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 BRI DGEWELL 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 10 February 2006 2 ITE Group BRI DGEWELL 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 10 February 2006 3 ITE Group BRI DGEWELL 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