market is growing at an impressive 15% per year, with the bulk of growth being "sucked" up by Google and Facebook, the two "gorillas" of the sector.
Panmure believes that demand patterns in the fragmented independent ad-tech industry are more mixed, with vigorous growth in mobile, video, and programmatic:
"Recent advertiser concerns around brand safety, fraud and measurement are unlikely to interrupt this structural growth in our view. However, they are likely to force continued, market evolution, improvements to Google’s and Facebook’s offers, and even more intense consolidation of independent ad tech companies."
Panmure says there are several drivers of industry consolidation:
- high fragmentation
- increasing standards
- the need to keep up with Facebook/Google
- increasing funding challenges
- strategic interest from other sectors
- (ad agencies, consultants, IT groups, telcos, publishers, Chinese investors).
Technology
As a result of this consolidation, RTHM is well positioned strategically to be one of the sector’s consolidators:
"The business has been through a near-death experience in recent years, forcing it to rebuild its tech stack and reposition itself in growth parts of the sector."
RTHM has good exposure to mobile, video, and programmatic sectors, as well as a flexible tech stack, good financing, and growing scale.
Financial Strength
Recently, the business has enjoyed growing momentum, with programmatic revenue jumping 28% in the first quarter, rising 63% in Q2, and 73% in Q3. It is currently operating around breakeven, but according to Panmure's calculations, if programmatic revenues grew from $100m to $200-300m, it would drive an EBITDA margin of 10-12%.
"The group benefits from a strong balance sheet ($75m net cash), a recovering share price, and a management team with deep M&A experience...
The recent acquisition of Perk ($43m, all stock) highlights the opportunity: as well as delivering a strong financial return (year one post-tax ROI of 10%) the acquisition strengthens the core platform, by adding unique inventory for buyers, and increasing volume through the platform."
Investment case
According to Panmure analyst Jonathan Helliwell, there will be "profound consolidation" of the independent ad tech sector going forwards, and that RhythmOne is a winner in this market:
"We initiate on RhythmOne which we see as a potential winner in this space, with a strong organic growth opportunity (following a complete rebuild of its tech stack) plus a strong inorganic one (as the sector consolidates)."
Mr Helliwell added that the current valuation of 0.9x revenues suggests "substantial potential upside" if RTHM can deliver.
