Snakk Media: Short-Term Down, Long-Term Up
Edison | Dec 21, 2014 02:37AM ET
Investing under the bonnet
Snakk’s (New Zealand: SNK) interims showed revenue growth of 34% (50% ex-currency), with Q2 growth slower than Q1 (12% vs 67%). With Q3 reportedly very busy, we view Q2 as a temporary blip while effort was being focused on assembling the internal infrastructure needed to address the substantial market opportunity in mobile advertising for both brand owners and publishers in Australasia and Asia Pacific. The share price is being over-shadowed by the prospect of further fund-raising to power the next phase of expansion and the rating stands at a considerable discount to quoted peers.
Adding infrastructure and services
Snakk is building a key independent Asia Pacific mobile advertising business, providing an end-to-end service for advertisers and publishers, from budgeting and creative through to delivery and outcome evaluation. By working with mobile solutions providers from around the globe, with regional technology exclusivity, Snakk is able to offer credible and proven services without the development risk. The new publisher-facing division, Represent Media, is driving new opportunities and the recent preferred partnership agreement with US firm Nativo (for Australia and New Zealand) is generating strong interest from publishers looking to use the fast-growing medium of native advertising – particularly well-suited to mobile.
Short-term down, long-term up
Our forecasts have again been revised down, reflecting the softer Q2 growth rate. As described in our September Outlook note, there has been significant investment in senior hires and expansion into Singapore, with not all of the added overhead revenue generating. However, investing now should enable the group to grasp the larger opportunities without compromising on the ability to deliver to (or beyond) existing clients’ expectations. Our model shows NZ$3.2m cash at end FY15, NZ$1.3m at end FY16, and it is likely that this will be topped up at some intervening point. While short-term forecasts envisage higher losses and a longer period until break-even, the prize now being targeted is considerably more valuable.
Valuation: Discount overdone
Even given its small size and early stage, on 1.9x EV/TTM sales Snakk sits at an overly large discount to a broad global peer group of quoted mobile solutions and digital advertising companies, which (after a strong recent bounce) trade at 4.1x. A DCF calculated on medium-term growth assumptions of 25-30% suggests that a price of between 11 and 15 NZ cents would be more in line with the market, with the current discount more than compensating for a further fund-raising.
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