Brand24: Strong Financial Results and Positive AI Sentiment Drive Upside Potential - Adding to Our Portfolio

We add Brand24’s shares to the long side of our monthly portfolio. Brand24 is the company for which we prepare the reports for the Warsaw Stock Exchange SA within the framework of the Analytical Coverage Support Program 3.0. Rationale: (i) 1Q23 good financial results (in consequence, the realization of our FY revenues and profits forecasts is higher than a year ago) imply ceteris paribus the upside risk for our current FY forecasts, (ii) investors’ positive sentiment towards companies related to AI development/ implementation, and (iii) pending strategic options review.This is an excerpt from the Polish version of DM BOŚ SA’s research report prepared for the Warsaw Stock Exchange SA within the framework of the Analytical Coverage Support Program 3.0.

 

Upcoming events

1. Release of selected KPIs for 2Q23: mid-July
2. Release of 2Q23 financial results: October 2
3. Release of selected KPIs for 3Q23: mid-October
4. Release of 3Q23 financial results: November 29
5. Completion of the (co-funded by EU) AI project (Abstrakcyjna sumaryzacja danych multimodalnych): by 2023-end
6. Completion of the strategic options review: by 2023-end

 

Catalysts

1. ARPU/ MRR growth ahead of expectations
2. More dynamic new clients acquisition
3. Commercial success of new products (e.g. Insights24)
4. Progression of financial results ahead of expectations
5. Stronger USD vs PLN
6. Agility in the AI field proves to be the right approach
7. Strategic options review effects boosting the Company’s development on foreign markets

 

Risk factors

1. Lower availability of Internet data, higher cost of their acquisition
2. IT infrastructure/ software malfunction
3. Maintaining financial liquidity
4. Product concentration
5. Inability to adapt promptly to changes in ways of presenting/ consuming content in the Internet
6. FX risk (USD weakening vs PLN))
7. Adverse changes in search engines algorithms
8. Rise in competitive pressures in the sector
9. Hike in R&D needs
10. Transfer pricing risk
11. RODO risk
12. Inability to attract new clients and retain the existing ones
13. Rising churn
14. Low share liquidity
15. Smaller than assumed further rise in ARPU/ MRR
16. Losing eligibility to use the IP BOX tax relief

 

We add Brand24’s shares to the long side of our monthly portfolio. Brand24 is the company for which we prepare the reports for the Warsaw Stock Exchange SA within the framework of the Analytical Coverage Support Program 3.0.

 

Rationale: 

1Q23 good financial results (in consequence, the realization of our FY revenues and profits forecasts is higher than a year ago) imply ceteris paribus the upside risk for our current FY forecasts, (ii) investors’ positive sentiment towards companies related to AI development/ implementation, and (iii) pending strategic options review. 

 

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BASIC DEFINITIONS
A/R turnover (in days) = 365/(sales/average A/R))
Inventory turnover (in days) = 365/(COGS/average inventory))
A/P turnover (in days) = 365/(COGS/average A/P))
Current ratio = ((current assets – ST deferred assets)/current liabilities)
Quick ratio = ((current assets – ST deferred assets – inventory)/current liabilities)
Interest coverage = (pre-tax profit before extraordinary items + interest payable/interest payable)
Gross margin = gross profit on sales/sales
EBITDA margin = EBITDA/sales
EBIT margin = EBIT/sales
Pre-tax margin = pre-tax profit/sales
Net margin = net profit/sales
ROE = net profit/average equity
ROA = (net income + interest payable)/average assets
EV = market capitalization + interest bearing debt – cash and equivalents
EPS = net profit/ no. of shares outstanding
CE = net profit + depreciation
Dividend yield (gross) = pre-tax DPS/stock market price
Cash sales = accrual sales corrected for the change in A/R
Cash operating expenses = accrual operating expenses corrected for the changes in inventories and A/P, depreciation, cash taxes and changes in the deferred taxes

 

DM BOŚ S.A. generally values the covered non bank companies via two methods: comparative method and DCFm method (discounted cash flows). The advantage of the former is the fact that it incorporates the current market assessment of the value of the company’s peers. The weakness of the comparative method is the risk that the valuation benchmark may be mispriced. The advantage of the DCF method is its independence from the current market valuation of the comparable companies. The weakness of this method is its high sensitivity to undertaken assumptions, especially those related to the residual value calculation. Please note that we also resort to other techniques (e.g. NAV-, DDM- or SOTP-based), should it prove appropriate in a given case.

 

Banks
Net Interest Margin (NIM) = net interest income/average assets
Non interest income = fees&commissions + result on financial operations (trading gains) + FX gains
Interest Spread = (interest income/average interest earning assets)/ (interest cost/average interest bearing liabilities)
Cost/Income = (general costs + depreciation)/ (profit on banking activity + other net operating income)
ROE = net profit/average equity
ROA = net income/average assets
Non performing loans (NPL) = loans in ‘basket 3’ category
NPL coverrage ratio = loan loss provisions/NPL
Net provision charge = provisions created – provisions released

 

DM BOŚ S.A. generally values the covered banks via two methods: comparative method and fundamental target fair P/E and target fair P/BV multiples method. The advantage of the former is the fact that it incorporates the current market assessment of the value of the company’s peers. The weakness of the comparative method is the risk that the valuation benchmark may be mispriced.

The advantage of the fundamental target fair P/E and target fair P/BV multiples method is its independence of the current market valuation of the comparable companies. The weakness of this method is its high sensitivity to undertaken assumptions, especially those  to the residual value calculation. Assumptions used in valuation can change, influencing thereby the level of the valuation.

 

Among the most important assumptions are: GDP growth, forecasted level of inflation, changes in interest rates and currency prices, employment level and change in wages, demand on the analysed company products, raw material prices, competition, standing of the main customers and suppliers, legislation changes, etc. Changes in the environment of the analysed company are monitored by analysts involved in the preparation of the recommendation, estimated, incorporated in valuation and published in the recommendation whenever needed.

 

KEY TO INVESTMENT RANKINGS

This is a guide to expected price performance in absolute terms over the next 12 months:

 

Buy – fundamentally undervalued (upside to 12M EFV in excess of the cost of equity) + catalysts which should close the valuation gap identified;

Hold – either (i) fairly priced, or (ii) fundamentally undervalued/overvalued but lacks catalysts which could close the valuation gap;

Sell – fundamentally overvalued (12M EFV < current share price + 1-year cost of equity) + catalysts which should close the valuation gap identified.

 

This is a guide to expected relative price performance:

Overweight – expected to perform better than the benchmark (WIG) over the next quarter in relative terms

Neutral – expected to perform in line with the benchmark (WIG) over the next quarter in relative terms

Underweight – expected to perform worse than the benchmark (WIG) over the next quarter in relative terms

 

 

The recommendation tracker presents the performance of DM BOŚ S.A.’s recommendations. A recommendation expires on the day it is altered or on the day 12 months after its issuance, whichever comes first. Relative performance compares the rate of return on a given recommended stock in the period of the recommendation’s validity (i.e. from the date of issuance to the date of alteration or – in case of maintained recommendations – from the date of issuance to the current date) in a relation to the rate of return on the benchmark in this time period. The WIG index constitutes the benchmark.

For recommendations that expire by an alteration or are maintained, the ending values used to calculate their absolute and relative performance are: the stock closing price on the day the recommendation expires/ is maintained and the closing value of the benchmark on that date.

For recommendations that expire via a passage of time, the ending values used to calculate their absolute and relative performance are: the average of the stock closing prices for the day the recommendation elapses and four directly preceding sessions and the average of the benchmark’s closing values for the day the recommendation expires and four directly preceding sessions.

 

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This report has been prepared by Dom Maklerski Banku Ochrony Środowiska SA registered in Warsaw (hereinafter referred to as DM BOŚ SA) and commissioned by the Warsaw Stock Exchange SA (hereinafter referred to as WSE SA) pursuant to the agreement on the research report preparation between DM BOŚ SA and WSE SA within the framework of the Analytical Coverage Support Program 3.0 described on the WSE SA website: https:/www.gpw.pl/gpwpa (hereinafter referred to as the Agreement). DM BOŚ SA will receive a remuneration for the research report in accordance with the Agreement.