In this video Chief Investment Officer, Steve Johnson talks to Alex Shevelev on why Forager’s Australian Shares Fund is finally profiting from it’s 10-year investment in Enero Group (ASX:EGG). Enero – which provides integrated marketing and communication services and houses agencies including BMF, Hotwire and Orchard – has recently reported positive performance with both its share price and profitability up.
Hi and welcome to white shirt day at Forager Funds management I’m Steve Johnson, Chief Investment Officer, and I’m joined by Alex Shevelev, Senior Analyst on our Australian Fund. We’re talking today about a stock that we have owned in our Australian Fund for more than 10 years. It’s called Enero, used to be called Photon Group.
It’s been a crazy rollercoaster of a ride, but I’ve never ever seen this business going better. The share price is up, the profitability is up and it’s declared a nice, big fat, fully franked dividend. Alex, what’s going on with a business that we thought would probably be suffering through COVID?
Well in fact, it’s done a lot better than we had feared. So a lot of the revenue across the business, across the various jurisdictions actually held up, and a lot of that has to do with two components of the business.
One is a lot of the clients of the business are tech firms, especially for Hotwire, which is a major component of the core business there.
Another is that they work in a sub segment of that marketing services business, which is public relations and that public relations component has also held up better than a lot of other specifically advertising driven segments of marketing services.
Absolutely right and even the advertising exposed piece of it here, it’s called BMF – it’s a big agency in Australia with some good clients like Aldi that have held up through this environment and they’ve been winning some new clients as well, which is actually great news because Matt Melhuish was CEO of this business up until a year ago. He had founded that BMF business and he’d been pretty crucial in terms of its performance.
So, great to see it performing well through a very difficult environment. But there is a part of this business that was very little, that has become very big and very important to its valuation, and it’s called OB Media. Alex, you’ve been really focused on this part of the business as it’s grown in terms of its contribution to Enero’s overall financials. Tell us what’s going on.
So the business, OB Media, is 51% owned by an Enero. The other shareholders are the old founders based in the U.S. Now, the business is a marketplace of sorts for publishers and advertising, and it is a business that has done phenomenally well over these last couple of years.
In the first half that’s just gone it looks like that business by itself has five times the contribution that it had a year ago, which is a huge outcome.
We’ve got a slide up here that shows Enero’s results over the past couple of years and you’ve been very focused on this line that I’ve circled down the bottom, which is outside equity interests. You just mentioned that they only own 51% of this. That means that all of OB Media’s revenue and profits go into Enero’s accounts. But you see this line down the bottom that is other people’s share of the profits and it’s grown like crazy and that tells us that the business is growing like crazy even though management’s been pretty reluctant to tell us what’s been going on there.
So it’s gone from zero, they’ve owned the business for 10 years they did nothing for a very long time, wasn’t making much money. Last half year, it was $1.4 million of profit. We started saying, well this is good, but is it going to go back to zero? It’s been $5 million, and that’s just the Enero share of the profit in the last six months and it seems like, from what management tells us, it’s continuing to grow like crazy.
Most interesting for me though, it’s now been classified in a non-core segment in a slide here, and that’s management speak for we’re thinking about selling it. How significant is that for the valuation of Enero?
Potentially very significant because there is potentially another buyer here who might value that business in a very different way to the way that it would be valued as a component of a listed company in Australia.
For example, a private equity firm or something like that can see that business, which is in the quite exciting ad tech space and put a multiple on those earnings that might be quite significant for Enero’s market cap. So in rough terms, that could equate to half of the current market cap and that market cap is up quite substantially over the last couple of months.
So we’ve got a core business here that is performing very well and really, we’ve won a lottery ticket is probably the honest truth about it, but it’s become a very significant lottery ticket. We’ve held this stock for a very long time and been through some difficult times and it’s great to see it going well and very important that we maximize the value of these investments, where we do get some luck along the way as well.
I wouldn’t be surprised to see some news around this particular part of the business over the coming months. It’s a particularly good environment for selling this type of business and it continues to perform well. If it stays in the Enero empire, it may never get as fully valued by the stock market, but it’s good. In any case it’s become a significant growth for Enero.
Thanks for tuning in, let’s hope the rest of reporting season is as good as what we’ve seen from this little stock.
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Forager Funds is a boutique fund manager specialising in a value investing approach. We offer an ASX listed Australian Shares Fund as well as an International Shares Fund both aimed at delivering returns for long term investors.