Infomedia (ASX:IFM)

Our investment strategy for Infomedia (ASX:IFM)

• Buy Infomedia up to $1.25.
• Our minimum target price for IFM is $1.70.
• Use a stop loss at $0.98.

 

Who is Infomedia?

Infomedia is a Sydney-based that provides software-as-a-service solutions to the automotive industry’s parts and service sector globally. The company’s foundation product, first developed in the 1980s, is Microcat, an online Electronic Parts Catalogue (EPC) that allows dealers and users of automotive parts to efficiently connect with OEMs. Superservice is a platform designed to improve the profitability of care repair and service operations. Infodrive, a ‘data-as-a-service’ platform, provides automotive industry data and analytics. And SimplePart, acquired in May 2021, is an auto e-commerce platform. Infomedia has been a public company on ASX since 2000, but the peak share price was registered in that year at around $2.50. In FY22 the company enjoyed revenue of $120m and underlying cash EBITDA of $25m. In May and June 2022 Infomedia received three non-binding offers from US private equity firms worth $1.70-1.75 per share. One bidder dropped out in July and in October 2022 negotiations around the other two proposals were terminated by Infomedia.

 

Our investment thesis for Infomedia:

• Infomedia has a strong competitive position in software for the automotive trade, with anyone involved in the industry globally generally needed to refer to Microcat and Infomedia’s other products. Infomedia has in excess of 250,000 end-users in 186 countries around the world.
• Infomedia has a track record of growing new products, with Superservice (introduced in 2012) and Infodrive (introduced in 2019, based on the 2019 acquisition of Nidasu) having been successful since they were first developed and growing strongly in recent years.
• Infomedia has strong relationships with Original Equipment Manufacturers, with the Top 10 customers having been with Microcat for over ten years. These kinds of relationships allow rapid adaptation of the product as market conditions change.
• Infomedia is not overly reliant on any particular geography, with revenue split roughly equally between North America, Europe and the Asia-Pacific.
• Infomedia benefits from a recovery in new car sales, which were around 67 million in 2021. The industry has yet to recovery to 2019’s 75 million level[1].
• FY22 was a strong year for Infomedia, with revenue up 23% at $120m and while underlying EBITDA was only up 8% at $50m, underlying cash EBITDA (which adjusts for acquisition earnout payments and R&D expenses that are usually capitalised) was up 29% at $25m. Part of the growth was related to SimplePart (for which twelve months of trading were included for the first time), but organic revenue growth was still a creditable 8%.
• Most of Infomedia’s revenue is recurring due to the SaaS nature of the business. Of the $120m in FY22 revenue, $100m was recurring.
• Infomedia’s capital needs are light, with the business able to throw off $22m in free cash flow in FY22.
• Infomedia has ample balance sheet resources to support the business, with no debt and $69m cash per June 2022. This position is a legacy of the $83.9m which the company raised at $1.50 per share in a placement and Share Purchase Plan in April 2020 in order to make sure the business would not be derailed by Covid-19.
• Infomedia is guiding towards modest growth in FY23. New CEO Jens Monsees told the 16 November 2022 Annual General Meeting that it expected FY23 revenue in the order of $127-$132mn, down from previous guidance of $131-$139 million. Simplepart and Infodrive expected to be decent performers.
• The recent offers for the company have drawn attention to the underlying value. In 2022 Infomedia has received three indicative buyout proposals from US private equity firms – TA Associates of Boston (13 May), Battery Ventures, also of Boston (27 May), and Solera, an investee of Vista Private Equity of Austin, Tx (20 June). Battery Ventures pulled out in July. Both Solera and TA Associates went into the data room offering $1.70 per share, which was considerably higher than the ~$1.17 share price in the week before the bidding started. Battery Ventures had offered $1.75. But in the end, Infomedia management turned down all three offers saying they all undervalued the company. We see potential for the private equity bidders to return to the negotiating table.
• The Viburnum stake associated with one of the offers is long-standing. The TA Associates bid disclosed a 14.5% stake in Infomedia because TA Associates teamed up with Infomedia’s largest shareholder, Viburnum Funds. That has led to concerns of a substantial share overhang. However, it needs to be born in mind that Viburnum Funds has been a substantial shareholder in Infomedia since 2016.
• There has been recent director buying. Chairman Bart Vogel bought 50,000 shares at $1.21 on 5 October, while CEO Jens Monsees bought 122,746 at the same price on 6 and 7 October.
• The CEO has strong industry experience. Jens Monsees, who was appointed as CEO in March 2022 and started with the company in May, worked as the global lead for digital transformation at BMW Group between 2016 and 2019.

 

Infomedia is a company in transition

Under new CEO Jens Monsees, Infomedia has embarked on a transformation from a company focused on products to be sold to the automotive industry, to a company focused on data and information that players in the automotive industry can use. At the same time in is working to simplify its business processes and reduce its cost base. There is potential for marked upgrades in earnings from FY24 as this strategy bears fruit. The 7 December 2022 Investor Day presentation went into some detail to describe the coming transformation.

• Infomedia is a data-rich company, with information today in its systems related to around a billion VINs (Vehicle Identification Numbers) globally.
• Data, when enriched into useful information, can help add value to players in all parts of the automotive ecosystem. For example, data related to a car’s brake pads, which can be captured by sensors, can lead to a text message to the car’s owner that it is time to attend to this issue in the next service. Infomedia is working to capture more data from automotive industry players and then monetise that data. It will emphasize products that are easily scalable and less ‘bespoke’ solutions that are relatively labour-intensive.
• Infomedia will be looking to increase its scale in the all-important North American and European markets in the near term, potentially through M&A.
• Infomedia is currently bolstering its salesforce with better systems (including Salesforce, which has been fully implemented recently) to track effectiveness, adding people with greater familiarity to the automotive sector.
• Infomedia is investigating opportunities to ‘offshore’ parts of its business. It also aims to make better use of AI and machine learning when capturing and processing new data sets.
• The company intends to move its headquarters to the Sydney CBD in FY23, from its current Northern Beaches location. The move will save money because of the high current availability of CBD office space. It is also moving people from its Detroit hub to its Atlanta hub in the US, effectively cutting down its US cost base substantially without reducing its commercial effectiveness.

 

Why has Infomedia stock been declining since late October 2019?

• The global automotive trade has been disrupted by Covid-19 and its impact on supply chains. Infomedia has been perceived to be impacted by this, even though the business has continued to growth through Covid.
• The April 2020 capital raising at $1.50 was considered dilutionary.
• There have been concerns that the original Microcat business has gone ‘ex-growth’.
• The end of the private equity bidding for Infomedia in October 2022 has temporarily impacted the share price.
• The modest FY23 revenue guidance change also impacted the stock in November 2022.

 

 

$1.70 is a reasonable price target

• The earlier $1.70 potential Private Equity buyout price represented an EV/EBITDA multiple of only 11x on FY23 consensus EBITDA estimates.
• Our secondary target of $2.00 would represent an EV/EBITDA multiple of 13x consensus EPS for FY23, which is reasonable given the expected growth rate over the next two years.
• On our favoured valuation metric, EV/EBITDA-to-EBITDA-growth, Infomedia is only valued at 0.49x and 0.44x for FY23 and FY24, i.e. well below the 1x level that indicates fair value.
• Use a Stop Loss at $0.98.

 

What is the upside beyond $1.70?

We see potential for an increase in Infomedia’s medium-term growth rate:

• A reduction in the cost base as Jens Monsees right-sizes the company;
• The potential to grow in China through providing parts cataloguing support for auto makers seeking to sell behind the ‘Great Digital Wall’;
• Increased growth in all businesses, particularly in the US as the sales force is refreshed and more targeted;
• Increased growth as Infomedia generates more actionable ideas for customers from its data;
• Further growth in earnings in the Simplepart business once the three-year earnout is completed in 2024[2].

 

Catalysts for the re-rate of Infomedia

We see three main catalysts to prompt a re-rating of the stock:

• Continued on-market buying by directors, which we believe can ultimately assist the broader market in paying attention to the story
• The half-yearly result in February 2023, which we expect can show that Infomedia is growing as expected.
• Renewed interest from Private Equity or even strategic buyers, that we believe are still lurking the company.

 

Risks

• A potential selldown by Viburnum.
• Potential downturns in the automotive industry.
• Missed guidance for FY23 in terms of revenue, or lowered guidance as we approach the half yearly.

 

[1] Source: Statista.

[2] Infomedia bought SimplePart in 2021 for US24.m upfront and an an earn-out of up to US$$20.5m based on SimplePart’s EBIT over three years.

 

 

UPDATE 21 MARCH 2023

 

Sell Infomedia

Our Infomedia Concierge trade has delivered 34.1% in a little over 3 months (since 8 December 2022).

While our initial price target of $1.70 per share is clearly higher than today’s price of $1.46, the stock seems to be stagnant since early March. This could be a prelude a period of share price weakness.

Given the turmoil in financial markets at the moment, we believe it is prudent to take a profit on a position like this. After all, the performance is well within our 20% to 40% target range.

We may jump back in to Infomedia at a later time, if and when the share comes down to an attractive level again.