UK Company Research
BRI DGEWELL ITE Group FTSE Small Cap / Media / ITE.L
Russian exhibitionists Overweight
ITE has seen an impressive recovery over the last four years, with the share Initiation of Coverage price responding to a new management team and strength in the company’s 10 February 2006 underlying markets. We believe that ITE continues to be well positioned to benefit from positive industry dynamics, strength in the Russian exhibition market and a growing contribution from its non-Russian assets. The current 140 rating is full, but more than justified, and we initiate coverage with an 130 Overweight recommendation. 120 110
ITE Group is one of the leading pure-play exhibition organisers in the UK, 100 organising 152 events in FY2005 in sixteen different countries. The primary 90 geographic focus is on the CIS territories (2005: 77% revenue and 84% gross 80 2005 2006 profit). The non-CIS businesses are also performing well, with underlying 2005 Ite Group relative to FTSE All Share revenues ahead by 27% over 2004. Vital Statistics
Recent results have been impressive, demonstrating good execution in strong Current Year ago underlying markets. Cash generation is a particular feature, leaving the Share price (p) 136 91 company with a range of strategic options. Issued shares (m) 289 281 Mkt Cap (£m) 355 256
ITE has not been alone in reporting good results. The exhibition industry has Performance Actual Relative* benefited and (we believe) will continue to benefit from a number of positive 1 month 6% 4% structural effects. 6 months 25% 14% 12 months 48% 26% ITE’s unique combination of event maturity and scale in a number of developing
markets makes it a strategically attractive asset. *Rel .to FTSE All Share Priced intraday on 9th February 2006 The concentrated exposure to certain developing markets and industry verticals Author: Iain Daly is of concern from a portfolio risk point of view. However, the prospects for both 020 7003 3524 remain benign and underpin our growth expectations. [email protected]
Following a period of substantial outperformance (+43% relative to the All Share Team: over the last twelve months), the shares are trading near the top end of their Andrew Walsh historical valuation range (calendarised 2006E PE of 20.3x). However, we 020 7003 3514 believe that we have not seen the end of earnings upgrades, nor cash returns to [email protected] shareholders, supporting further upside. We initiate with a short-term fair value of 148p. Patrick Yau 020 7003 3504 [email protected] Financial Overview
Y/end Sept, £m Turnover EBITA Adj. PBT Adj EPS (p) DPS (p) PE (x) Yield (%) Specialist Sales: Michael Savage 2004A 60.8 16.3 17.9 4.6 2.2 29.6 1.6 020 7003 3312 2005A 78.5 23.8 25.9 6.5 2.8 20.9 2.0 [email protected] 2006E 76.4 21.9 22.9 6.3 3.1 21.6 2.3 2007E 86.7 26.5 27.4 7.5 3.5 18.1 2.6 Bridgewell Securities Limited Old Change House Source: Company, Bridgewell Securities estimates 128 Queen Victoria Street London EC4V 4BJ www.bridgewell.co.uk ITE Group
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Contents
Company description ...... 3
Investment case ...... 4
SWOT analysis ...... 6
Company background ...... 7 Corporate history ...... 7 Management team and board...... 9
Why exhibition organising? ...... 10
Why emerging markets? ...... 14
Competitive landscape ...... 17
The ITE business strategy ...... 19 Vertical focus…...... 19 Maturity and new launches ...... 21 Venue strategy...... 22 Geographical expansion...... 25
Forecasts ...... 27
Valuation...... 31
Appendix A:...... 35 Financial record...... 35 2005 results in detail ...... 37
Appendix B: Key risk factors ...... 41
Appendix C: Regulatory disclosures ...... 43
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Company description Table 1: Key statistics
Item Market Cap / Share price £355m / 136p 12m share price range 86p - 141p Website www.ite-exhibitions.com
Source: Bridgewell Securities
ITE Group is one of the UK’s largest independent exhibition organising businesses. The company currently has in excess of 550 employees in 18 separate locations worldwide. During the year ended 30th September 2005, ITE organised 152 exhibitions in sixteen different countries. ITE’s events target a number of industry verticals, including extractive industries, construction & building, travel & tourism, automotive, clothing & fashion, leisure, and IT & telecommunications. ITE’s primary geographic exposure is to Russia (62% of sales) and the former CIS (15% of sales), with the remainder split between Western and Eastern Europe, Asia and Africa.
Bridgewell View – ITE offers investors a double play on pure-play exhibition organising and the prospects for the CIS, under the helm of a cautious and well regarded UK management team. The combination of strong underlying markets and good execution has seen the shares enjoy a substantial upward re-rating. However, we believe there is more to come in terms of organic growth, bolt-on acquisitions and further cash returns to shareholders.
Trading performance and estimates Table 2: ITE Group trading history and Bridgewell estimates
Y/end Sep, £m 2003A 2004A 2005A 2006E 2007E Revenue 58.9 60.8 78.5 76.4 86.7 EBITDA 14.5 16.8 24.2 22.4 27.1 PBT – Adjusted 15.4 17.9 25.9 22.9 27.4 PBT – Adjusted Biennial 14.2 19.2 21.9 22.5 24.3 EPS – Adjusted (p) 4.1 4.6 6.5 6.3 7.5 DPS (p) 1.6 2.2 2.8 3.1 3.5 Net cash 22.1 33.6 13.0 15.5 26.1
EBITDA margin (%) 24.5 27.6 30.8 29.4 31.2 Operating cash conversion (%) 121.0 133.2 120.3 101.2 100.0
Source: Company, Bridgewell Securities estimates
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Investment case
In our view, ITE represents a double play for UK investors. Firstly, ITE is a pure exhibition organising business and offers exposure to one of the best performing business models within the media landscape. Secondly, the group’s geographical and vertical focus offers investors exposure to the growth prospects of the CIS, under the helm of a cautious and well regarded UK management team.
Positive fundamentals. The core CIS territories have experienced strong economic growth since 2000, buoyed by commodity prices and structural improvements. While still risky, most commentators regard the outlook as broadly positive over the medium term. Most commonly accepted measures indicate a substantial decrease in the risks associated with investing in emerging markets. The exhibition industry is well positioned to benefit from this and ITE is one of the leading players within its core territories. Exposure to emerging markets, in our view, remains a net positive for ITE.
Business model. The exhibition business model is characterised by high operating margins and cash generation, once a brand portfolio has reached the right level of maturity. Established brands also offer high barriers to entry. The key challenges are balancing the maturity (growth vs. margin) of the portfolio and securing appropriate venue tenure. We believe that ITE scores well in terms of portfolio maturity, although profitability is still dominated by a relatively small number of key events. ITE has approached the venue challenge through a series of agreements with venue owners. This has substantially reduced venue risks for the key events.
Competition. Competitive pressures are mounting in the Russian marketplace, fuelled by attractive yields and an increase in venue supply. ITE is seeing erosion around the edges but the core events remain largely unaffected. The increasing exposure to relatively immature non-Russian markets, where competitive pressure is lower, more than offsets this effect.
Proven management… ITE has seen a substantial recovery in its performance since 2001. There is no doubt that strength in underlying markets has been a significant contributor to this, but we also believe that the new management team has played a role. The business has refocused on its core markets and is taking a measured approach to expansion. Acquisitions remain a fundamental part of the expansion strategy, but recent deals have been small, complementary to the existing portfolio and have been struck at attractive valuations. The improving margin profile also indicates good execution skills.
…focused on shareholder return. The combination of a cautious approach to acquisitions and the business’s substantial cash generation was the driving factor behind the £30m share buyback in 2005. Although reserves will need to be rebuilt before a similar exercise is undertaken again, we believe this could
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become a recurring theme. The company has now returned 85% of its pre- exceptional earnings over the last five years to shareholders which, in the absence of major disposals, we believe is almost unique in the small cap media space. The balance sheet remains ungeared and provides significant strategic flexibility for the group, not least the ability to make earnings-enhancing, bolt- on acquisitions.
Valuation upside remains. On a headline basis we estimate that ITE currently trades on a calendarised 2006E PE of 20.3x, a 19% premium to the Event Organising peer group and a 21% premium to the B2B peer group. We believe that the biennial effect needs to be considered, as FY2006 will not see the Moscow International Oil & Gas Exhibition (MIOGE) event. Spreading the effect across FY2006 and FY2007 reduces the PE to 19.9x, which would still leave the stock at a premium to its peers. We believe that this premium can be justified on a number of points - not least the growth, margin and cash flow profile relative to its peers.
Bridgewell View - Despite a headline valuation that stands at the top end of the historical range, we still believe there are attractions for investors, particularly those new to the story. We believe that our forecasts are cautious and we can see clear potential for future upgrades. ITE enjoys significant balance sheet flexibility, which should support a premium rating. Our bottom-up valuation supports a fair value of 148p. We initiate coverage with an Overweight recommendation.
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SWOT analysis Table 3: SWOT Analysis
Strengths: 1 Well established, profitable key events underpinning the portfolio 2 Local market knowledge and presence 3 Management experience and focus 4 Strong venue relationships 5 Maturity of key brands has created substantial strategic value 6 Outlook for key verticals remains strong
Weaknesses: 1 Vertical and geographical concentration 2 Relative lack of exposure to consumer and service economy events 3 Lack of horizontal brand extensions 4 Geographical diversity negated by correlation after the fact (i.e. emerging markets tag) 5 Portfolio “tail” effect
Opportunities: 1 Continued growth of the core CIS economies 2 Potential new entrants put off by prior experience 3 Undergeared balance sheet 4 Establish new consumer brands 5 Horizontal brand extensions, creating a more broadly based media business 6 New geographical opportunities
Threats: 1 Political and economic risk 2 Vertical instability (e.g. commodity price risk) 3 Potential yield pressure from continued venue capacity expansion 4 Local market new entrants
Source: Bridgewell Securities
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Company background
ITE Group is one of the largest independent exhibition organising businesses in the UK. The company currently has in excess of 550 employees in eighteen separate locations worldwide. During the year ended 30th September 2005, ITE organised 152 exhibitions in 16 different countries.
ITE organises events in a number of industry verticals, including extractive industries, construction & building, travel & tourism, automotive, clothing & fashion, leisure, and IT & telecommunications.
ITE’s primary geographic exposure is to Russia (62% of sales) and the former CIS (15% of sales), with the remainder split between Western and Eastern Europe, Asia and Africa.
Corporate history
The following chart tracks the major milestones for the group since 2000.
Chart 1: ITE timeline 2000-2006
140p 2000 to 2002, ITE spends £57m on acquisitions VSS exits – 5.9% (Turkey, CIS, technology)
120p Positive trading update
VSS sells 6.9%
100p Positive trading update VSS sells 4.4%
Final results, 80p Positive trading update tough trading, £30m tender offer £39m writedown Lawrie Lewis steps down as Chairman 60p Final results, £40m fundraising restructuring complete, VSS £30m (17%) solid trading 40p Lawrie Lewis sells 6.3% Russell Taylor appointed FD 20p Profits warning, Turkey & technology Ian Tomkins VSS increases appointed CEO stake to 20.1% 0p Jan 00 Jan 01 Jan 02 Jan 03 Jan 04 Jan 05
Source: Datastream, Company announcement
ITE joined the market through the reverse takeover of Cementone in March 1998. The timing was less than auspicious, with the Russian debt crisis coming to a head later in the year. This was to hold back group performance over the next couple of years as the core Russian events were impacted. With investors clearly nervous about the exposure to the volatile Russian economy, the group saw its share price decline
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substantially. Coupled with the growing technology boom, the group made a clear decision to step away from its CIS roots.
From 1999 to the end of 2001, the group embarked on a series of acquisitions and ventures, branching into technology exhibitions and new territories such as Turkey, Central and Eastern Europe and Asia. The original founders of the group, the Shashoua family, also exited in 1999, leaving Lawrie Lewis (ex-Blenheim) at the helm of the company.
Overall, the company spent a net £60.2m on acquisitions during the period 1999 to H1 2002. In November 2000, the US media-focused investment bank Veronis Suhler Stevenson (VSS) participated in a £40m fundraising, investing £30m for a 17% stake.
This period of expansion coincided with the technology collapse and severe instability in the Turkish market. The group issued a formal profits warning in April 2001 and in the results for the year ended September 2001 unveiled a £39m writedown relating to the recently acquired businesses.
2001 marked the nadir for the company. Since then we have seen a significant management restructuring; with Ian Tomkins promoted from Finance Director to CEO, the departure of Lawrie Lewis and, in early 2003, the appointment of Russell Taylor as group FD. The group has returned its primary focus, somewhat ironically, to its Russian and CIS roots. The combination of a booming Russian economy and a buoyant oil price have provided a more than benign environment for the company.
Since the start of 2005, VSS has taken advantage of the substantial recovery in the share price and have exited from their holding in the company, which at its peak was 20.1% of the issued share capital. This has substantially increased the free float of the company to c.85%. Since VSS originally invested in the company, it has had the right to nominate directors to the board. From a maximum of two non-executive directors, the last remaining VSS nominee, Marco Sodi, has recently stepped down from the Board.
Bridgewell View - ITE’s early years as a quoted company were dominated by an over-aggressive acquisition and expansion programme and significant management volatility. This experience clearly underpins the approach of the current management team, which is one of measured expansion and focus on core markets and verticals.
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Management team and board
Iain Paterson – Non-Executive Chairman. Iain has been Chairman of ITE since 2002. He has held senior board positions in a number of companies, particularly within the Oil sector, including Enterprise Oil. Alongside ITE, Iain is also Non-Executive Chairman of Sondex plc and Hunting plc.
Ian Tomkins – CEO. Ian joined ITE in 1998. In 2000 he was appointed Finance Director, becoming CEO in October 2002. Prior to ITE, Ian qualified as a chartered accountant in Australia and then served as financial controller for Village Roadshow Ltd in Australia.
Russell Taylor – FD. Russell joined ITE as CFO in March 2003. Prior to ITE, Russell was finance director of Air Miles International Group. Previously, Russell had spent seven years at Earls Court Olympia Group as Group Finance Director and latterly MD of Earls Court & Olympia Halls. Russell is a chartered accountant.
Edward Strachan – Executive. Edward joined ITE in 1993 in order to launch ITE’s presence in Kazakhstan. Since then he has managed ITE’s activities in St Petersburg, Central Asia and the Caucasus. He is also responsible for the wholly owned Turkish subsidiary.
Ceyda Erem – Executive. Ceyda has been a director since 1999 and is responsible for the Turkish associate relationship.
The Rt Hon Sir Jeremy Hanley – Senior Non-Executive. Sir Jeremy joined the Board in 1998. From 1983 to 1997, Sir Jeremy was MP for Richmond & Barnes, holding a number of ministerial positions.
Michael Hartley – Non-Executive. Michael joined the Board in 2003. He is currently Chairman of Dawson International plc and Chief Executive of the Viyella division of Coats Viyella plc.
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Why exhibition organising?
We believe that exhibition organising, in particular the B2B “trade show” segment, is one of the more attractive niches within the current media landscape. This is somewhat ironic, given the longevity of the exhibition business model, in a media universe currently dominated by disruption to many traditional media structures.
The exhibition business model, when well executed, is highly cash-generative and scalable. Over the last five years ITE has consistently enjoyed a cash conversion ratio in excess of 100%.
Once a brand is established, then this creates substantial barriers to entry. One has only to look at brands such as 3GSM (Informa), CeBIT (Deutsche Messe) and MIPCOM (Reed Elsevier), which are the benchmarks for their respective industries. Although smaller in scale, ITE has a number of brands that meet these criteria; Mosbuild (construction) and Moscow International Oil & Gas Exhibition are good examples.
Trade shows, as opposed to consumer shows, display a closer linkage to the broad cycle rather than the advertising cycle, being a cost of sale as well as a brand-building expense. The commercial nature of these forums scores highly in terms of measurable return on investment.
Newsflow emanating from the industry has been positive for the last three years and shows no sign of abating. The closer linkage to the global economic cycle, rather than the more concentrated advertising cycle, has provided a firm basis for growth as the global economy has steadily recovered from the millennial slowdown.
Attractive business model…
We believe that, when well executed, the exhibition organising economic model is highly attractive. We would highlight the following:
Cash-generative. The payment cycle of a typical event should throw off substantial working capital. Typically, an event will be marketed to exhibitors anywhere between twelve and eighteen months in advance. Exhibitors tend to pay an upfront deposit (15-20%), followed by stage payments of the remainder during the six months prior to the event. Venue costs, usually the single largest cost to the organiser, will be payable only a few months in advance of the event. The physical costs of the event (construction and promotional staffing) will coincide with the event. The cash effect of this can be seen in the ITE balance sheet, where deferred income runs at c.46% of subsequent year revenues and the cash conversion ratio is in excess of 100%.
Visibility. The natural result of this payment / booking cycle is a high level of visibility. For the more established events, it is not unusual for exhibitors to pre-
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book the next edition at the time of the current edition. We would again point to the accruals line as an indicator of this visibility.
Scalable margins. Relative to other media business models, the margin profile within a mature exhibition organiser is attractive. The cost structure of an event is split between the direct costs, while venue costs (typically 20%-30% of revenue) are variable, as are stand and event staffing costs. Gross margins should therefore range between 40% and 60% depending on the maturity and relative pricing level. EBIT margins benefit from maturity (high marketing costs behind newer brands) and scale (spreading central costs over a larger event portfolio). As a rule of thumb, newer shows will take anywhere between one and three editions to reach breakeven depending on the level of marketing investment and space sales growth. Mature EBIT margins (before group costs) should range between 25% and 35%.
Table 4: Relative Media EBITA margins
EBITA margin Averaging peer group Events 26% ITE, Informa, Tarsus Group B2B Publishing 17% UBM, Centaur, Incisive Media Wilmington, Huveaux, Metal Bulletin Market Research 15% Taylor Nelson, Datamonitor Consumer Mags 12% EMAP, Future Agencies 12% Aegis, Huntsworth
(We have excluded loss makers) Source: Bridgewell Securities estimates, Hemscott
Exposure to the broader cycle
The true benefit of trade shows is that they straddle both commercial and marketing roles, implying a direct relationship to the broader and less volatile economic cycle than just the more volatile advertising cycle. We believe this combination role is more pronounced in emerging economies, such as the CIS, where there are fewer routes to market and a less established media sector than in advanced economies.
Maturity creates a virtuous circle
The maturity of an event is a key determinant of profitability. Generally speaking, the early editions of an event will require a proportionately higher level of marketing investment as the brand is built up, even though actual space sales may be coming from a relatively small base. Marketing investment in this sense is a good proxy for capital expenditure; as the event matures and becomes well established, marketing spend becomes less expansionary and more maintenance in nature. The impact on event EBIT margins is therefore marked, particularly for mature events that are still experiencing substantial space sales growth. However, we would normally assume that an inverse relationship exists between margins and growth.
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Industry newsflow is encouraging
In the early part of the millennium, the exhibition industry faced challenging conditions. The combination of the technology downturn, 9/11 and SARS all exacerbated the downward leg of the broader economic cycle. Although there are very few top-down data the available reported company figures show declining revenues and event closures during 2001 and 2002. However, since the end of 2003, the picture has begun to change. Tables 5 and 6 below demonstrate the progress that has been made.
Table 5: Underlying revenue growth for major European event organisers
2002 2003 2004 2005* CMPi -13% 6% 4% 2% EMAP 9% 6% 11% 9% Reed Exhibitions -1% -6% 6% 9% dmg world media 5% -7% 11% 5% VNU Exhibitions 5% 2% 6% 6% Frankfurt Messe 2% 5% 5% n/a Informa -12% -5% 7% 13% ITE Group 4% 12% 4% 14% Average 0% 2% 7% 8%
*2005 figures are taken from latest announcements Source: Company announcements
Table 6: European exhibition activity 2003 - 2004
2003 2004 Exhibitions 955 988 Exhibitors (‘000) 296 324 Visitors (m) 32.0 39.8 Gross space rented (sq m) 28.9m 29.4m
(representing 19 European venues with c.47% gross space in Europe) Source: EMECA
We can see that underlying revenue growth across the peer group has improved substantially, with ITE leading the way. The top-down industry data also suggest that 2004 saw a 2% increase in total area sold and a 24% increase in visitor numbers.
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Alongside the improvement in the financial performance of events-focused businesses over the last three years, the broader media companies are reflecting this by stepping up acquisition activity in the space. Table 7 gives a summary of recent activity in the space.
Table 7: Acquisition activity
Date Target Bidder Value Multiple (RIC.L) Jan 2006 Shorecliff Communications UBM $12.3m 2.0x 2006 rev Jan 2006 MediaLive UBM $65.0m 1.6x 2006 rev Nov 2005 Black Hat Japan Jewellery UBM $12.7m n/a Nov 2005 Expressions of Culture DMGT $4.4m n/a Sep 2005 iMedia Communications DMGT $12.0m n/a Aug 2005 Informex UBM $24.0m 10.4x 2005 EBITDA Aug 2005 SES INM $43.0m 5.2x 2004 rev Jul 2005 IIR INF £768.0m 2.5x 2004 rev Feb 2005 Publican UBM £21.0m 3.1x 2004 rev Jan 2005 Ad:Tech events DMGT $19.4m n/a Nov 2004 Various events DMGT £7.4m n/a Mar 2004 Canadian Farm Show DMGT £1.1m n/a Feb 2004 Various events DMGT £5.3m n/a
Source: Company announcements
We can see a wide spread of valuations in the above table, reflecting the varying strategic motives behind some of the transactions (i.e. Incisive Media’s acquisition of SES and Informa’s acquisition of IIR). The mid point is broadly 2x revenue, which (dependent on the margin profile) implies a PE multiple of 8x to 10x for the larger events or businesses. For smaller events, we would expect the multiple to be capped at 8x historical earnings. The combination of growth and cost synergies should see prospective multiples reduce substantially.
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Why emerging markets? Chart 2: ITE 2006E gross profit by region
RoW East & S Europe 0% UK & W Europe 5% 10%
Central Asia 16%
Russia 69%
Source: Bridgewell Securities estimates
In Chart 2 above, we show the group’s geographical exposure. While there is a clear degree of specific risk within emerging market economies, as an asset class they have outperformed their more developed counterparties over the last few years. In Chart 3 below, we show the relative performance of the FTSE Emerging Market index relative to the S&P and MSCI Europe over the last 10 years.
Chart 3: Emerging Markets relative to the US and Europe, 1996-2006 (Jan 1996=100)
FTSE Emerging S&P 500 MSCI Europe
300
250
200
150
100
50
0 Jan 1996 Jan 1996 Jul 1997 Jan 1997 Jul 1998 Jan 1998 Jul 1999 Jan 1999 Jul 2000 Jan 2000 Jul 2001 Jan 2001 Jul 2002 Jan 2002 Jul 2003 Jan 2003 Jul 2004 Jan 2004 Jul 2005 Jan 2005 Jul 2006 Jan
Source: Datastream
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Prior to the currency shocks of the late 1990s, the flow of capital into emerging market economies was less than discriminating. This situation has now changed with growth far more broadly based and secured on rising domestic consumption and export growth and not just capital flows. The impact of rising commodity prices cannot be understated, with many emerging market economies net exporters of commodities.
Chart 4: GDP expectations for CIS territories, yoy growth %
Russia Ukraine Kazakhstan Belarus Turkmenistan
20.0% 18.0% 16.0% 14.0% 12.0% 10.0% 8.0% 6.0% 4.0% 2.0% 0.0% 2003 2004 2005 2006
Source: IMF World Economic Outlook, Sept 2005
“Looking forward, regional [CIS] growth is expected to remain robust at 6% in 2005 and 5.7% in 2006, with consumption remaining the driving force…Near term risks to growth remain on the upside, given the outlook for oil and other commodities, although there are also downside risks, including… risks to investor confidence from market-unfriendly government interventions, and prudential risks associated with continued rapid credit growth.” – IMF, World Economic Outlook, September 2005
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How has the combination of this relatively benign economic outlook and political uncertainty affected the region’s risk profile? Given the preponderance of the Russian economy, both in the region and also for ITE, we have looked at the spread between Russian government bonds and US Treasury bonds. Chart 5 below shows how the spread has narrowed consistently to its current level of c.150 basis points.
Chart 5: Russian sovereign debt yield vs US Treasuries
Russia 2028 Red Yield US 30yr Red Yield 25%
20%
15%
10%
5%
0% Jan Jul Jan Jul Jan Jul Jan Jul Jan Jul Jan Jul Jan 2000 2000 2001 2001 2002 2002 2003 2003 2004 2004 2005 2005 2006
Source: Datastream
Bridgewell View - With the market clearly taking a view as to the improving Russian specific risk profile and a reassuring collage of macroeconomic data, we believe emerging market exposure is a net positive, rather than a negative, for ITE Group. Coupled with a solid outlook for the key commodity verticals, this implies a positive near-term trading environment for the company and underpins the prospects of further earnings upgrades.
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Competitive landscape
In Chart 6 below, we show the Moscow organising market in graphical form. We have averaged the square metreage of the event portfolios for the organisers in order to provide a single size yardstick. This approach understates the ITE position, given the variance in event size (the average area for ITE’s main Moscow events is 20,500 sq m, representing c.74% of all Russian area). We have then ranked the organisers in terms of the international breadth of their activities (i.e. Reed at the top and the local venue operators at the bottom).
Chart 6: Moscow event organising market in 2005 International organisers 5 2 38 8 15 4
Square Square metres 0 1,000 2,000 3,000 4,000 5,000 6,000 7,000 8,000 9,000 10,000 metres
9 32 30 7
2 No. of events Local organises / venue
Source: UFI, UIEF, company websites, ITE Group, Bridgewell Securities
ITE is one of the largest independent organisers in the Moscow market, with an estimated market share of c.25% in terms of space sold in 2005. The closest competitors in terms of metreage sold are Expocentr and MVK Sokolniki, although they are unable to match ITE’s pricing, driven by the high level of international sales.
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ITE has clearly benefited from its loyalty to what has been a tricky market in which to operate and the current position of leadership is a function of this continuity. However, the combination of increasing venue space, high growth potential and attractive yields has seen an increase in competitive activity.
Of the large international players, Reed Elsevier has been active in launching a number of new events in Moscow. However, it is targeting a different vertical spread to ITE (tool-making, telecoms and jewellery) and currently have less than five wholly owned shows on the 2006 calendar (compared to c.38 for ITE). This is not the first attempt by Reed to break into the Russian market; the previous forays were largely unsuccessful.
Worthy of a special mention are the German Messe, which have long been looking to expand beyond their municipal foundations. For example, Düsseldorf Messe will be organising 15 events in 2006 across a range of sectors (with a heavy industry focus), while Frankfurt Messe will be organising four events. Düsseldorf Messe is perhaps the most established of the German players, having subsidised the building of Hall 7 at Expocentr in Moscow.
Expomedia Group (AiM-listed, £60m market cap, not rated), which was set up by the Shashoua family (the original founders of ITE), is an active organiser in the Moscow market, with eight events scheduled for 2006 and a number of conferences through its Infor-Media joint venture with Informa plc. The primary difference between Expomedia and ITE is the former’s strategy of partnering with media brand owners (such as Gazprom Media, Gruner+Jahr, DMGT and Frankfurt Messe), while ITE is a proprietary brand play. Expomedia also employs a different venue strategy, favouring outright ownership and management based on long-term leases. Of the remaining international organisers, we would mention Montgomery International (two events in Russia – food and drink).
The local organising market is also growing in activity. The largest local competitor is the venue, Expocentr, which employs a hybrid organising model. At the last count, Expocentr will be organising 32 events in 2006. MVK Sokolniki is another hybrid venue / organiser offering 30,000 sq m and 30 events. IFA Russia is a pure organiser with nine events scheduled for 2006.
Bridgewell View - Competitive pressures are mounting in the key Russian market. The increasing amount of venue space is encouraging new entrants and this is likely to hold back yield expansion. However, the combination of venue agreements and existing brand strength should see ITE more than hold its own in its key titles. The “portfolio tail” is unlikely to make significant progress and the number of events organised is already on the decrease - a process that should be margin-accretive.
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The ITE business strategy
Vertical focus…
Not only does ITE show a high degree of geographical concentration; it is also concentrated on a few key industry sectors. In Chart 7 below we show the revenue split by industry vertical.
Chart 7: ITE Group gross profit by vertical, 2004 and 2005 Other IT 8% 5% Construction Fashion 36% 5%
Motor 8%
Food 11%
Travel Oil & Gas 12% 15%
Source: Company
It is clear that one of the drivers behind ITE’s performance over the last few years has been its leading position in the key growth sectors of the resurgent Russian economy. The positive backdrop to both the Russian market, and these sectors in particular, is likely to fuel growth over the medium term. However, with the Russian economy beginning to mature and with the growing importance of the consumer, it is important to see expansion into new verticals, especially within the services sector.
Following the £30m tender offer in 2005, the group will have to rebuild its distributable reserves before undertaking another major return of capital. This will mean that the group will accumulate significant acquisition firepower over the next couple of years. We do not expect an indiscriminate acquisition spree; the lessons of 1999 to 2001 will not be forgotten quickly, but small, title based add-ons would be appropriate.
…although a surprising lack of horizontal extensions
With the exception of RAS Publishing (magazine publishing for UK fashion buyers), acquired in June 2004 for £2.0m, ITE remains a pure play exhibition organiser. To question this, given the performance of the company over the last three years, may seem churlish, but we believe there are areas of incremental opportunity that have yet to be exploited.
The core of the B2B model is the vertical brand (traditionally based around a magazine or information product brands) around which horizontal extensions (web sites, conferences and exhibitions) can be established. Within certain sectors (notably
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construction and oil & gas) ITE enjoys this strong central brand position. Why the lack of extensions?
Immaturity of media channels. The media sector within the CIS, although growing rapidly, is still relatively immature. This has curtailed the opportunities for web-based publishing activities for example.
Sticking to its knitting. ITE’s key skills are in event organising and marketing, not broader publishing. In the absence of appropriate acquisitions (injecting skills rather than brands), the group would have to invest substantially in a publishing infrastructure. The last few years have seen a period of recovery and focus on the core event portfolio against a backdrop of strong underlying demand. Management has argued convincingly that exploring peripheral publishing opportunities would have distracted and diluted the main opportunity.
Expanding within existing verticals. Rather than invest in new media, such as publishing, ITE has instead looked to deepen its existing vertical event presence through the launch of satellite events around a core brand and cloning brands into new territories. Good examples here are the success of Mosbuild, which has now led to Kiev Build and Kazbuild, and Moscow International Oil and Gas Exhibition, which is now replicated in nine different territories.
Bridgewell View - Now that the group has firmly established its recovery, we believe that the time may be right to explore horizontal publishing opportunities. Despite the inevitable margin dilution inherent in such an expansion, the benefits of securing incremental brand revenues and deepening brand traction will become more important, particularly within an increasingly competitive environment. Such a strategy should sit side by side with expansion within existing verticals.
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Maturity and new launches
Although ITE’s strong performance over the last three years has been driven by the key events in the portfolio, the group has been active in launching new titles. In Table 8 below, we show the impact that new launches have had on the group over the last two years.
Table 8: Sources of revenue growth for ITE Group
£m Revenue Gross profit Margin (%) Mature growth 2005 Non-annual 9.1 4.7 52% Recurring events 5.8 2.9 50% Acquisitions 2.1 1.0 48% Immature growth New launches 2.4 0.1 4%
Mature growth 2004 Non-annual 0 0 0% Recurring events 3.3 2.2 67% Acquisitions 0.2 0.1 50% Immature growth New launches 2.4 0.5 21%
Source: Company
Early-stage events tend to be loss-making, while mature events can enjoy high margins but slower revenue growth. New title origination is risky, as they require a great deal of marketing investment. Partnering with existing media owners can mitigate this risk, but only at the cost of diluted brand ownership and profit share. This approach is perhaps most appropriate for new market entrants. Execution skills and a high degree of local market knowledge are therefore paramount in order to achieve the appropriate risk profile.
Overall, in 2005. ITE launched 24 new events, which generated £2.4m of revenue (3% of the group total) and 11,000 sq m of space sales (3% of the group total).
In terms of geographical spread, new launch activity in 2005 was concentrated outside the core Russian market, with a particular focus on the Central Asian region. In the short term we expect this trend to continue as the group takes advantage of a more benign competitive environment in these territories.
Bridgewell view – In the group context, new launches are peripheral in their impact on gross profit, yet will be perceived by investors as fundamental to the longer-term growth profile. We are therefore encouraged by the extent of new launch activity, with a clear focus on new territories.
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Venue strategy
Chart 8 below gives a snapshot of venue space across Europe and the CIS.
Chart 8: Venue space across Europe and the CIS 2 Venue Size (000m2) 2005 GDP / m GDP 2 >30 > 1.5 Others Total Total m GDP $bn $m Growth % Mature Markets Germany 16 22 41 79 3.00 m 2,812 0.9 m 1.8% France 9 32 52 93 1.50 m 2,110 1.4 m 2.1% Italy 10 9 25 44 0.98 m 1,706 1.7 m 1.1% UK 4 33 30 67 0.70 m 2,188 3.1 m 2.4% Spain 5 3 14 22 0.54 m 1,109 1.4 m 3.2% Total: 6.72 m 1.7 m ex UK: 6.02 m 1.4 m
CIS Territories Russia 5 17 0 22 0.45 m 744 1.7 m 5.3% Ukraine 1 3 0 4 0.06 m 83 1.4 m 5.4% Kazakhstan 0 1 0 1 0.01 m 59 4.9 m 7.7% Total: 0.52 m 2.7 m
Source: UFI, EMECA, IMF, EIU, Bridgewell Securities Ltd
There is a stark contrast between the developed European markets and the CIS in this analysis: firstly, in the absolute number of venues available, and secondly in the area. We have used GDP per square metre as a very broad comparator; excluding the UK, the CIS offers 1.9x the amount of GDP per square metre in Europe. This effect is even more marked when one considers that the Moscow region counts for a disproportionate amount of national GDP in Russia and yet contains only two modern venues (Expocentr and Crocus, together offering 170,000 sq m), implying an effective GDP per square metre in excess of $2.0m.
The quality of the available venue space is also an issue. Although Russia has a headline capacity of 0.45m sq m, less than half of this is of a quality high enough to hold an international standard event. (A similar situation exists in the UK, with high quality space available only at Earls Court, NEC and Excel.)
A key issue for exhibition organisers in emerging markets has been tenure. Given that brand investment is weighted towards the early stages of a brand’s life, venue risk is a clear impediment to building sustainable value. There are solutions to this problem.
Venue management
This route has been taken by Expomedia Group plc (AiM-listed, £60m market cap, not rated). Expomedia was founded by the Shashoua family, the original founders of ITE Group, and their business model is a direct response to the venue tenure challenge. Although at core an organising business, Expomedia also owns its own venues (Poland) or manages them a long-term lease basis (Germany, India, Hungary, Netherlands). This allows the company to secure its own events for the length of the
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management lease and then sublet to other organisers the remaining space. This is a radical strategy, requiring a combination of organising and venue management skills, and is still at a relatively early stage of its roll-out.
Venue agreements
The alternative strategy, and that employed by ITE, is to enter into contractual relationships with the venues. These agreements do not follow a set format; they take the form of either advance rental payments or loans to finance future venue expansion. Loans will be offset against future venue costs, or occasionally repaid in cash. In return for the financing, ITE will generally seek, on a single or multi-event basis, guarantees as to availability, themed protection and a pricing formula.
Themed protection. This is a guarantee that the venue will not host, or organise itself, a similar event. The duration of this exclusivity can be annual, or for a certain part of the year. A large proportion of competitive pressure can come from the venues (who will often employ a hybrid venue / organising model). It has not been unknown in the past for a venue to stop hosting a successful event in order to relaunch it under its own banner.
Pricing formula. This allows ITE to reduce the risk of substantial price inflation in future years. Generally, prices will be agreed over a one or two-year time horizon and will then float according to a pre-agreed inflation plus formula.
Following the agreement with the Crocus venue in Moscow, the table below shows the outstanding venue agreements and outstanding balances. The Crocus agreement has been struck on an advance payment basis, with the venue owner using the receipts to fund the construction of a third pavilion. In return, ITE has secured certain event rights up to 2015 and has fixed venue costs over the short term, with longer-term pricing subject to a pre-agreed formula.
Table 9: ITE venue payments
£m 2004 Utilised Additions Balance Moscow (advance payment) 0.0 0.0 5.7 5.7 Kiev (advance payment) 1.6 -0.3 0.0 1.3 Almaty (venue loan) 0.8 -0.5 0.5 0.8 St Petersburg (advance payment) 2.0 -0.6 0.0 1.4 Uzbekistan (advance payment) 0.0 -0.1 0.3 0.2 Bulgaria (venue loan) 0.2 -0.1 0.0 0.1 Total 4.6 -1.6 6.5 9.5
Advance to Moscow venue was a post balance sheet event Source: Company accounts, Bridgewell Securities estimates
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Yield management
The ability to mitigate yield volatility is a key management skill, and we believe that the record of ITE Group is encouraging here.
Chart 9: ITE Group - yield vs. space sales
Sq Metres Sold (lhs) Headline Yield (rhs)
450,000 £ 225 sqm
400,000 £ 220 sqm 350,000 £ 215 sqm 300,000
250,000 £ 210 sqm
200,000 £ 205 sqm
150,000 £ 200 sqm 100,000 £ 195 sqm 50,000
0 £ 190 sqm 2002 2003 2004 2005 2006 2007 2008
Source: Company accounts, Bridgewell Securities estimates
We have adjusted the above chart for the flattering impact that World Petroleum Congress (WPC) had on yields in 2005, while also adjusting the forward yield by stripping out an unusually low-yielding event in Turkey that had a material impact on headline yields. We are expecting a decline in Moscow yields in 2006, partly because of the “biennial effect”, but also as a result of new space becoming available in Crocus. Generally speaking, we would expect a period of venue capacity expansion to place a cap on yields, although this will be offset by the greater area sold. The group’s ability to agree venue rates via forward agreements should be seen within this context.
Both Crocus and Expocentr are planning to open a third new pavilion by the end of 2007. The combined potential new area (c.120,000-130,000 sq m) would almost double the existing capacity. From our discussions with market participants, it is clear that there is a high degree of pent-up demand, which could absorb the new capacity without seeing yields come under real pressure, as has been the case in Turkey.
Bridgewell View - Venue risk cannot be understated and will be highly sensitive to supply and demand factors in each market. The ITE approach to mitigating this risk is consistent with the pure organising model and is a prudent use of current cash flow to protect the visibility of future cash flows. The downside from this strategy comes in the event of a major market decline, where the group will be faced with either recovering funds or paying pre-agreed venue costs ahead of the prevailing rate.
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Geographical expansion
Even though the key events in Moscow are performing well, the increasingly congested landscape is curtailing opportunities for new title launches. This is not a new phenomenon, and ITE has been expanding its activities outside of the Russian market for a number of years. This is a process that is likely to continue through a combination of organic launches and bolt-on acquisitions. In Chart 10 below, we show the historical record of space sales outside of Russia and our expectations going forward.
Chart 10: Space sales ex Russia
Space sales ex Russia
250,000
200,000
150,000
100,000
50,000
0 2004 2005 2006E 2007E 2008E
Source: Company, Bridgewell Securities estimates
The key attraction of expanding into the CIS economies outside of Russia is the growing importance of their energy reserves in a world growing nervous about Russia’s use of energy as a strategic lever.
In the financial year just reported, ITE made three acquisitions, all outside the Russian market:
Caspian Events Ltd (£2.2m). This acquisition bought into the group the Caspian Oil & Gas exhibition, based in Baku, Azerbaijan.
BTO (€2.2m). This business owns the Kiev AgriHort agricultural machinery show held in February each year.
DEW Events Ltd (initial £3.4m). Four UK-based footwear exhibitions, complementary to the existing MODA brand.
The key area of geographical expansion in the short term will be in Central Asia and the Ukraine. 2005 saw new shows launched in Kazakhstan, Azerbaijan and Uzbekistan. The Almaty venue is currently running at full capacity so the key Kazakhstan Oil & Gas
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and Kazbuild events are unlikely to show significant space growth in 2006 until new space comes on line in 2007. Azerbaijan also suffers from venue issues (the available space doubles up as a sports facility), and we would expect to hear news on alternative arrangements in the near term. Uzbekistan was the best performing of the Central Asian territories, with eight new event launches during 2005.
The key attraction of the Central Asian markets is the relative lack of international competition and the strategic attractions of their energy reserves. Local venue infrastructure remains an issue, but is not insurmountable.
ITE has been active in making acquisitions in the Ukraine over the last couple of years, and this has driven good top-line growth (+50% in 2005) despite political uncertainty at the end of 2004. The recent expansion of the IEC venue has lifted space constraints and should fuel growth over the medium term.
ITE has now established operations in Mongolia, Tajikstan, Kyrgyzstan, Western China and Iran. We do not expect these to contribute materially to the group in the short term, but they are laying the foundations for future growth.
Bridgewell View - Despite the pain experienced as a result of previous acquisition led expansion, we believe that this is an integral part of the ITE story going forward. The group is now far more disciplined in its approach and expansion into new markets is likely to be measured and complementary to existing activities.
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Forecasts
In Chart 11 below, we show our detailed P&L estimates for the group.
Chart 11: Detailed profit & loss estimates
Y/End 30 Sept 2003 2004 H1 H2 2005 H1 H2 2006E 2007E 2008E £ m Russia 42.6 41.3 48.4 46.4 54.1 53.1 Central Asia 7.6 9.6 12.1 13.7 14.9 16.0 UK + W Europe 3.5 4.2 6.0 8.3 9.0 9.6 Eastern + S Europe 4.5 4.4 5.0 6.4 6.6 6.9 Rest of the World 0.7 1.3 7.0 1.6 2.0 2.4 Turnover 58.9 60.8 22.7 55.9 78.5 23.8 52.5 76.4 86.6 88.0 % Change 12% 3% 12% 38% 29% 5% -6% -3% 13% 2% Russia 20.8 20.7 25.2 23.1 27.6 26.8 Central Asia 2.7 3.5 5.0 5.5 5.9 6.4 UK + W Europe 2.4 2.2 2.2 3.7 4.1 4.3 Eastern + S Europe 0.8 0.8 1.7 2.0 2.0 2.1 Rest of the World 0.1 0.1 2.0 0.1 0.1 0.1 Gross Profit 26.7 27.2 8.6 27.4 36.0 8.8 25.5 34.3 39.8 39.8 Gross Margin % 45% 45% 38% 49% 46% 37% 49% 45% 46% 45%
Operating Expenses -12.3 -10.4 -5.8 -6.0 -11.8 -6.1 -5.8 -11.9 -12.7 -13.1 EBITDA 14.5 16.8 2.8 21.4 24.2 2.7 19.7 22.4 27.0 26.7 Depreciation -0.5 -0.5 -0.2 -0.2 -0.4 -0.3 -0.3 -0.5 -0.6 -0.6 EBITA 14.0 16.3 2.6 21.2 23.8 2.5 19.4 21.9 26.4 26.0 Margin % 24% 27% 11% 38% 30% 10% 37% 29% 31% 30% Goodwill -2.3 -2.5 -1.5 -1.6 -3.1 -1.7 -1.7 -3.5 -3.5 -3.5 Exceptional -0.8 0.3 0.0 0.2 0.2 0.0 0.0 0.0 0.0 0.0 Associates 0.7 0.5 0.3 0.2 0.5 0.3 0.2 0.4 0.4 0.4 Net interest 0.7 1.1 0.9 0.7 1.7 0.3 0.3 0.6 0.9 1.3
PBT Reported 12.3 15.7 2.2 20.7 23.0 1.3 18.2 19.5 23.8 23.9 PBT Adj. 15.4 17.9 3.8 22.1 25.9 3.0 19.9 22.9 27.3 27.4 PBT Biennial Adj. 14.0 19.3 22.5 24.3 25.9 28.7
Tax -4.0 -5.0 -1.1 -6.4 -7.4 -0.9 -5.7 -6.6 -7.8 -7.9 Tax rate % 26% 28% 29% 29% 29% 29% 29% 29% 29% 29% Adj earnings 11.4 12.9 2.7 15.8 18.5 2.1 14.2 16.4 19.5 19.6 No. shares m 274.2 281.6 285.2 282.3 282.3 261.2 261.2 261.2 262.2 263.2
EPS p Reported 3.1p 3.9p 0.4p 5.3p 5.7p 0.2p 5.0p 5.1p 6.3p 6.3p EPS p Adj. 4.1p 4.6p 0.9p 5.6p 6.5p 0.8p 5.4p 6.3p 7.4p 7.4p EPS p Biennial Adj. 3.7p 5.1p 5.4p 6.8p 6.9p 7.9p % Change 81% 11% 43% -4% 19% 0% Total DPS (p) 1.6p 2.2p 0.9p 1.9p 2.8p 1.0p 2.1p 3.1p 3.5p 4.0p
Source: Company, Bridgewell Securities estimates
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To smooth the effect of the biennial MIOGE event and the 2005 impact of WPC, we have spread the MIOGE contribution (c.£2.7m of PBT) over the two-year cycle and have stripped out the c.£2.0m PBT contribution of WPC in 2005. These adjustments give us a biennially adjusted group PBT of £22.5m in 2005 (16% ahead of the similarly adjusted 2004 figure).
The company has yet to report under IFRS and we have prepared our forecasts under existing UK GAAP. The interim results for the six months ended March 2006 will be the first to report under IFRS. We do not anticipate any significant changes to the numbers, beyond the treatment of acquired goodwill and share option costs (although this impact should be relatively small, as costs are already expensed on a straight line basis over the life of the grant).
Revenue assumptions
We have modelled group revenues on a regional basis. We have made assumptions about the mix between metreage sales and average yield across the core and non-core titles within each region. In Table 10 below we highlight our key revenue assumptions.
Table 10: Key revenue assumptions
Y/end Sep, £m 2004 2005 2006E 2007E 2008E Russia - Events 44 40 39 40 40 - Sq Metres Sold 173,000 194,000 192,635 223,652 220,273 - Ave £ Rev per metre 239 249 241 242 241 Central Asia - Events 56 63 64 65 66 - Sq Metres Sold 47,000 59,200 66,686 71,743 76,976 - Ave £ Rev per metre 204 205 206 207 208 UK + W Europe - Events 4 5 6 6 6 - Sq Metres Sold 21,000 25,000 38,007 40,721 42,708 - Ave £ Rev per metre 201 241 170 175 180 Eastern + S Europe - Events 28 35 36 37 38 - Sq Metres Sold 36,000 49,000 75,600 66,045 69,187 - Ave £ Rev per metre 121 103 84 100 100 RoW - Events 9 10 10 11 12 - Sq Metres Sold 2,000 13,800 2,667 3,227 3,872 - Ave £ Rev per metre 663 505 600 605 610
Source: Company, Bridgewell Securities estimates
2006 will not see the MIOGE event and this explains the 4% decline in headline Russian revenues. We also assume that average yields will decline by 3% in 2006, with the inflation experienced over the last few years offset by the impact of the new Crocus space. The event most likely to be impacted by lower yields is
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the Moscow International Motor Show. However, in 2007 we expect yield growth to pick up with the biennial effect. Ignoring MIOGE entirely, we are looking for Russian revenue growth of 5% in 2006E.
Elsewhere in the portfolio, we are expecting Central Asia to post the best underlying performance, driven by new launch activity (proportionately more important than in Russia). Central & Southern Europe will be impacted by the inclusion in 2006 of a large metreage but low-yield event that distorts the group headline averages. The UK will benefit from acquisitions, although the inclusion of the RAS publishing business impacts the headline yield. Our yield assumption above relates to the underlying events portfolio. The Rest of the World will be impacted by the non-recurrence of the WPC event.
Cost assumptions
The biennial effect will also hit gross margins, although maturity benefits elsewhere in the portfolio will offset this to a degree. We are looking for a 2006 gross margin of 45.0%, down 80 basis points on 2005. The next biennial effect should see gross margins hit 45.9% in 2007E.
Despite the lack of MIOGE we still expect operating expenses to grow as the group invests in new launches and infrastructure outside of Russia. In 2004, the last non biennial year, operating expenses declined in absolute terms. However, we would expect expense growth to be limited (under 2%).
In 2007 we anticipate a pick up in expenses in line with the biennial effect, (+6%) although not to the same extent as revenue growth (+14%). The net effect is a 160 basis point decline in EBITDA margins to 28.7% in 2006, recovering sharply in 2007 to 30.6%.
Other assumptions
We do not assume any significant progress in the Turkish associate given the continuing structural venue issues, and therefore assume that this contribution remains largely unchanged going forward.
We have modelled the net interest receivable based upon average cash balances throughout the year, assuming an effective interest rate of 4%. The main impact here is the effect of the share buyback in July 2005 at a cash cost of £30m.
We have assumed a 28.7% effective tax rate on pre-goodwill profits going forward, in line with 2005. ITE should benefit from a marginally lower tax rate than the UK norm due to its geographic spread. The tax rate has been as low as 26.2% in the recent past, but the inability to recover tax losses in some areas will make this figure difficult to achieve on an ongoing basis.
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2006 should see the main EPS benefit of the 2005 buyback with 21.9m shares being cancelled. We estimate that this has enhanced 2006 EPS by 7%.
Cash flow and balance sheet Chart 12: Cash flow & balance sheet Estimates
Y/End 30 Sept 2003 2004 H1 H2 2005 H1 H2 2006E 2007E 2008E £ m EBITDA 14.5 16.8 2.8 21.4 24.2 2.7 19.7 22.4 27.0 26.7 Working capital 1.9 3.9 10.9 -7.6 3.3 8.0 -7.8 0.2 0.7 3.6 Other 0.6 1.1 0.5 0.5 1.1 0.0 0.0 0.0 0.0 0.0 Operating Cashflow 16.9 21.8 14.2 14.4 28.6 10.7 11.9 22.7 27.7 30.3 Associates 0.0 0.2 0.4 0.0 0.4 0.2 0.2 0.4 0.4 0.4 Net Interest 0.7 1.1 0.9 0.7 1.7 0.3 0.3 0.6 0.9 1.3 Tax -3.7 -3.4 -4.5 -3.9 -8.4 -0.9 -5.7 -6.6 -7.8 -7.9 Capex -2.3 -2.9 0.3 -0.2 0.0 -7.2 -0.3 -7.5 -1.4 -1.5 Equity dividends -4.0 -4.5 -4.6 -2.5 -7.1 -4.6 -2.5 -7.1 -8.0 -9.2 Acq & disposals -3.6 -1.3 -2.3 -3.4 -5.8 0.0 0.0 0.0 0.0 0.0 Cashflow pre Fin. 4.0 10.9 4.4 5.1 9.5 -1.5 3.9 2.5 11.8 13.6 Financing 0.4 0.5 0.1 -30.1 -30.0 0.0 0.0 0.0 0.0 0.0 Opening Net Cash 17.7 22.1 33.5 38.0 22.1 13.0 11.6 13.0 15.5 27.2 Closing Net Cash 22.1 33.5 38.0 13.0 13.0 11.6 15.5 15.5 27.2 40.3
Intangibles 30.0 29.3 30.5 33.7 30.2 28.8 27.5 Tangibles 1.9 1.9 1.8 1.7 1.8 1.9 2.0 Inv + associates 1.1 1.5 1.2 1.4 1.8 2.3 2.7 Total Assets 33.1 32.7 33.5 36.8 33.9 33.0 32.1 Net Working Cap -15.6 -20.5 -26.8 -23.5 -17.3 -23.0 -30.3 Provisions/Minorities -1.0 -1.3 -1.3 -2.1 -2.5 0.0 0.0 Capital Employed 16.5 10.9 5.4 11.2 14.1 10.0 1.8 Net Cash (Debt) 22.1 33.5 38.0 13.0 15.5 27.2 40.3 Net Assets 38.6 44.4 43.4 24.2 29.6 37.1 42.1
Source: Company, Bridgewell Securities estimates
We have assumed a similar working capital profile for the group going forward. The main components of working capital are trade debtors (historical range 25% –33% of revenues) and accruals (historical range of 44%-47% forward sales).
Venue loans and prepayments are recorded within short-term debtors. We assume that the venue loan balance will be released by 2008, although prepayments will be an ongoing feature.
Capital expenditure will spike in 2006 due to the Crocus prepayment, but we expect ongoing capital expenditure levels to remain under £1.0m in the absence of any further venue agreements.
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Valuation
In Table 11 below, we show the comparable valuation metrics for the UK event organising peer group and the broader B2B publishing peer group. We have used calendar 2006 as the benchmark.
Table 11: UK Comparable Valuation Metrics
Share price Market cap EV Calendar 2006E (p) £m £m EV / Sales EV / EBITDA PE Informa 443.5 1,870.5 2,584.4 2.6x 11.6x 14.8x Tarsus 199.5 101.6 110.5 4.7x 17.0x 20.6x Event organising average 3.4x 13.8x 17.2x
UBM 660.0 1,818.5 1,575.5 2.2x 12.8x 17.4x Incisive Media 148.0 148.7 196.7 3.0x 10.7x 13.4x Centaur Holdings 107.0 159.8 133.8 1.7x 9.2x 19.1x Wilmington 184.5 153.8 159.6 1.7x 9.2x 15.9x Euromoney 520.0 461.7 522.0 2.5x 12.0x 17.2x Metal Bulletin 282.7 155.1 164.1 2.9x 13.0x 20.3x B2B Publishing Average 2.2x 10.9x 16.9x
ITE Headline 136.0 355.0 339.5 4.2x 14.1x 20.3x ITE Smoothed 19.9x
Bridgewell Securities Limited makes markets in Centaur Holdings, Incisive Media, Informa, Metal Bulletin and Wilmington Source: Bridgewell Securities estimates, consensus estimates
On a headline basis we estimate that ITE currently trades on a calendarised 2006E PE of 20.3x, a 19% premium to the Event Organising peer group and a 21% premium to the B2B peer group. We do believe that the biennial effect needs to be considered as 2006 will not see the MIOGE event. Spreading the effect across 2006 and 2007 does reduce the PE to 19.9x, which would still leave the stock at a premium to its peers. We believe that this premium can be justified on a number of points:
ITE’s margin profile is the most attractive within these peer groups; we are forecasting an EBITDA margin of 29.4% in FY2006E, rising to 31.2% in FY2007E. The next closest would be Incisive Media (Overweight) with a FY2006 margin of 24.7%, rising to 28.0% in FY2007E. The average calendar 2006 margin across these peer groups is 22.0%, some 740 basis points lower than that for ITE.
After adjusting for the biennial effect, we believe that ITE offers one of the better growth profiles. We estimate the underlying earnings CAGR for ITE until FY2008 to be 14%. This compares with 13.5% for Wilmington (Neutral), 12% for Informa (Buy), 11% for Incisive Media and 10.5% for Centaur (Neutral). Only Tarsus (not rated) offers a better profile with a CAGR of 34% but this remains an earlier stage recovery story.
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ITE’s free cash return on sales is also the best in the peer group.
Table 12: Free cash flow return on sales & free cash yield
Free cash margin Free cash flow yield
FY2006E FY2007E Calendar 2006E ITE Group 12.5% 22.1% 3.8% Centaur 11.4% 11.9% 6.6% Incisive Media 9.4% 14.1% 2.7% UBM 9.2% 6.6% 4.4% Wilmington 8.1% 8.5% 5.0% Metal Bulletin -5.7% 5.7% -1.8%
Bridgewell Securities Limited makes markets in Centaur Holdings, Incisive Media, Informa, Metal Bulletin and Wilmington Source: Bridgewell Securities estimates, consensus estimates
Potential for upgrades
We believe our estimates to be cautious and see the risk to our earnings estimates on the upside. What could drive these upgrades?
Strong trading. In the core Russian market we are looking for underlying revenue growth (adjusting for MIOGE) of under 4% in the current year. Given the robustness of the underlying market, we believe this is a beatable target. Although we have taken account of recent acquisitions, we have been cautious on the potential for incremental cost savings.
Balance sheet. Despite the £30m buyback in July 2005, ITE retains a healthy net cash position, which we estimate will be £15.5m at the year-end. Combined with strong free cash generation we see this surplus capital building up rapidly. In the absence of future buybacks or acquisitions we estimate the net cash balance will be £40m in FY2008.
Buybacks. We estimate that the 2005 £30m buyback enhanced FY2006 EPS by 7%. Although distributable reserves will have to be rebuilt to allow a similar exercise to be undertaken, we estimate that a similar buyback (at the current price) would enhance FY2008 EPS by over 5%.
Acquisitions. Although the company has been selective and cautious in its approach to acquisitions over the last four years, we expect further bolt-on deals to be pursued in the future. Given the business’s cash flow profile, the balance sheet has substantial debt capacity. Even at a very conservative 10x EBITDA interest cover, this implies £60m of debt capacity, giving potential firepower of £75.5m on our FY2006 net cash estimate. If one assumes a broad yardstick of 8.0x historical earnings, this implies an incremental £6.7m of post-interest earnings or potential upside of 40% on our FY2006 EPS estimate.
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In our view, it is highly unlikely that the current management team would attempt such an aggressive gearing up of the balance sheet. However, we do anticipate a number of smaller acquisitions over the medium term.
DCF
In order to sense-check the comparative valuation above, we have also run a DCF model. The result can be seen below.
Table 13: ITE group DCF model
Y/end Sep, £m 2006E 2007E 2008E 2009E 2010Ee EBITDA 22.4 27.0 26.7 31.8 30.3 Working capital 0.2 0.7 3.6 -0.0 2.6 Associates 0.4 0.4 0.4 0.4 0.4 Tax -6.6 -7.8 -7.9 -9.5 -9.2 Depreciation -0.5 -0.6 -0.6 -0.7 -0.7 Free cash flow 16.0 19.8 22.3 22.2 23.5
WACC 8.1% Terminal growth rate 2.5% Terminal multiple (1) 18.1x
Present value of cash flows 81.4 Present value of terminal value 284.8 Net cash / (debt) 15.5 DCF value 381.7 No of Shares (m) 252.0 Fair value (p) 151
(1) Terminal multiple inputs = 5 year CAGR EPS 14%, average RoE 49.1%, WACC 8.1% Source: Bridgewell Securities estimates
This model suggests a fair value of 151p, implying upside of 11% on current levels. In the absence of further upgrades, this price would equate to a calendarised 2006E PE of 23.1x, or 21.8x on a biennally smoothed basis.
Table 14 below shows a range of sensitivities for our DCF model.
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Table 14: DCF sensitivity matrix
Terminal Multiple 14.0 x 15.0 x 16.0 x 17.0 x 18.0x 19.0 x 20.0 x 21.0 x 22.0 x 6.2% 164 p 6.7% 161 p 7.2% 158 p 7.7% 155 p WACC 8.2% 126 p 133 p 139 p 145 p 151 p 158 p 164 p 170 p 177 p 8.7% 148 p 9.2% 145 p 9.7% 143 p 10.2% 140 p
Source: Bridgewell Securities estimates
Bridgewell View – Despite a headline valuation that stands at the top end of the historical range, we still believe there are attractions for investors, particularly those new to the story. We believe that our forecasts are cautious and we can see a clear potential for future upgrades. ITE enjoys significant balance-sheet flexibility, and this should support a premium rating. Our bottom-up valuation supports a price target of 148p. We initiate coverage with an Overweight recommendation.
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Appendix A:
Financial record
In Chart 13 below, we show the group’s five year financial record.
Chart 13: ITE Group five year record Y/End 30 Sept 2001 2002 2003 2004 2005 CAGR £ m
Revenue 50.4 52.4 58.9 60.8 78.5 12%
Gross Profit 22.3 21.4 26.7 27.2 36.0 13% - Margin % 44.2% 40.9% 45.3% 44.8% 45.8%
EBITDA 11.4 9.3 14.5 16.8 24.2 21% - Margin % 22.6% 17.7% 24.5% 27.6% 30.8%
PBT - Adjusted 11.4 8.2 15.4 17.9 25.9 23% PBT - Reported -29.9 -0.4 12.3 15.7 23.0
EPS - Adjusted 3.4p 2.3p 4.1p 4.6p 6.5p 17% EPS - Reported -13.1p -1.0p 3.0p 3.8p 5.5p
DPS 0.5p2.5p1.6p2.2p2.8p
Operating Cashflow 13.3 10.4 16.9 21.8 28.6 21% Free Cashflow 9.9 8.7 13.5 19.2 21.9 22%
Net Cash 16.3 17.7 22.1 33.5 13.0
Source: Company
Medium-term history is one of recovery
The last three years have seen a sustained recovery from 2002, which saw the brunt of the cyclical downturn. Encouragingly, the company still reported underlying margins of 17.7% despite the poor trading environment. Over the last five years the company has returned a compound annual growth of 23% in pre tax profits and 22% in free cash flow off a 12% growth in revenues. Adjusting for the biennial effect (in both 2001 and 2005) the CAGR in PBT is actually slightly higher at 25%.
The group has benefited from a triple benefit:
Strong underlying demand in core markets and target sectors
A focused rationalisation programme following a period of over-expansion from 1999 to 2001
Good execution in key markets.
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This performance has also been achieved through a period that was not uniform in terms of macro newsflow. The instability within the Ukraine at the end of 2004 is a good example. Although this impacted one show, the territory recovered within a couple of months and hardly made a dent in the overall group performance.
Margins have seen a consistent improvement, both at the gross and operating level. The biennial effect is most pronounced at the gross level, but has been more than offset by economies of scale and greater efficiencies at both the centre and territory operating level. As a result, we believe that the portfolio effect is now getting stronger and should help to insulate the group from individual event risk. Active management of the portfolio tail should also protect margins.
Cash flow is a defining feature
ITE’s strong cash generation is one of its main attractions. Over the last five years, the free cash return on sales has not been below 16.6% (in 2002) and in 2005 was a healthy 27.8% of sales.
In Table 15 below, we show a more detailed five year cash flow record.
Table 15: ITE Group five-year cash flow record
Y/end Sep, £ m 2001 2002 2003 2004 2005 EBITDA 11.4 9.3 14.5 16.8 24.2 Working capital 1.9 1.2 1.9 3.9 3.3 Other 0.0 -0.1 0.6 1.1 1.1 Operating cash flow 13.3 10.4 16.9 21.8 28.6 Associates 0.0 0.2 0.0 0.2 0.4 Finance costs 0.8 0.9 0.7 1.1 1.7 Taxation -3.7 -2.3 -3.7 -3.4 -8.4 Capital expenditure -0.7 -0.6 -2.3 -2.9 0.0 Acquisitions & disposals -17.4 -5.6 -3.6 -1.3 -5.8 Equity dividends -1.6 -1.6 -4.0 -4.5 -7.1 Net cash flow pre-financing -9.3 1.3 4.0 10.9 9.5
Source: Company
The only major discretionary outflows have been acquisitions and disposals and dividends. Including the £30m share buyback in 2005, ITE has returned £48.9m of cash to shareholders over the last five years, equivalent to 85% of pre-exceptional net earnings over the same period.
In order to create the necessary distributable reserves to undertake the share buyback, ITE had to cancel its share premium account through the High Court. The reserves created were utilised in the buyback. This means that further cash returns to shareholders will be limited by the amount of retained profits generated on an ongoing basis. However, with the dividend covered c.2.0x and in the absence of major acquisitions, we would estimate the company to be in a similar buyback position within three to four years.
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2005 results in detail
In Table 16 below, we set out the P&L highlights for the year just reported.
Table 16: ITE Group P&L Highlights
Y/end Sep, £m 2004 2005 % ∆ 2004 Non biennial 41.3 44.8 9% MIOGE 0.0 3.6 Russia sub-total 41.3 48.4 17% Central Asia 9.6 12.1 27% UK + W Europe 4.2 6.0 43% Eastern + S Europe 4.4 5.0 16% Non-biennial 1.3 1.5 11% WPC 0.0 5.5 Rest of the World sub-total 1.3 7.0 426% Non biennial 60.8 69.4 14% Biennial 0.0 9.1 Turnover 60.8 78.5 29%
Non-biennial gross profit 27.2 31.3 15% Gross profit 27.2 36.0 32% Non biennial margin (%) 44.8% 45.1% Group margin (%) 44.8% 45.8%
Non-biennial EBITA 16.3 19.1 17% EBITA 16.3 23.8 46% Non biennial margin (%) 26.9% 27.4% Group margin (%) 26.9% 30.3% Net interest 1.1 1.7 PBT adjusted 17.9 25.9 44% Tax rate (%) 28% 29% Non biennial EPS adjusted (p) 4.6p 5.3p 16% EPS adjusted (p) 4.6p 6.5p 43% DPS (p) 2.2p 2.8p 25%
Source: ITE Group
The 2005 numbers were impacted by two specific factors. The first was the Moscow International Oil & Gas Exhibition (MIOGE), which is a biennial event and last held in the September 2003 financial year, and will recur next in FY2007. The second was the World Petroleum Congress (WPC) event, which was a one-off event held during September in Johannesburg. To aid clarity, the company splits out the impact of these events, which we have shown above.
2005 was a year of substantial progress, with headline revenue growth of 29%, a 100 basis point increase in the gross margin, and good operational cost control with EBITA margins increasing by 340 basis points to 30.3%. The £30m tender offer impacted late in H2 so the net interest line benefited from strong average cash balances. The
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effective tax rate was 28.7%, up by 100 basis points on 2004, resulting in headline EPS growth of 43%.
Even more encouraging was the group’s underlying performance. Adjusting for the impact of MIOGE and WPC, group revenue was ahead by 14% to £69.4m with a 15% increase in underlying gross profit to £31.3m. Although there are clear scale margin benefits from both MIOGE and WPC events (contributing an EBIT margin of 52%), this masks good cost control in the core business, which saw EBIT margins increase by 50 basis points to 27.4%. After the small increase in the tax rate, underlying earnings grew by 16%. Overall, in 2005, the group organised 152 events (+11% on 2004) in sixteen countries. Total area sold was 341,000 sq m (+24% on a headline basis) with an average yield of £230 (+5.5% on a headline basis).
Russia (62% revenue)
Performance here was strong, with reported sales growth of 17% to £48.4m. Total space sold was up 12% to 194,000 sq m. Adjusting for MIOGE, revenues were up 9% to £44.8m, off space sales growth of 3% to 178,400 sq m. Russian gross profit was up 22% on a headline basis, while MIOGE adjusted gross profit was ahead by 11%.
ITE is experiencing a divergence of performance in the Russian market, with the smaller events (lower yields and marginally profitable) suffering from increasing competitive pressures while the core events (high yield and high margin) are performing well. The number of events organised fell from 44 in 2004 to 40 in 2005 despite the biennial impact, yet average yields increased from £239 in 2004 to £249 in 2005. Although ITE does not split out the full impact of event closures by territory, for the group as a whole the impact of timing differences and closures was 11,000 sq m and £3.0m of revenue in 2005. If one assumes that the majority of this effect was experienced in Russia, this would imply underlying space sales growth of c.8% and maintained yield growth of 5%. Given the dominance of the core events in Russia (the seven largest events account for 74% of space sales and a higher proportion of gross profit), there is the danger of placing too much emphasis on the peripheral events, however, the underlying signs here are encouraging, with the company clearly actively managing the portfolio.
The key milestone for the Moscow market in 2005 was the lifting of space restrictions with the first full-year availability of the new Crocus venue (Phase 1), which came on stream towards the end of 2004. The initial new capacity was 30,000 sq m, representing a 25% increase in total Moscow venue capacity. This allowed ITE to expand its key Moscow events (in particular Mosbuild), which were constrained in 2004. The table below shows the space sales performance of the main Moscow events.
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Table 17: Space sold in Moscow – key events
Square metres 2003 2004 Growth 2005 Growth MIOGE (Oil & Gas) 14,300 0 15,600 9% Mosbuild (Construction) 43,200 44,600 3% 55,400 24% MITT (Tourism) 17,500 16,700 -5% 19,300 16% World Food Moscow 17,500 20,000 14% 20,300 2% Moscow International Motor Show 22,800 16,600 -27% 16,900 2% Ingredients Russia 4,500 4,700 4% 5,500 17%
Source: Company
Phase 2 of the Crocus venue is expected to open in Q1 2006 and will offer a further 60,000 sq m of gross space (c.30,000 sq m net). ITE has confirmed that a number of its events will transition to Crocus in 2006 (Expoelectronica, Mining World Russia, Moscow International Motor Show and Ingredients Russia).
Outside of Moscow, the primary exhibition activities are based in St Petersburg. Volume growth here was 9%, with the main event, Baltic Building Week, growing by 3%. Growth in this event has been space-constrained, but a 4,000 sq m increase in venue capacity in 2006 should see growth improve.
Central Asia (16% revenue)
Headline revenue growth was 26.5% to £12.1m, with gross margins improving to 41.0% (36.9%). Performance was buoyed by strong underlying demand (volume growth of 26% to 59,200 sq m) and a first-time contribution from the Caspian Oil & Gas exhibition. The two Kazakhstan-based events; Kazakhstan Oil & Gas and Kazbuild both grew by 20% over 2004 to 7,400 sq m and 8,200 sq m respectively. The office in Uzbekistan had a good year, doubling in size, with eight new event launches in the year.
Eastern & Southern Europe (6% revenue)
Revenue growth was 16% to £5.0m, while gross margins nearly doubled to 33.0% (18.7%). Volumes were up 36% to 49,000 sq m.
The Ukrainian business was boosted by acquisitions, with two events acquired in 2004 both showing good growth. The timing of the WorldFood Ukraine event coincided with a period of political instability and revenue declined 15%, underlining the political risks in certain markets.
The Turkish subsidiary had a mixed year. The sales agency (booking Turkish exhibitors into other group events) performed well but the in-territory exhibitions continued to suffer from structurally low yields. The Turkish associate business, ITF, had a better year than in 2004 with strong volume growth helping to offset low yields. ITE’s share of profit was £0.46m, marginally up on 2004.
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UK & Western Europe (8% revenue)
Headline revenue growth was 43% to £6.0m, although gross margins came under pressure, down to 36.0% (51.6%). This was largely due to a mix effect between the RAS publishing business (first full-year contribution since acquisition) and the core MODA event brand. 2005 also saw a number of extensions to the MODA event, which we would assume impacted yields.
Rest of the World
The highlight here was the successful, but non-repeatable, World Petroleum Congress. This event follows a triennial cycle, with the next event in Spain in 2008. Overall the event contributed £5.5m of revenue and £2.0m of profit. ITE was also able to launch a related 9,000 sq m exhibition alongside the core conference, and this has the potential to recur. The remaining business saw revenue growth of 11% to £1.6m, but remains lossmaking and is not material in the group context.
Cash flow & balance sheet
In line with previous years, 2005 saw a strong cash performance from the business. Operating cash flow was £28.6m, representing an EBITA conversion ratio of 120% (2004: 133%).
ITE spent a net £5.8m on acquisitions during the year, including: Caspian Events Ltd in October 2004 for £2.2m in cash; BTO (owner of the Kiev-based AgriHort event) in August 2005 for €2.2m; and finally DEW Events Ltd in September 2005 (four footwear events) for an initial £3.4m; the balance of the £5.8m is deferred consideration.
Underlying capital expenditure was £0.4m, reflecting the business’s low capital requirements. During the year, a further £0.8m of venue loans and advance rental payments were made, primarily in Almaty and Uzbekistan. Subsequent to the balance sheet date, ITE made a $10m advance payment to the owners of the Crocus venue. This has secured rights over the venue, and related themed protection, for certain of the group’s key events until 2015.
The major balance sheet event during the year was the £30m share buyback via a tender offer in July 2005. At the half-year stage, net cash was £38.0m. Despite the year-end net cash position falling to £13.0m, average cash balances were high during the year, generating net interest income of £1.6m. Net assets following the buyback were £24.2m, a decline of 46% on the prior year.
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Appendix B: Key risk factors
Political risk
During the period 1998 through to 2001, investors shared substantial concerns about both the structural stability of the CIS economic zone and the underlying political risks. Democratic and judicial structures in the region are relatively immature, compared with Western equivalents, and this continues to be a source of lingering concern, despite substantial progress made over the last four years.
Despite the perception of political risk the only notable upheaval that ITE has experienced in the last few years was in the Ukraine at the end of 2004, but in this situation the local market recovered within a few months.
Economic risk
Exposure takes a number of forms. The most direct remains currency. ITE invoices the majority of its exhibitor clients in either euros (52% of 2005 sales) or dollars (41% of 2005 sales), so faces translational risk on these receipts, although 30% of these invoices are settled in local currency. The central cost base of the business is sterling- denominated, while a high proportion of local costs are in local currencies. ITE does hedge through both forward contracts and maintaining non-sterling cash balances. Although translational local currency exposure is relatively small, the group is exposed in terms of competitive pricing in sterling terms relative to local market participants. In the event of local currency weakness, this would make equivalent hard currency prices and margins harder to maintain.
There is a clear consensus amongst commentators that the macro outlook for the CIS territories in particular remains broadly positive over the medium term. This is evidenced by the consistent narrowing in Russian bond yields relative to US treasuries over the last few years.
Commodity and industry risk
In a similar fashion to others in the B2B publishing peer group, ITE is exposed to the health of its underlying target verticals. In ITE’s case the main exposure is to the construction industry (with the Build brand family) and the oil industry (with the International Oil & Gas series). The construction vertical will clearly respond to the health of the relevant domestic economy. However, the oil industry is clearly driven by the supra-national oil price. ITE has clearly benefited from the buoyant oil and gas prices, with high demand levels for its related events.
The outlook for energy prices remains broadly positive; with no sign of a slowdown in Asian demand, coupled with concerns about supply constraints in Nigeria and Iran. The likelihood of Russia continuing to use its energy reserves as a strategic lever is also helping to stimulate interest in the energy resources of its commodity-rich neighbours, such as Kazakhstan, Uzbekistan and Tajikstan. These are all territories where ITE is active in organising energy- related events.
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Portfolio maturity risk
Beyond the absolute exposure to certain key industry verticals, as illustrated above, we believe that there is a further maturity-related effect that needs to be considered. Despite an active new launch programme (in 2005 ITE organised 152 events compared with 117 in 2002), in 2005 56% of total space sold and c.75% of gross profit was generated by mature titles. If one assumes that the Russian economy will mature on similar lines to the West, one would expect to see the services and consumer-oriented shows to gain more momentum. These are sectors that are under-represented in the ITE portfolio.
Investors will want to see ITE’s portfolio balance addressed over the next few years. We do not believe that this portfolio balance will negatively impact over the short term, but it is to our mind a medium-term issue.
Competition
The prevalence of high yields and strong underlying growth is clearly driving up competitive pressures in the core Russian market. The amount of venue space is on the increase and this is likely to further stimulate competitive activity.
While this will clearly have an effect on local market yields (which we have factored into our forecasts) we believe that ITE’s competitive position remains strong. The use of venue agreements has guaranteed availability for many of the key events, while the expansion into less competitive territories will also help to offset a more competitive Russian market. Brand strength is critical and ITE is the brand leader in many of its target verticals, which in itself creates barriers to entry.
Venue availability and tenure
It may be a simplistic statement, but an event cannot be held without a venue. The cost of a venue is also the largest direct cost that an organiser faces. The availability, tenure and pricing of a venue are therefore critical components of the yield achievable by the organiser. The recent tragedy in Poland illustrates the extremes of venue risk.
ITE has employed a pro-active strategy of signing agreements with key venue owners in order to reduce risk. We believe this is a prudent approach in the absence of full venue ownership.
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Appendix C: Regulatory disclosures Recommendation history: Centaur Holdings 27/04/04 18/08/04 28/09/04 06/01/05 19/07/05 UW N OW OW N 110
100
90
80
70
60 2004 2005 2006 Centaur Holdings relative to FTSE All Share
X=No Recomm. B=Buy OW=Overwei ght N=Neutral UW=Underweight S=Sell
Source: DataStream, Bridgewell Securities
Recommendation history: Incisive Media 24/02/04 29/06/05 B OW
160
140
120
100 2004 2005 2006 Incisive Media Group relative to FTSE All Share
X=No Recomm. B=Buy OW=Overwei ght N=Neutral UW=Underweight S=Sell
Source: DataStream, Bridgewell Securities
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Recommendation history: Informa 24/02/04 01/04/04 08/09/04 14/09/04 12/10/04 07/01/05 25/04/05 OWN OWN OW OW B 450
400
350
300
250 2004 2005 2006 Informa relative to FTSE All Share
X=No Recomm. B=Buy OW=Overwei ght N=Neutral UW=Underweight S=Sell
Source: DataStream, Bridgewell Securities
Recommendation history: Wilmington Group 24/11/05 N 190 180 170 160 150 140 130 2005 2006 Wilmington Group relative to FTSE All Share
X=No Recomm. B=Buy OW=Overwei ght N=Neutral UW=Underweight S=Sell
Source: DataStream, Bridgewell Securities
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Recommendations
Bridgewell Securities has adopted the following scheme for stock recommendations.
Buy – Outperformance of UK FTSE sector (or peer group) by 10% or more over six months. Overweight – Outperformance of UK FTSE sector (or peer group) by 5% to 10% over six months. Neutral – Outperformance or underperformance of UK FTSE sector (or peer group) by up to 5% over six months. Underweight – Underperformance of UK FTSE sector (or peer group) by 5% to 10% over six months Sell – Underperformance of UK FTSE sector (or peer group) by 10% or more over six months. Where a recommendation is relative to a peer group rather than a FTSE sector, that peer group will be specified in the document. The period for the recommendation is indicative only. The expectation is that performance will occur in line with the recommendation during the period, but not necessarily over the period as a whole. Recommendations may be changed at any time during the specified period.
A description of Bridgewell’s valuation methodology can be found at www.bridgewell.co.uk/recommendation_scheme Equity Research Quarterly Ratings Distribution
Data current as of 31 December 2005
Buy (%) Overweight (%) Neutral (%) Underweight (%) Sell (%) All Client All Client All Client All Client All Client 26 45 34 34 26 20 9 0 5 2
Includes AIM and Official List companies General
Analysts’ remuneration is not linked to specific corporate finance transactions, nor to recommendations contained in research, but is determined by the general profitability of Bridgewell Group Limited and its subsidiaries.
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Disclosure table of relationships and other material interests
As at 16 January 2006 888.com 4,6 Collins Stewart Tullett 4 Imagination Tech 4 Aberdeen Asset Management 1,4,5,6 Corin Group 4 Imprint n 4 Adamind 1,3,4,5,6,7 Corporate Services 1,2,4,5 Incisive Media 4 Advanced Medical Solutions Group 1,3,4,5 Cosalt 1,4,5 Independent Media Distribution 1,2,4,5 Afren 1,3,4,5,6 Crest Nicholson 4 Informa 4 Akers Biosciences 1,3,4,5 CryptoLogic 1,4,5,11 Innovation Group 1,2,4,5 Alea Group Holdings 4 CSR 4 Inspicio 1,3,4,5 Allergy Therapeutics 1,3,4,5 CSS Stellar 1,3,4,5 Instore 4 Alphameric 4 Dana Petroleum 4 Intec Telecom 1,2,4,5 Amlin 4 Datong 1,3,4,5,6 Intelligent Environments Group 1,3,4,5 Andor 1,3,4,5 DDD Group 1,3,4,5 Interior Services Group 3,5 Anite Group 4 Dechra Group 4 Interserve 4 ARC International 4 Dee Valley 1,2,4,5 Intertek 4 Arena Leisure 4 Detica 4 iSOFT Group 1,4,5 Ark Therapeutics 4 DIC Entertainment 1,3,4,5,6 Isotron 4 Atkins 4 DICOM Group 1,2,4,5 Jessops 4 Atrium Underwriting 1,4,5 Dobbies Garden Centres 4 JJB Sports 4 Avingtrans 1,3,4,5 Easynet 4 John David Group 4 Axon Group 4 Empire Interactive 1,3,4,5 John Laing 1,4,5,6 Babcock 4 Empresaria 1,3,4,5 Johnston Press 4 Bellway 1,4,5 Enterprise 4 K3 Business Technology Group 1,3,4,5 Berkeley Group Holdings 4 Entertainment Rights 4 Kier Group 1,4,5 Biocompatibles International 4 Evolutec 1,3,4,5 Liontrust Asset Management 4 BioProgress 1,3,4,5,6 Expomedia 4 Lok'n Store 4 Blacks Leisure 4 F & C Asset Management Group 4,10 London Clubs International 4 Bloomsbury Publishing 4 Fibernet 4 London Scottish Bank 4 BNB Recruitment 4 Flying Brands 1,2,4,5 Luminar 4 Body Shop 4 Future 4 Majedie Investments 1,2,4,5,10 Bovis Homes Group 4 Game Group 4 Majestic Wine 4 Brandon Hire 4 Games Workshop 1,2,4,5 Management Consulting 4 Brewin Dolphin Holdings 1,2,4,5 GCap Media 2,4,5 Marshalls 1,4 Brit Insurance 4 Global Energy Development 1,3,4,5 Mayborn Group 4 BTG 4 Glotel 1,2,4,5 McCarthy & Stone 4 Care UK 4 Greene King 4 Metal Bulletin 4 Carillion 4 Gresham Computing 1,2,4,5 Michael Page 4 Catlin Group 4 Gyrus Group 4 MITIE Group 4 Cattles 4 Harvey Nash 4 Morgan Crucible 4 Celsis International 1,2,4,5 Henderson Group 4 Moss Bros 4 Centaur Holdings 4 Hiscox 4 Mothercare 4 Charles Stanley Group 1,2,4,5 Hornby 1,2,4,5 Mouchel Parkman 4 Charteris 1,3,4,5 Huntleigh Technology 4 Mowlem 4 Chrysalis Group 4 Huntsworth 4,5 MSB International 4 Clarity Commerce 1,3,4,5 Huveaux 4 Nautical Petroleum 1,3,4,5,6 Close Brothers Group 4 Icap 4 Nestor Health 4 CODASciSys 1,3,4,5 IG Group 4,6 Next Fifteen Communications 1,3,4,5,6
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Nord Anglia 4 Sanctuary Group 4 TT electronics 1,4,5 Northgate Info 4 Serco Group 4 TTP Communications 4 NSB Retail 4 Shanks Group 4 Tullow Oil 4 NXT 1,2,4,5,6 Shed Productions 1,3,4,5,6 UBC Media Group 4 office2office 4 SHL Group 4 Universal Salvage 4 Optimistic Entertainment 1,3,4,5 Sinclair Pharma 1,4,5 Vectura 4 Ottakar's 2,4,5 SMG 4 VEGA Group 1,2,4,5 Paladin Resources 4 SOCO International 1,2,4,5 Venture Production 4 Paragon Group of Companies 4 Spectris 4 Weir 4 Peacock Group 4 Spice Holdings 4 Wellington Underwriting 4 Penna Consulting 1,2,4,5 Spring Group 4 Westbury 4 Pipex 4 Stanley Leisure 4 Wetherspoon JD 4 PlusNet 1,3,4,5 SurfControl 4 WHAM Energy 1,3,4,5,6 Premier Direct 5 Synairgen 1,3,4,5 Whatman 4 Premier Oil 4 Synergy Health 4 Whitehead Mann 4 PSD Group 4 Television Corporation 1,2,4,5 Wilmington 4 Quantica 1,2,4,5 The Local Radio Company 1,3,4,5 Wilson Bowden 1,4,5 Rathbone Brothers 1,4,5 Thomson Intermedia 1,3,4,5 Wogen 1,3,4,5,6 Redrow 4 Trafficmaster 1,4,5 Wolfson Micro 4 Reed Health 4 Transense Technologies 1,3,4,5,6 Wolverhampton & Dudley 4 Rensburg Sheppards 4 Travis Perkins 4 XKO Group 1,3,4,5 Robert Walters 4 Tribal Group 4 Zetex 4 RPC Group 4
1. Bridgewell Securities Limited acts as broker to the company. 2. Bridgewell Securities Limited acts as financial adviser to the company. 3. Bridgewell Securities Limited is nominated adviser to the company. 4. Bridgewell Securities Limited makes markets in the company’s equity. 5. A subsidiary company of Bridgewell Group Limited has in the last twelve months acted as adviser to the company or provided investment banking services for which they have received compensation. 6. A subsidiary company of Bridgewell Group Limited has in the last twelve months acted as lead manager or co lead manager in an offer of securities of the company. 7. Bridgewell Group Limited or one of its subsidiary companies (excluding any positions held as market maker) has a shareholding or warrants or options of between 1% and 5% of the share capital of the Company. 8. Bridgewell Group Limited or one of its subsidiary companies (including any positions held as market maker) has a shareholding or warrants or options of between 5% and 15% of the share capital of the Company. 9. Bridgewell Group Limited or one of its subsidiary companies (including any positions held as market maker) has a shareholding or warrants or options of over 15% of the share capital of the company. 10. The Company has a shareholding of between 3% and 10% in Bridgewell Group Limited, the holding company of Bridgewell Securities Limited. 11. Bridgewell is party to an agreement with the company whereby the production of research on that company is one of the services Bridgewell has agreed to provide. 12. In accordance with our normal investment research policy this piece of research was sent to the subject company for review of factual information only; following receipt of factual corrections from the company, Bridgewell changed its Research Recommendation (as defined in our investment policy). .
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BRI DGEWELL
Bridgewell Securities
Research General Sales Economics Graham Bell 020 7003 3323 [email protected] Richard Jeffrey 020 7003 3500 [email protected] Alex Buchanan 020 7003 3305 [email protected] Capital Goods Dwight Burden 020 7003 3321 [email protected] Jonathan Hurn, CFA 020 7003 3518 [email protected] Jonathan Clements 020 7003 3303 [email protected] Oil & Gas James Flavin 020 7003 3304 [email protected] Al Stanton 020 7003 3517 [email protected] Mark Gibbon 020 7003 3315 [email protected] Contracting, House builders & Support Services Arthur Gordon 020 7003 3302 [email protected] Howard Seymour 020 7003 3501 [email protected] Gerry Liberman 020 7003 3313 [email protected] Michael Donnelly 020 7003 3506 [email protected] Rupert Woolfenden 020 7003 3325 [email protected] Ian Jermin 020 7003 3525 [email protected] Steve Yelland 020 7003 3326 [email protected] Chris Millington 020 7003 3509 [email protected] Nick Spoliar 020 7003 3520 [email protected] Specialist Sales Leisure Michael Cuthbert 020 7003 3317 [email protected] Charles Wilson 020 7003 3511 [email protected] Terry Murray 020 7003 3311 [email protected] Media Michael Savage 020 7003 3312 [email protected] Andrew Walsh 020 7003 3514 [email protected] Ian Spence 020 7003 3526 [email protected] Iain Daly 020 7003 3524 [email protected] Patrick Yau 020 7003 3504 [email protected] Sales Traders General Retail Colin Thompson 020 7003 3404 [email protected] Paul Deacon 020 7003 3512 [email protected] Gary Cunningham 020 7003 3409 [email protected] Mark Photiades 020 7003 3515 [email protected] Andy Gipp 020 7003 3408 [email protected] Technology Software Dave Skinner 020 7003 3405 [email protected] Milan Radia 020 7003 3508 [email protected] Kevin Ashton 020 7003 3510 [email protected] Traders Paddy Carter 020 7003 3528 [email protected] Philip Quinn 020 7003 3445 [email protected] Carl Franklin 020 7003 3502 [email protected] Andy Baker 020 7003 3441 [email protected] IT Hardware Darren Broomfield 020 7003 3443 [email protected] Dan Ridsdale 020 7003 3522 [email protected] Phil Gardner 020 7003 3446 [email protected] Telecoms Services Colin Graham 020 7003 3442 [email protected] Dan Gardiner 020 7003 3521 [email protected] Ross Spacey 020 7003 3444 [email protected] Non-Bank Financials Geoff Miller 020 7003 3505 [email protected] Katrina Preston 020 7003 3513 [email protected] Life Sciences Elizabeth Klein 020 7003 3523 [email protected] Michael Aitkenhead 020 7003 3527 [email protected]
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