Critical Mass

Company overview

Criteo is an advertising technology company that was a three man start-up in Paris in 2005 before launching its first product in 2008. It sits in a space (adtech) that is highly competitive, at the mercy of being sandwiched between giant customers / suppliers, and constantly evolving – don’t throw the whole segment in the bin yet though, as Criteo is a platform that has proven useful to customers with its data driven offering.

At its core Criteo is a retargeting company – this means that if you browse for flights on Expedia and then don’t end up buying them, ads for those flights you were looking at or similar flights that are predicted to be likely purchase items for you will be “re-targeted” to you on other platforms (e.g. while you browse Facebook or a news website). This is known as programmatic advertising whereby display ads are not random but rather programmed for you. Criteo is a market leader within this niche.

How does it work?

Criteo connects with an eCommerce retailer through first party data integration. We will continue with the Expedia example: Criteo will form a direct sales relationship with Expedia and establish a campaign based on which customers they seek to target and how they would like to reach them. Then Criteo will gather data on Expedia customers when they browse on the Expedia website as it will now be embedded with the Criteo cookie. This data is matched to an identifier (random character sequence, not your name to ensure privacy is protected) and then collated with the users browsing activity across all other platforms Criteo has access to. From these disparate data sources, Criteo’s purpose built engine is able to form a mosaic of each users browsing and purchasing patterns and able to craft personalized programmed targeted ads. Criteo’s engine utilizes this data to calculate the cost-benefit of placing an ad in front of a user live (in under 150 milliseconds) as they scroll Facebook, based on that users click/purchase probability and the traffic acquisition cost (“TAC”) of placing that ad in front of them. This allows Criteo to place real-time bids on ads on Facebook only when the engine predicts a profitable spread may be made by Criteo as it charges on a cost-per-click (“CPC”) basis. This is an advantage as display advertising is increasingly shifting to a real-time bidding model on websites as programmatic increases in popularity for advertisers. These ads are intended to deliver the right product placement at the right time in order to increase advertising ROI. This is the core of “programmatic” retargeting advertising and it is experiencing rapid growth transforming display advertising from its previously scattergun approach (where advertisers pay on vague cost per view metrics) to a targeted higher ROI advertising method that instead is charged on a CPC basis.

This method arguably creates a positive feedback cycle for Criteo’s data advantage. Through their existing partnerships they have access to >$550bn of annual online sales, or 1.2bn+ active monthly shoppers. They are then able to reach and re-target these shoppers through thousands of direct publishers (think the Washington Post, or ESPN). Due to their rich data set and personalized ads they are able to generate industry best ROIs for advertisers, generating >$27bn annual post-click sales for >15,000 retailers. This feeds back into the loop by increasing their access to commerce data and hence the Criteo engine should continuously be improving advertiser ROI as it accesses more and more user behavior and creates a more refined profile of each user as the platform reaches critical mass with its data sets.

In its current form, Criteo is the leading independent re-targeting platform however it can leverage its data set to garner more of the ad spend pie. A new vertical that Criteo mgmt. have focused on is Commerce Marketing, or inspiring people to buy things. Using their identity profile of users, they can work with retailers and brands to target specific demographics that are likely to engage with a brand and accordingly place ads for products in front of those users at the right time on the right website/app. This will likely increase in importance in the future as the trend toward programmatic ads play out in various forms for online display and Criteo shifts from being able to only target a single product purchase to instead acquiring customers.

Off a cliff


The share price has been on a steady descent since May as shown above as it has been increasingly subject to negative sentiment due to the announced introduction of Intelligent Tracking Prevention (“ITP”) by Apple to Safari. What this technology intended to do was cut Criteo off at the source by not allowing their cookies to track user activity on Safari hence Criteo could not re-target ads to users as it is unable to view their browsing. Criteo management initially had a technological workaround that was going to mitigate c. 50% of the impact from the protocol change, yet the stock continued to be pressured. The negative sentiment was eventually justified when last week the stock dropped 25% in a day as management announced the iOS update blocked their workaround and therefore instead of the revenue headwind from ITP being 9-13% as initially guided, it would likely represent a 22% drag on 2018 revenue as they were cut off from access to Safari. The harsh reaction of the market to this news likely prices in the worst case scenario for ITP with Safari sourced revenues lost for perpetuity. This may be an overreaction by the market or it may be the market punishing mgmt. for inadequately communicating the Apple policy shift and misguiding the impact initially.

What am I investing in?

After speaking to a friend who looked at Criteo to invest in recently, he told me that after some diligence he realized ultimately it wasn’t a scalable tech story but instead an ad agency which sells digital content. It is worth noting Criteo has a direct relationship with 87% of its clients so this assertion appears valid especially when considering the required sales network to support revenue growth. To evaluate it as an ad agency, we must instead look at the unit economics of the business to assess profitability, sales and marketing productivity (customer acquisition cost), and retention rates / churn.

CRTO Financials

From the above historical financials (2013 -16 was a period of high growth) we can see what Criteo’s cost structure looks like with R&D running at 14% to maintain product development, S&O is 35 – 40% in order to acquire and service customers, while G&A slowly sees the benefit of operational leverage. Given the hit from ITP, it is likely EBITDA margins will contract substantially from the c. 30% LTM due to inability to nimbly right size the sales force.

Given Criteo’s business model appears consistently profitable with incremental S&M driving top line growth, the critical operational metric is churn which will define unit economics. This gauge of customer satisfaction should be the key warning sign to assess in each quarterly update from the company. Criteo has maintained c. 90% retention rates for the past five years along with strong net client adds each quarter while 78% of their LTM revenue ex-TAC came from uncapped client budgets. Given their performance thus far it appears investing in Criteo’s ability to continue to build strong client relationships and maintain access to client ad budgets is a worthwhile proposition.


Fraud: As an ad agency, client satisfaction is critical and any dent to Criteo’s reputation could be fatal to the business. Gotham City Research have released numerous reports that claim Criteo garners clicks from fraudulent websites and clickbots that misstate effectiveness of campaigns. Such claims may be true given the difficulty in validating adtech data and nascent shift to online ad spend for brands with many still working out optimal digital strategy, however it is difficult to qualify this claim. Criteo’s historical retention rate and same client spend growth suggests clients have been overwhelmingly supportive of their platform thus far.

Privacy: Increasing concern about use of cookies is a constant risk to adtech players. It is this concern that led Apple to prevent tracking by implementing ITP on Safari. There is a risk that this may have a spillover effect to the rest of the Criteo ecosystem as customers may perceive Criteo’s targeting as limited. European regulatory changes to be implemented should have a limited impact on Criteo, while Chrome is unlikely to mirror Apple’s browser change as it would adversely impact advertisers and hence the Google advertising platform. Also Apple is unlikely to extend ITP to AppStore applications as this would impact those apps attractiveness to advertisers and publishers would migrate to Android, harming the iOS ecosystem

Market power: Criteo is the largest independent in a space dominated by two giants, Google and Facebook. They control the majority of online ad spend and offer advertisers comprehensive advertising solutions, therefore they may look to further pressure adtech players by replicating their business models at scale. Criteo does offer an alternative to publishers and brands otherwise being forced to pass on all their sensitive customer information to Google and Facebook, which they may be averse to


Criteo has an attractive business model due to its high margins and growth which is relatively capital light (R&D at c. 14%). This lends itself to an attractive cash flow generation profile which will consistently de-risk the stock.

On a trailing basis (2017) the company trades on a P/E multiple of c. 9.5x and EV / EBITDA multiple of c. 4x. These attractive low multiples don’t look so rosy on a forward basis as consensus 2018E EPS forecasts a 50% drop in EPS, even though revenue is roughly flat year-on-year. Non-Safari business growth is expected to offset the 22% revenue hole left by the loss of Safari revenue. The significant EPS fall is due to the significant deleveraging as Criteo will have an inflated cost structure (Sales personnel) as they did not plan for ITP revenue contraction.

Despite the temporary earnings pressure posed by ITP in 2018, the company will continue to be cash flow generative and by end of 2017 it will have 25% of its current market cap in cash.


Criteo is a risky investment. Remain cautiously optimistic due to valuation, cash flow generation and entry point. Ultimately the risk of permanent capital impairment is evident as Criteo may be threatened by regulatory changes to protect consumer privacy, fraud risk attached to opaque advertising practices, or changes in tact by either Google/Facebook to apply more pressure to independents. Despite these risks, at current levels it is worth investing a smaller stake in Criteo as the risk/reward appears to offer reasonable upside over the medium term. Long term growth remains attractive due to the rise of programmatic advertising, and buying it today on a trailing EV/EBITDA of 4x (a fair indication of Criteo’s earning power) offers upside.

Disclosure: I am long Criteo (NASDAQ: CRTO)

Viva la revolución

Latin America is finally being liberated to the age of eCommerce and the company best placed to capitalise on this is MercadoLibre.


It is never healthy to dwell on what could have been, especially in the game of investing, but many people regret not riding the decade long run up in Apple, Google, and [insert tech name here]. Similarly many are amazed at the wealth created for Amazon shareholders as it recently blew through a 500bn market cap, yet I always saw it as trading far beyond reasonable value for a company that couldn’t even turn a profit. What my value-orientated perspective missed was that Amazon & Jeff Bezos had a singular focus – a moat. Bereft of profits it had cash flow, to continue to plough into new ventures and innovations as investors gave them credit to continue to execute with the vision that one day they should be the last one standing in a winner-takes-all landscape.

Second bite at the apple

Hit rewind a couple of years on the Amazon corporate timeline and we have a similar opportunity today, MercadoLibre (“ML”). ML is often dubbed the Amazon or eBay of Latin America (“latam”). When looking at the ecosystem of ML however it instead reminds me more of an Alibaba. At the core lies Marketplace, a place for third party buyers and sellers to transact either through an auction or fixed price format similar to eBay where a fee is skimmed on each dollar of Gross Merchandise Value (“GMV”) sold through the platform. Once a transaction is completed, payment is encouraged to be made via MercadoPago a payments solution in the mould of a Paypal where fees are taken as a % of Total Payment Value (“TPV”). Financing is also bundled into MercadoPago whereby users may elect to pay via instalments, and then ML can offload credit risk to underwriters and take a revshare. MercadoEnvios is their third party logistics (“3PL”) solution that merchants can utilize to take care of the logistics of transactions (just like Cianiao for Alibaba). MercadoShops offers an end-to-end solution for offline retailers to create their eCommerce store for a fixed fee, similar to Shopify. They also have a sizeable classifieds business that works off a fixed fee business model rather than a take rate on transaction value. Finally, there is also MercadoClics which offers advertisers real estate on ML websites and charges on a cost-per-click basis similar to other eCommerce websites such as Amazon and Alibaba. ML is the dominant eCommerce player in Latin America today, and as you can see it could easily be viewed as the Amazon (B2C), eBay (C2C), Craigslist (C2C), Shopify and PayPal of latam. Despite the attractiveness of such a description it is also worth noting that global behemoths such as Amazon and Alibaba have already built similar ecosystems in their home markets and there is nothing stopping them from stepping on MLs toes.

Multi-decade story

The Total Addressable Market (“TAM”) is huge. Latin America has over 600m people, that’s nearly as much as the US and EU, combined. Yet due to the lagging telco infrastructure in the region, lower disposable income and lack of adoption, internet penetration in the region severely lags other markets.

The TAM is yuuuuuuuuuuuge

Emerging markets across latam offer secular GDP/capita growth as the middle class grows in the region and the macro growth will bring a host of benefits for ML. Growth in internet penetration to catch up with the developed world will see the world of e-commerce open up to more of the 600m consumers in end markets.

Internet penetration (% of population)

2010 2017 Penetration increase
Latin America / Caribbean 36% 62% 26%
Asia 23% 47% 24%
Europe 58% 80% 22%
North America 79% 88% 9%

It is still very early in the innings for eCommerce and widespread adoption of smartphones will further support the strong positive momentum for penetration increases region wide. There’s not much value in trying to perfectly predict growth but the basic message for regional internet and smartphone penetration is this – it’s going up. The trajectory of adoption will of course depend on infrastructure spending and discretionary income and therefore overall economic health is likely to be the underpinning factor.

eCommerce as a % of total retail sales

2015 2016 2016 YoY growth in eComm sales
Latam 2.2% 2.6% 22%
Brazil 3.1% 3.6% 14%
Mexico 1.4% 1.7% 27%

eCommerce catching up – Consumers in the region haven’t appeared to widely and completely embrace eCommerce as a medium yet, as shown by ecommerce penetration as % of retail above. This is a key lever for growth as latam consumers get more accustomed to using the internet to transact. The blue print is clear as developed markets have high single digit eComm penetration and China the truly digital society at c. 15%!

ecomm penetration
ML markets (yellow) significantly lag developed nations / China

However, it is worth noting there are challenges specific to the region including mistrust of online payments, and logistical challenges (unionized state postal service) meaning delivery times are often relatively slow. Smartphone adoption (mCommerce share of eCommerce is growing rapidly) and familiarity with the internet will eventually help latam eCommerce growth inflect.

Macro double-edged sword – Key risk but reasons for optimism

The macro story is a double edged sword as the long history of political instability suggests. The headline risk is political turmoil that may trigger GDP slowdowns, spiraling inflation and FX deterioration which would severely hamper ML fundamentals. It is US-listed hence reports in USD$ and latam currency depreciation as experienced in the past few years substantially reduces reported revenues/earnings.

Dic(k)tator Maduro loves a hi-five

Brazil (54% of 2016 revenue) – The BOVESPA has rallied significantly in recent times from its lows as investors begin to see the light at the end of the tunnel as the country slowly emerges from one of its worst ever recessions. While the outcome of the next election is unclear at this point it is difficult to see a far left (Lula) or far right (Bolsonaro) candidate winning. Recent data supports the uptick in sentiment as real growth in wages and economic activity appears to be returning.

Argentina (31% of 2016 revenue) looks set to pick up over the next few years as the political environment remains stable as recent polling showing President Macri’s coalition Cambienos being favored which would suggest economic reforms will continue. Political certainty and healthy demand for government bonds should lend support to the currency. There is also very low leverage in the private sector (20% of GDP) which allows for a multi-year credit cycle to fuel growth. The central bank also have acknowledged they are committed to fighting inflation which has been a drag in recent periods.

Others: Mexico (6% of revenue) has shown relative strength in the region and with stable political leadership looks poised for steady growth (c. 2%) in the near term. Venezuela used to be a core market contributing 10% of 2014 revenues before President (Dictator) Maduro plunged the country deep into turmoil and essentially turned it into a failed state (Venezuela contributed 4% of 2016 revenues).

Payments Platform

As with many emerging markets, latam has a significant unbanked population and payments offers a huge runway for growth to accompany internet adoption. Cash is still the prevalent form of payment however MercadoPago TPV growth has outpaced GMV growth as the TPV/GMV ratio tracks a very similar path to that of Paypal TPV growth vis-à-vis eBay GMV growth as it grows to be a platform beyond ML. The option value embedded in MercadoPago is extremely high as a standalone fintech enterprise that will be able to resolve a key friction point of eCommerce via payments but also offer a multitude of services beyond that of an online payment gateway (e.g. Consumer lending, Vendor financing, Off-platform payments processing etc.).

MercadoPago has a pathway to become the dominant payments platform in the region

Competitor risk

Is first mover advantage enough? Network effects built into a marketplace model give MercadoLibre a big edge. Longer term a capable management team with local knowledge improves understanding of end markets and users better than international players. Ultimately it becomes a question of business model. Alibaba operates a similar capital-light model to MELI and moved first in China, when eBay subsequently tried to enter China they failed and now Alibaba has a dominant position. JD continues to be a threat due to the advantages to the consumer of a capital heavy vertically integrated model which allows for a better customer experience in certain instances (similar to AMZN logistics network).

The squeeze is about to come…

Initially when reports of Amazon entering Brazil were published two months ago ML stock plunged 10% as clearly the market acknowledged the threat of the Bezos behemoth. ML mgmt. have faced this threat head on by playing an aggressive share game to reduce the risk posed by the AMZN model – their solution was to subsidise free shipping across their Brazil website. This is an expensive move as the previously healthy margins take a huge hit to support growth and protect share. I do not view this as temporary. eCommerce customers expect free shipping and I don’t see a future whereby ML will be able to revert back to having healthy margins and not having to subsidise shipping costs. This is a fantastic move by ML as it means management are taking a long term view to being the dominant platform in latam, just as they have done since 1999. This singular focus is similar to the approach taken by Amazon in North America. The resultant impact is likely going to be no or very low profitability for the foreseeable future (c. 5 years) as ML seeks to ride the wave up, but LT EBITDA margins should ultimately fall in-line with targeted margins for similar players at c. 10 – 15%. The short term depression of earnings means share price is likely to be volatile over the next few years, creating stress for holders but opportunities for those in it for the long haul.


Management are critical as minor strategic missteps in an industry that moves as fast as eCommerce can be fatal. Marcos Galperin the founder and CEO has almost all his net worth ($1bn) tied up in stock. However it isn’t his financially aligned interest in ML stock that gives me comfort – it’s his story. Long story short he was the heir to SADESA (his family business which is one of the largest leather companies in the world) yet instead founded ML in his mid-20’s while doing his MBA with a vision to build the eBay of Argentina. His vision has grown along the years and it is clear today that his aspirations were always greater than financial reward as he seeks to build a truly fantastic company. CEO’s with this tunnel vision eventually create tremendous value for shareholders in the long term. Still incredibly young at 45 years old he has a long road ahead to build ML into something completely different to today. The rest of the senior management team are also tied to long term retention plans with cash vesting over rolling 8 year windows.


It is difficult to value the ecosystem today however each piece (payments / financing / logistics / advertising) helps compound the value of each $ of GMV.

Without wasting time attempting to build a DCF, lets just focus on the five drivers that matter: (i) TAM; (ii) GMV; (iii) Take rate; (iv) EBITDA margin; and (v) Multiple.

By far the most important variable for value is the GMV, hence the long term regional macro story is the key driver for TAM while the ability of management to fend off AMZN (and others) will determine market share to arrive at GMV. We are also relying on management to continue to effectively monetize the platform to increase take rates hence a high degree of confidence in their capability is required. EBITDA margins are likely to trend towards steady state for vertically integrated eComm players which based on targeted margins for similar players may fall within the 10 – 15% range. The multiple is difficult to predict in steady state as it will likely be years if not decades before these types of companies trade based on traditional metrics (feel like we will be waiting a while for the day a P/E ratio will matter for Amazon). Regardless of when that day will arrive, the market will ascribe significant value to a dominant, profitable and cash flow generative eCommerce franchise.

From a comparative perspective MLs EV/GMV of 0.74x appears in-line with peers approximately: Alibaba 0.57x; eBay 0.48x; Amazon ex-AWS c. 0.7x

Arguably the growth runway ahead for ML is more attractive and for the purposes of an analog comparison to consider the addressable opportunity let’s compare China to Latam. China’s GDP is approximately 3x Latin America GDP. However Alibaba and combined market cap is $550bn while MercadoLibre’s market cap is $12bn (46x larger). On a relative basis looking far out into the future of MercadoLibre potentially as the leader of latam eComm the opportunity to invest today is attractive.

At $266/share, for the reasons discussed above MercadoLibre represents a compelling investment opportunity today. Don’t be mistaken though, to buy this for the reasons above is to make a long term commitment. Not a long term commitment like Kim Kardashian getting married for 72 days, a real commitment to a story that may take a decade to play out. Expect volatility in the next few years however the payoff will be immense if MercadoLibre ends up being a key player in Latin America’s eCommerce landscape.

Disclosure: I am long MercadoLibre (NASDAQ: MELI)

Sleeping Beauty


Up over 275% since its ASX debut… is BWX expensive? This sleeping beauty could be about to wake up as a tenbagger. 

Image result for sleeping beauty
Step 1: Good skincare regime; Step 2: Profit


BWX is an Australian based owner, producer and distributor of the following personal care brands: Sukin, DermaSukin, Uspa, Edward Beale, Renew Skincare, and Mineral Fusion. It originally started out as a contract manufacturer to the skin care industry but over time transitioned to being a vertically integrated skin care company by purchasing brands. As it stands today, the third party manufacturing side of the business has shrunk as the focus of the company is solely focused on its flagship brand, Sukin. It represented 83% of revenues in FY16 and is set to grow, while it is already the No. 1 selling skin care brand in Australian pharmacies.

Brand positioning

Sukin is positioned as a “masstige” product with pricing being accessible to the mass market but offering luxury characteristics. Strong category growth of the natural skin care market has been supported by a shift in consumer preferences towards: cleaner and greener products, increased health and safety concerns, environmental concerns as well as awareness of the potential threats posed by synthetic chemicals commonly found in skincare products. This trend is here to stay as millennials drive the eco-conscious consumer mindset, but most current natural products command a material pricing premium to chemical based counterparts. Sukin sets itself apart by offering a vegan, carbon neutral, chemical free, paraben free natural product at almost the same price as standard products. This ethos is aptly captured by their motto printed on each of their bottles (which is recyclable, of course) – “Skincare that doesn’t cost the earth

Sukin range

BWX’s natural skin care focus represents advantageous category exposure. FMCG itself is seen as a defensive sector as people still brush their teeth and wash their hair in an economic downturn (one would hope), but home and personal care (“PC”) specifically is seen as an attractive segment due to higher margins. As a result PC focused stocks (Procter & Gamble / Beiersdorf) command a valuation premium to Food FMCG stocks (Nestle / Danone). Within PC, the largest market is skincare, which is expected to post the strongest market growth from CY14 – 19 (per Euromonitor estimates). Drilling down deeper, the natural segment of the market is expected to grow faster than the overall category. Sukin is well positioned to benefit.

Geographic expansion

In FY16, only 22% of Sukin sales were from overseas. So far, the story has been the domestic success however, over time we the real upside to be derived from RoW sales currently targeted at New Zealand, China, Singapore, Malaysia, UK, US and Canada. The ability for Sukin to replicate its success in these markets represents a vast opportunity with many of the addressable market sizes outstripping local potential (e.g. UK skin care market size is c. 2x Australia).

Management takes a measured approach to new market entry via independent distributors, and subsequently once established they set up a direct distribution office on the ground to service larger clients. This blueprint has been followed in the UK where previously they sold via independent distribution but in mid-2016 pivoted to direct distribution through the establishment of a sales office and warehousing after they secured shelf space with the largest health and wellness retailers in the country. While the success will ultimately be determined by the “pull” from the customer, the driver of earnings in the near term will be the ability of BWX to establish distribution partnerships to “push” the product to as many shelves as possible.

We see promising signs thus far with their entry into the UK as key retailers (e.g. Boots) have increased the number of stores stocking Sukin, with further runway available. While the market opportunity is substantial in the UK, China is a whale of a market for skincare products. Sukin’s reputation is boosted in the eyes of the Asian consumer by the positive connotations attached to the natural healthy Australian image. Just look at Chinese affinity for Swisse pills or A2 Milk to gauge the type of premium attached to Australia’s food, health or natural exports. Initial steps taken by management to establish stores on TMall and are ideal first steps to go direct to the Chinese consumer.


On July 3rd the company announced the acquisition of Mineral Fusion (“MF”), the No. 1 natural cosmetic brand in the US. The deal was fully debt funded for a consideration of US$38.4m, and a $4.6m earn out. The market did not seem to react to the announcement yet this is one of those few times where an acquisition may actually generate a very high IRR for the acquirer, despite the premium transferred to the target. Given the guided EBITDA range for 2017 is US$3 – 4m, this deal looks pricey at first glance given the implied acquisition multiple of 11 – 14x EV / EBITDA however it is worth considering the strategic potential.

Firstly, the factors that make Sukin attractive in Australia make MF appealing in the States. This is clear as its exposure to the natural cosmetics category has helped drive a 3-year sales CAGR of 20%. Secondly, the complementary nature of the acquisition is clear as 77% of 2016 sales for MF were from cosmetics and nail care. MF core sales represent new segments for BWX that will add width and diversification to the BWX stable, allowing BWX to drive more volume through its established distribution in ANZ and abroad. Thirdly, while the US is a massive market with consumer preferences similar to other western countries due to fierce competition and difficulty with distribution it is notoriously tough to build a brand there without burning cash. The MF platform represents a ready-made US distribution arm for BWX to enter the US market, something that may prove invaluable over the long term. Finally, as the acquisition is debt funded it will increase leverage to 2x net debt / EBITDA post integration which, given the cash generation of BWX, will not stress the balance sheet. Rather the utilisation of debt headroom will drive shareholder gains through earnings accretion. Despite the nauseatingly common parroting by corporate press releases of a “match made in heaven”… this could be one of those times.


Marketing strategy: The key differentiator of BWX to other branded PC products is its marketing spend. While maintaining similar or lower gross margins, the reason for industry leading EBITDA margins is due to its spend on sales and marketing of 10% of sales comparing favourably to international competitors at 25 – 30%. This competitive advantage is derived from the word of mouth endorsement of Sukin by women who love the product, which has and always will be the best form of marketing out there. BWX choose to utilise digital media and influencers to promote their brand rather than traditional media, a far more effective return on investment due to the increased likelihood of a young woman trying out a new product recommended by a blogger they follow. Bloggers are more likely to be perceived as a trusted source compared to just another billboard or commercial. Beauty bloggers are all powerful in this space as lead influencers, and if you want proof ask any young woman what beauty blogs they read and you will soon unearth a whole new side of the internet. Blogs upon blogs with high traffic, devoted to discussing Napoleon Perdis vs. MAC (pretend like you know) as a much more worthy match-up than Mayweather vs. McGregor. Another valuable bit of market research is to google “Sukin blog review” and read some of the bloggers reviews of the products, or give their Instagram page a visit to see the engagement they nurture with their core demographic. A far more valuable feedback tool for consumer investing than sell-side research.

Blue = “Sukin”; Red = “Mineral Fusion”

Interesting trend in search queries – 100% growth of interest for both Sukin and Mineral Fusion over the past 3 years


Capital light growth: Even though it is vertically integrated, BWX should be able to support further growth as it has in the past with minimal capex (1 – 2% of sales)

Management: The management team and board have extensive FMCG experience and have been around the company for a long time overseeing substantial growth thus far. Moving forward this group who have to date made all the right moves are incentivised to keep growing the brand since key senior personnel have the majority of their net worth derived from paper fortunes in BWX stock (CEO John Humble holds 10% of shares outstanding)


Customer concentration: A concerning characteristic of the Australian pharmaceutical market is the relative concentration of a few key players such as Priceline, Terry White, and Chemist Warehouse. BWX derived 50% of its FY16 sales from three customers and it is plausible that these customers may attempt to exercise market power to squeeze BWX margins or demand volume based promotional discounting as Sukin grows. This however seems unlikely while the Sukin brand remains attractive and customer loyalty is high

Competition: Currently competing with MNC and other nature focused company sub brands such as Nivea, Olay, Jurlique, Trilogy, Natio, Burts Bees. The revolution of natural products has not gone unnoticed as FMCG majors will increasingly seek to enter and dominate the sector, not ceding share to smaller names. As such, it is likely competition will increase in the “masstige” segment of the market. A natural mitigating factor to this is the personal importance of skin care to most women and the high customer retention rates once a product is established as a part of a skincare regime

Execution: The downside for BWX is that overseas consumers tastes deviate from Australian consumers and overseas growth does not pan out. Under such a scenario, domestic sales are likely to hit a ceiling over the medium term and the multiple is likely to de-rate as it could go ex-growth

Brand deterioration: While highly unlikely, a scandal attached to the Sukin brand that adversely affects its natural image or results in a recall would be a disaster for the company. Bloggers may also take a negative view of the brand as Sukin is currently not “organic certified” which some posts online have already noted

Poor execution: This risk is particularly relevant within the Chinese market. It is uncertain what proportion of domestic sales are derived from informal “diagou” sales channels, however estimates have put it at 10 – 15%. The risk of entering China too quickly via e-commerce channels may be that diagou margins are compressed and the diagou promote other Australian skin care brands over Sukin to their Chinese clientele. Another risk to the Chinese market is regulatory changes that are currently delayed indefinitely by the government are introduced whereby Sukin will be effectively locked out of direct sales into China due to requirements for products to be animal tested

Brand building expenses: New markets take increased discounting to grow distribution and higher brand building costs, compressing margins


In terms of valuation, on first glance at the share price chart it feels as though we have missed the boat on BWX due to the stunning run up in price since the $1.50 (!!!) issuance in November 2015. This is due to the company soundly beating its prospectus forecast through outperformance of Sukin. Share price has continued to appreciate due to a raft of earnings upgrades and improving analyst commentary, but as we consider the investment today is there significant upside to the lofty ambitions the market has given the company credit for already?

Based on management guidance and consensus estimates (Annual results are due in a few weeks) on a trailing basis for FY17, BWX trades at c. 22x EV/EBITDA (assuming $50m of acquisition debt related to MF) and at 31x P/E. While the pricing on face value seems stretched and beyond the grasp of a traditional value investor, this fails to recognise the obvious growth potential and momentum of the business. On a forward basis utilising FY18 consensus, BWX trades at c. 15x EV/NTM EBITDA and 23x P/E NTM. The upside from these levels is significant as the growth levers attached to geographic expansion, exposure to underlying consumer trend shift to natural products, operating leverage and cross selling between Mineral Fusion and Sukin means earnings can continue to grow substantially off a relatively low basis for many years to come.

Traditionally, due to the mature nature and similar capital structure of many FMCG businesses most stocks within the sector trade on a P/E basis, with multiple premium reliant upon profitability and growth trajectory. Looking at the valuations of a PC peerset (JNJ; PG; OR; ULVR; CL; EL; BEI) shows trading levels of 20 – 28x forward P/E for lower growth than BWX (albeit all these conglomerates hold a much higher quality stable of diversified brands). Increasingly stretched valuations over the past few years in a post-QE world may be inflating this but considering comparables we can expect BWX to trade at an EPS multiple in the future of 20x given the higher growth profile. From a cash flow perspective, the FCF yield on the business may seem weak over the near term however; cash conversion from EBITDA to FCF is not reduced due to capex but rather NWC investment to support growth. Upside from buying at these levels is clear when you consider the very real possibility of EPS growing threefold from current levels.


Buy. Expensive at $5.65, but cheap when considering the growth opportunity for BWX. While expansion carries risk, the reward on offer gives us confidence to be a buyer at current levels. Will likely require patience as a multi-year expansion plays out and there will be bumps along the way.

Disclosure: I am long BWX (ASX: BWX)

iSentia, putting the story back together.


Isentia Group Limited (ASX: ISD) is a media intelligence software-as-a-service provider positioned to service a range of corporate and government clients. Established in 1982 as a traditional press-clippings business, iSentia today holds a dominant position in the ANZ media monitoring market.

iSentia has its traditional standard media monitoring offerings as well as value added services (VAS) which includes social media monitoring and analysis/insight reports and other services.

Mainstream media monitoring comprises the bulk of the firm’s revenues (circa two thirds) and is generally paid for via subscription (some legacy clients pay via the volume of articles read, however this is being phased out).

For clients, media monitoring services start out with a basic ‘mainstream media alerts’ service that sends out relevant notifications via email/text once every 24 hours for a recurring fee. Customers can upgrade to online news notifications for an additional recurring fee and to the Media Portal platform (which provides live updates and is also the platform for media analysis) for another recurring fee. A range of other premiumised services is layered on top.


Buyer beware

Do you know who weaves a great story? Roadshow bankers. Now take those bankers, have them pushed by private equity firms, and they will be able to sell oil to the Saudis. I am generally sceptical of an IPO since the reason for floating is usually not in the buyers favour (taking money off the table, couldn’t get a trade sale away, etc.), but if there is one thing to always be sceptical of, it is an IPO from a private equity vendor. Now that does not mean every PE exit is a dog, just that there is a very high likelihood the major upside has been harvested… with just enough meat on the bone to survive a lock-up period.

Special IPO gift bestowed on the market from our PE pals.


The story – Did we land on Mayfair?

The narrative on the back of a hot offering (offered at $2.03 with an opening pop of c. 20%) was picked up by the market feverishly. iSentia was a critical media aggregator for corporates and governments alike, with a 90% market share in Australia representing a quasi-monopoly that would levy price increases upon its customers into perpetuity. As it delivered strong ANZ earnings growth, the narrative strengthened and the market bid up the price to a market peak of $4.85 as momentum led to analysts extrapolating past growth far into the future.

Image result for monopoly man cartoon

Keep printing money.


Narrative break – Do not collect $200 for passing Go.

Benjamin Graham described Mr.Market as a manic-depressive who is emotional, euphoric and moody. The flip side of such euphoria is punishing when companies are priced for perfect execution. The narrative of iSentia fell apart quickly when people realised that this may not be the cash cow monopoly they initially expected. A confluence of factors hit as: (i) Meltwater, a global player with strong social media capabilities made a concerted push into Australia pressuring iSentia’s pricing; (ii) Traditional media outlets put up paywalls and extraction of value from content came into focus – leading to increased copyright costs; and (iii) King Content, the $48m acquisition into an adjacent service (content marketing) went sour with integration issues and momentum loss causing a projected EBITDA contribution to swing to a loss.

Image result for monopoly do not pass go cartoon

Monopoly man falls on hard times.


Where are we now?

While the outlook for iSentia is vastly different today from 2 years ago, the core of the investment case remains the same. The compelling reasons that were initially there to buy it remain:

  • High quality top line stemming from durable recurring domestic software as a service (“SaaS“) revenue
  • Diversified customer base
  • Pricing growth from upselling

Monitoring requirements for organisations in a more complex and disparate media environment are growing rather than shrinking, entrenching the product need to end users. iSentia continues its pivot to add social media capability while the continuous investment into R&D is critical, allowing for the roll out of new products that enable pricing increases and ensuring a product edge ahead of competitors.


While its cloud capable platform analysing a multitude of media sources is difficult to replicate, global competitors have similar offerings that may be portable to APAC clientele. The threat to iSentia’s moat moving forward is unlikely to materialise from a superior product offering from current competitors but instead from increased churn of larger multinational clients to a holistic solution from a global player. MNCs may prefer a single provider for worldwide media coverage, rather than the regional offering currently promoted by iSentia. Given iSentia’s average revenue per user (“ARPU”) the ability to move down-market to mid-market and smaller firms is limited due to prohibitive costs for end users, hence defence of their core large cap clients is critical. Short-term churn will likely drive price action as the market is sensitive to the threat of Meltwater eating into ISD’s client base, but it will prove difficult for Meltwater to meaningfully alter the long term market structure given iSentia’s 90% penetration. Pricing differential alone is unlikely to induce switching; only offering an advantage when pitching to end users without any current external media analytics. Rather a product edge is required – Meltwater’s core competency is social analytics, while iSentia is (perhaps late to the game) substantively beefing up their social analytics. This has been fleshed out via the addition of sentiment analysis within their core Mediaportal platform as well as completely new products focused on social such as Storyboard. A full product suite serves as the best ongoing defense to their moat, mitigating the risk of ANZ churn. The market appears to be pricing in a negative forward view of ANZ churn, as the Macquarie Australia Conference presentation catalysed a 15% jump in the stock price. The important new information to come out in that deck? Not much… apart from a line on p. 18 that “Q3 client churn returned to historic norms”. A short term stabilising of customers was enough to drive a 15% recovery in SP, hence once the overhang of Meltwater’s initial impact clears and iSentia’s market share retention is clearer to the market we can potentially expect a further recovery. Barring a multi period large scale hemorrhaging of customers, it is fair to ascribe a value to the ANZ business on a standalone basis similar to current trading levels as management continue to drive steady ARPU growth via upselling.

Growth option

The true upside to iSentia and potential for share price appreciation lies within the option value of new markets. The growth strategy communicated by management has been focused on markets with no established player and initial roll out was within Philippines, Malaysia, Thailand, Singapore and Vietnam. iSentia is well placed to capture a leading share in these nascent markets, with no incumbent as a roadblock to establishing client relationships in the region. Management estimate they only serve c. 25% of their target clients in S.E Asia, therefore there is substantial runway left for growth.

Localised players such as Wisers and Hottolink that operate in China and Japan respectively make entry more difficult in other Asian markets; however, this can be treated as a free option with even small penetration into such large addressable markets likely to move the needle. Asia is a key plank of the investment case moving forward, and iSentia have made promising early strides as well as placing the right people in the driving seat with the hire of David Liu (long time media exec, with regional experience as Aegis AsiaPac head) indicative of their appetite for growth.

What could the future look like?

To invest into iSentia means you need to take a view on the following operational drivers:

ANZ customer churn: The critical short-term data that will influence sentiment and market consensus on whether iSentia can restore its former glory. I personally model net churn to peak in FY18 at 5% with a slow deterioration of clients thereafter, as Meltwater steadily chips away

ANZ SaaS pricing: There are two choices for iSentia to battle Meltwater, retain pricing power and risk churn or retain customers and have pricing deteriorate. The latter would be the wise choice. As such, the pricing growth into perpetuity premise is broken and a hit to pricing for basic SaaS products is likely on the horizon

ANZ upselling: Consistent product innovation allows ARPU to grow as clients utilise more products, with opportunity for value added services to increase penetration within existing base. Value added services penetration within existing customer base increased c. 600bps over the two years to FY16, but it is likely this rapid growth will slow, as the largest clients with the biggest budgets are exhausted

Asia customer net adds: Difficult to gauge what the runway will be like but based on the total addressable end markets they are targeting it is reasonable that total customers for rest of the world will increase by 50% by FY25 – this doesn’t translate into strong penetration in target growth markets but is representative of promising client growth

King Content: The turnaround is underway with a new unit head for King Content and it may not turnaround, but the acquisition has a scrap value if jettisoned. Content Marketing does not have the attractive defensive qualities of the core business therefore it is difficult to forecast, however a conservative case is projected with revenues falling until FY18 and stabilising thereafter.

Content acquisition costs: The trend of content for traditional media being paywalled and becoming more expensive is likely to continue and as such, a spike in copyright costs is forecast for FY17 as a new equilibrium is found

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King Content’s new CEO has parachuted in just in time.




(Un)fortunately the SP has been grinding higher since I started writing this post, with $1.50 at the outset morphing into $1.90 at the time of publishing. Remains attractive at current levels – consider adding to your portfolio at any price below $2 as the risk/reward skews to the upside with my valuation implying a 25% margin of safety at $2. Entry point offers sufficient downside protection via the core ANZ SaaS revenues, which are relatively sticky. The market will react in the short term to domestic churn, but as churn and pricing impact from the heightened Meltwater competition stabilises the share price will recover. Upside to be driven by a re-rating in the stock to trade in line with SaaS peers as well as meaningful upside within the Asian growth story – an option we are happy to pick up on the cheap at current levels.

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Disclosure: I am long iSentia (ASX: ISD)