Tremor sweats on issues beyond its control

Tremor International (TRMR) was subject to a double-digit share price fall as investors didn't seem particularly enamoured with record second-quarter cash profits of $39.1mn (£32mn). They were probably more concerned over the negative factors that “limited advertiser activity” through the second quarter.

Potentially negative near-term factors for the digital advertising software provider are set against a promising market backdrop over the long haul. Analysis from Dublin-based Research and Markets reveals that the global digital advertising market was worth around $486bn in 2021 and is expected to reach $980bn by 2026 at a CAGR of 15.1 per cent.

That growth represents a sizeable opportunity, with several available revenue streams such as digital display ads, internet paid search and social media, although it also necessitates periodic capital commitments to keep pace with an increasingly crowded marketplace. Indeed, Tremor posted a record Connected TV (CTV) spend of $110.9m, representing an increase of 26 per cent compared with the first-half of 2021. Video revenue, including CTV, represents the lion’s share of Tremor’s contribution ex-traffic acquisition costs (TAC) at approximately 80 per cent at the half-year mark.

Bosses are guiding for revenue ex-TAC for the full year at $290mn, with cash profits of $200mn, assuming no major Covid-19 setbacks and/or a deterioration in the global security situation. We last covered Tremor just prior to the pandemic when the group delivered an unexpected profit warning. Since then, the shares have been on something of a roller-coaster ride, and now trade at a 17 per cent premium to net asset value and on an enterprise/cash profit multiple of 5.4, suggesting that the valuation is far from extravagant. The pending $239mn acquisition of the Amobee advertising platform is set to expand Tremor’s competencies and its global market share, and the group should increasingly benefit from the adoption of 5G Networks and the Internet of Things. But given the potential impact of external issues on volumes and TACs, we remain on the sidelines. Hold.

Last IC View: Sell, 135p, 24 Sep 2019