Equity Spotlight – Infomedia Ltd (IFM)

Following on from Monday’s post on high-yield dividend stocks, today we take a quick look at Infomedia Ltd (IFM).

Note: I haven’t done my usual job of thoroughly examining the last 5 years of financial data (time constraints of my full-time job), so I’ll be relying on equity, NPAT and assets figures from a proprietary, 3rd-party source.

The Business
According to the IFM website,

Infomedia’s electronic parts selling systems have become the global standard for the automotive industry, used by more than 57,000 users in over 160 countries and 34 languages.

In 2000, Infomedia acquired Datateck Publishing Pty Ltd, a data management company, resulting in an immediate broadening of the Infomedia product and service range.  Since then, the Company has worked steadily on both consolidating its position as an electronic parts catalogue provider of choice for the global automotive industry, as well as exploring opportunities in other complex parts and service dependent industries.

IFM’s main product is Microcat Live – a microsot.net-based tool that enables the service staff of vehicle dealers to swiftly and accurately find replacement parts. Major clients of IFM  include Kia Europe, Toyota Australia and Mexico, Honda Australia, Jaguar, Land Rover and Ford.

Infomedia is headquartered in Sydney with support centres in Australia, Europe, Japan, Latin America and North America.

The Financials

IFM’s return on equity has ranged between 36% and 26% over the last 5 years, with NPAT showing a worrying downtrend over the same period ($15.3m to $9.3m).  This has occurred despite share buy backs in FY08, ’09 and ’10, which should act to increase ROE if profits were being maintained.  Not a good sign.

IFM is currently debt free.  According to Commsec equity has hovered between $0.08 and $0.14 per share for a decade, sitting at $0.11 as of Jun 2010.  Intangibles are currently estimated at $0.10 per share compared to tangibles of $0.02, however earnings are only $0.04 per share.  Given the decreasing NPAT trend, one should question whether the intangible assets represent fair value.

Management

A quick glance at the 2010 annual report shows little in the way of director histories.  Corporate experience outside IFM seems to be concentrated in two directors, who have held executive and non-executive positions in Cash Converters, Itx Group and a few financial companies.  Board tenure is  quite long, with most members in their roles since the late nineties and early noughties.

Salary makes up the majority of all key personnel remuneration, with bonuses typically making up 15%  or less of total packages.  Internal management ownership of IFM is negligible.

Management have a history of paying dividends in excess of profits (as seen in the preceding ROE graph in 2007).  In our opinion this is a sign of poor capital management.

Opportunities

  • Diversified client base
  • Widely-accpeted product

Risks

  • Foreign exchange movements, particularly the elevated AUD
  • Downturn in automotive industry as Western economies enter a period of low demand
  • Decreasing NPAT and questionable capital management decisions

Summary

Infomedia is a classic example of a high-yield dividend stock that requires closer scrutiny.  Despite its inclusion in my article on Monday, a fundamental value investor should be wary of a stock with volatile ROE, high intangibles and questionable capital management practices.  Throw in the macroeconomic factors of exchange rate movements and a possible downturn in Western consumer demand, and IFM suddenly looks less like a safe dividend stock and more like a company facing serious challenges.

At Empire Investing we’d consider Infomedia non-investment grade.

Valuation

Assuming normalised ROE (including franking credits) drops from 30% to 20% over the next 5 years, with 10% reinvested and a current equity per share level of $0.12, Empire would value IFM at $0.20 per share.

As we do not consider IFM investment-worthy, we would not recommend a maximum buy price.

Disclosure: The author is a Director of a private investment company (Empire Investing Pty Ltd), which has no current interest in the businesses mentioned in this article.  The article is not to be taken as investment advice and the views expressed are opinions only.  Readers should seek advice from someone who claims to be qualified before considering allocating capital in any investment.

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Comments

  1. Agree Q, this puppy has been an under-performer for awhile…ever since it sold its headquarters in Sydney (admittedly at a decent capital gain).

    Two major problems:

    (1) Their margins are been squeezed by the car industry moguls. Plus, IFM don’t have the “goolies” to put up their prices even though they are in a very strong position. I mean its a big call to replace parts software across a dealer network running into the thousands!
    (2) Revenue is in US dollars – since most of it is overseas – whilst expenses are in Aussie dollars (staffing is the big expense and the computer brains are based in Sydeny). Not a good situation in the current exchange rate environment.

    Plus they have had a change of leadership in the last year or so with the former MD and Chairman coming in to turn things around. Thus far he hasn’t but then again he has struck heavy exchange rate head winds.

    Yep, not a good investment at 20 cents…and a dead set dog to those who invested at $1 on float. But I’d think about buying around the 15 cent level or lower.

  2. Good stuff Q. I would tend to agree. I looked at IFM a few months ago when I saw a little note on Comsec advising shareholders about a buyback. I did some digging and passed – needed more of a margin of safety.

    A similar small digital-asset management company I do like however is Wellcom group (WLL). Their line is to provide brand management services to some of the bigger corporates in Australia (and in the last year or two UK and Asia). They started out about 10 years ago as a reprographics firm (now more trendily referred to as pre-media), but have evolved into an IT based digital design and workflow management service.

    From what I understand, they have a pretty unique competitive position – they sit between advertisers and the firm, competing with neither (in fact some of the big advertisers like Saatchi & Saatchi are their clients too). I think this is because of the innovative hub model they use. They set up units of 5 or so people within the client’s HQ, so there’s constant communication on projects, and ample opportunity for re-sell. Expert work goes to the central Wellcom offices and to other specialist hubs. Corporate clients get a better service by outsourcing, and they get to hold onto their IP independent of the advertising agency coming or going (add agency contracts are becoming increasingly short term). Contracts are long term – +5 years (WOW has been using their system to make catalogs and advertising material, letterhead, annual reports, etc. since 2001). They also had a joint-venture with Australia Post for years doing largely the same thing (plus some stamp design), which they have just acquired in whole.

    Differences/similarities with IFM- Wayne Sidewell the founder still holds majority interest (danger of related-party transactions) and internal ownership is high, ROE of 17%(depending how you measure it) is lower than IFM, but is increasing (due to divestment of non-core capital intensive printing subsidiaries and increasing profit), earnings understate cash flows, capital management is more sustainable (70% payout ratio), no debt, (~18% of market cap, 25% of assets, or about 5 months worth of total expenditure in cash), has core Australian revenue stream (admittedly largely from retailers), and is expanding with overseas ventures just beginning to contribute to earnings.

    TTM dividend yield is merely respectable at ~7% compared to IFM.

    Obviously I like this, so assume I own a bit.

    Cheers,
    LF

  3. It’s been a disappointer, for sure. A couple of points I’d make, perhaps the author missed these due to the lack of sufficient time as he mentioned:

    – It’s an overstatement to say “Management have a history of paying dividends in excess of profits” when they’ve only done this a few times (I’d also disagree that this is *necessarily* a poor use of capital)

    – I have issues with IFM’s accounting policy of capitalising the cost of development of their products rather than expensing them in full. This has made profits look higher than they actually are for a while, and I think it’s about to make them look lower (the amortisation rates have increased significantly over the last year). The capitalised development forms a large part of the intangibles

    – They have been fortunate to have hedged with great success in the last two years against the higher AUD, though the hedges will soon run out (or get much more expensive to renew). They would benefit hugely from a lower AUD – something the MB bloggers mostly believe will happen in future

    – Yesterday’s results announcement showed increasing revenue in local currency terms, and a new product that appears to be starting to pay off.

    – My viewing of the Director histories is that it’s pretty much in line with the standard level of detail??

    A disclosure – I have a small holding in this company.

    • Howdy Maz

      From what I can see they’ve paid distributions in excess of profits (after reinvestment) for 2 of the last 5 years – that’s enough for me to be wary. Given they also bought shares back in one of those years (2010), indicates to me they have issues with capital allocation. If they did their modelling correctly one of those options – buyback or distribution – would have resulted in a better outcome for shareholders. Why do both?
      I didn’t know about the accounting policy of capitalising development – thanks for the heads up. On the director’s histories, the scant detail may just be due to the fact there’s not much corporate experience outside of IFM. From the reports I’ve read of other listed companies there’s usually a lot more past employment history given for directors. But as I said, that may just be due to the small size of IFM.
      And thanks for the disclosure – always good to see.

  4. On capital management, I can see (in principle) reasons to do both. Mrs Maz and Maz have very different tax rates, so our after-tax result from a higher dividend vs participating in a buy-back might be quite different. The “ideal” capital management strategy changes with time too, so (again, in principle) there’s no reason why one shouldn’t sometimes pay a higher dividend than that year’s profit, especially in cases where there’s ample retained earnings, franking credits (less important), cash, net current assets, and cash flow.

    Whether IFM have done this ideally is a different question, of course. The buyback at higher prices now appears to be a mistake, but hindsight is a wonderful thing…