Ad pepper Germany/ Media Flash note Investment Research 17 October 2011 Buy Step-by-step improvements from Accumulate Upgrade to „Buy‟, PT slightly adjusted to EUR 1.8 (EUR 1.9) 1.14 Share price: EUR APM has delivered 3Q11 group sales in line with our forecast and a somewhat closing price as of 14/10/2011 better EBITDA. Although operating results remain in red territory, the quarter Target price: EUR 1.80 showed in our opinion that the earnings trough is lying behind. 4Q11 should from Target Price: EUR 1.90 bring a positive result. Despite lower projections we have assumed for the Reuters/Bloomberg APME.F/APM GY medium term, we still expect APM to deliver operating break-even in FY13. As the Daily avg. no. trad. sh. 12 mth 33,345 share price has lost 44% since mid June, and as the net liquidity is still around Daily avg. trad. vol. 12 mth (m) 0.06 EUR 0.8 per share, we upgrade to „Buy‟ („Accumulate‟). New PT EUR 1.8 (1.9). Price high 12 mth (EUR) 2.09 Price low 12 mth (EUR) 1.09 APM has released preliminary 3Q11 figures today. Sales came in at EUR Abs. perf. 1 mth -3.1% 13.5m, up c. 10% yoy. The top line number was better by EUR 0.2m relative to Abs. perf. 3 mth -41.5% our forecast as ad agents had a strong revenue performance in the quarter. Here, Abs. perf. 12 mth -43.5% APM booked a higher share of gross budgets for search engines, probably as a Market capitalisation (EURm) 24 consequence of the Ergo contract and thus, segment revenues came to EUR 2.4m Current N° of shares (m) 21 (equinet: EUR 2.1m). This time, Webgains was a bit weaker relative to our 3Q11 estimates (EUR 4.9m vs. EUR 5.1m) whereas ad pepper core came in at EUR Free float 41% 6.3m (equinet: EUR 6.1m). Key financials (EUR) 12/10 12/11e 12/12e Sales (m) 52 55 60 Due to the product mix, the 3Q11 gross margin of 40.8% reached a new low since EBITDA (m) 2 (2) (1) 3Q08, but thanks to the efforts of OPEX restructuring, APM was able to top our EBITDA margin 3.3% nm nm EBITDA forecast. Here, the absolute amount was implicitly said to be EUR EBIT (m) 1 (3) (2) EBIT margin 2.0% nm nm minus 0.45m whereas we expected EUR minus 0.7m. The net profit came in at Net Profit (adj.)(m) 2 (3) (3) EUR minus 0.54m which appeared to be supported by a low tax rate. Our estimate ROCE 32.8% -110.0% -95.1% stood at EUR minus 1.0m. Cash flow must have been negative as liquid assets Net debt/(cash) (m) (23) (16) (14) declined by c. EUR 850k qoq to EUR 16.4m (c. EUR 0.8 per share). In a quick Net Debt Equity -0.9 -0.7 -0.7 Net Debt/EBITDA -13.5 7.5 11.4 chat with the CFO we learned that due to the higher gross sales of ad agents, Int. cover(EBITDA/Fin.int) (3.0) 2.9 2.0 working capital requirements grew. EV/Sales 0.3 0.1 0.2 3Q11 review EV/EBITDA 8.3 nm nm in EUR m 3Q11a 3Q11e delta 3Q10 yoy 9M11a 9M11e delta 9M10 yoy EV/EBITDA (adj.) 8.3 nm nm EV/EBIT 14.2 nm nm Sales 13.5 13.3 1% 12.3 10% 39.7 39.5 1% 37.1 7% P/E (adj.) 17.1 nm nm EBITDA -0.5 -0.7 -36% 0.3 n.a. -2.4 -2.7 -9% 1.0 n.a. P/BV 1.5 1.1 1.3 EBITDA margin -3.3% -5.4% +210bp 2.8% -610bp -6.2% -6.9% +70bp 2.8% -900bp OpFCF yield 1.1% -15.8% -11.9% EBIT -0.6 -0.9 -36% 0.2 n.a. -2.8 -3.1 -8% 0.5 n.a. Dividend yield 4.4% 0.0% 0.0% Net profit -0.5 -1.0 -46% 1.4 n.a. -2.7 -3.1 -14% 2.3 n.a. EPS (adj.) 0.11 (0.14) (0.13) EPS -0.03 -0.05 -49% 0.06 n.a. -0.13 -0.15 -16% 0.10 n.a. BVPS 1.21 1.03 0.91 DPS 0.05 0.00 0.00 Sources: Company data, equinet Research APM has still not provided a concrete outlook so far. In line with the management, we hope that growth of ad agents and Webgains as well as the seasonally stronger December quarter will bring improvements for the top line. The 2.2 vvdsvdvsdy launched real time bidding platform should support. Having said this, and taking 2.0 APM‟s personnel restructuring into account, we speculate on a much better profit 1.8 development in 4Q11 (equinet EBITDA: plus EUR 0.3m). 1.6 1.4 We have however scaled back our estimates (p.2) as we have altered our view 1.2 on the segments to some extent, incorporate a weaker overall economic outlook 1.0 Sep 10 Oct 10 Nov 10 Dec 10 Jan 11 Feb 11 Mar 11 Apr 11 May 11 Jun 11 Jul 11 Aug 11 Sep 11 Oct 11 and to stay conservative. Nevertheless, we continue to expect EBITDA break-even AD PEPPER Stoxx Media (Rebased) in 2013 for a full fiscal year. Although changes of earnings estimates look Source: Factset Shareholders: Board Members 48%; Own Shares 8%; significant, the fair value comes down by only EUR 0.10 to EUR 1.80. Grabacap ApS 3%; Consequently, we upgrade to „Buy‟ („Accumulate‟) after the share price saw a significant drop in the summer months. For company description please see summary table footnote Analyst(s): Adrian Pehl, CFA +49 69 58997 438 [email protected] Produced by: All ESN research is available on Bloomberg (“ESNR”), Thomson-Reuters, Capital IQ, TheMarkets.com, FactSet Distributed by the Members of ESN (see last page of this report) Ad pepper Estimate changes in EUR m FY11 old FY11 new change FY12 old FY12 new change FY13 old FY13 new change Sales 56.1 54.9 -2% 62.4 60.1 -4% 68.4 66.3 -3% EBITDA -1.8 -2.2 18% -0.5 -1.2 127% 0.6 0.2 -73% EBITDA margin -3.3% -3.9% -60bp -0.9% -2.0% -110bp 0.9% 0.2% -70bp EPS [EUR] -0.14 -0.14 0% -0.09 -0.13 44% -0.07 -0.10 43% Sources: Company data, equinet Research Discounted Cash Flow model Phase I Phase II Phase III EUR m 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 Sales 54.9 60.1 66.3 72.3 77.5 81.4 85.5 89.8 94.2 99.0 100.9 Sales growth 6.3% 9.4% 10.3% 9.1% 7.3% 5.0% 5.0% 5.0% 5.0% 5.0% 2.0% EBIT -2.7 -1.8 -0.5 0.7 1.7 3.4 3.8 4.1 4.5 5.0 5.1 EBIT margin -4.9% -3.0% -0.7% 1.0% 2.2% 4.2% 4.4% 4.6% 4.8% 5.0% 5.0% Tax (0.8) (1.1) (1.6) (1.6) (1.6) (1.7) (1.8) (1.8) (1.9) (1.9) (1.9) Tax rate nm -95.0% 1900.0% 133.0% 75.0% 45.0% 42.5% 40.0% 37.5% 35.0% 34.5% NOPAT (3.5) (2.9) (2.1) (0.9) 0.1 1.7 2.0 2.3 2.7 3.1 3.1 Depreciation 0.5 0.6 0.6 0.7 0.7 0.7 0.8 0.8 0.9 0.9 0.9 in % of Sales 1.0% 0.9% 0.9% 0.9% 0.9% 0.9% 0.9% 0.9% 0.9% 0.9% 0.9% Capex (0.5) (0.8) (0.8) (0.9) (1.0) (0.9) (1.0) (1.0) (1.1) (1.1) (1.0) in % of Sales 1.0% 1.3% 1.3% 1.3% 1.3% 1.1% 1.1% 1.1% 1.1% 1.1% 0.9% Provision delta 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 in % of Sales 0.1% 0.1% 0.1% 0.1% 0.1% 0.1% 0.1% 0.1% 0.1% 0.1% 0.0% NWC delta (0.9) (0.1) (0.1) (0.2) (0.2) (0.2) (0.2) (0.2) (0.2) (0.2) (0.1) in % of Sales -1.6% -0.1% -0.1% -0.3% -0.3% -0.2% -0.2% -0.2% -0.2% -0.2% -0.1% Other current assets delta (1.7) 0.4 0.4 0.4 0.4 (0.0) (0.0) (0.0) (0.0) (0.0) 0.0 in % of Sales -3.1% 0.6% 0.6% 0.5% 0.5% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% Free Cash Flow -6.0 -2.7 -2.0 -0.9 0.1 1.3 1.6 2.0 2.3 2.7 3.1 FCF growth nm -54.5% -28.3% -51.8% -107.1% 1889.6% 21.9% 19.7% 17.6% 16.2% 14.8% Present Value FCF -5.9 -2.5 -1.6 -0.7 0.0 0.8 0.9 1.0 1.1 1.2 17.7 PV Phase I -10.7 MCap 34.6 Targ.