Ascential targeting the e-commerce boom

B2B marketing and analytics company Ascential (ASCL) is going after digital commerce. Last year, it sold off its marketing consulting business MediaLink for $125mn, and used that money to acquire seven digital commerce businesses. The belief in this strategy is based on the forecast that global e-commerce market will grow to 40 per cent of all retail sales by 2026 – having been accelerated by the Covid-19 pandemic.

During the year, organic digital commerce revenue increased by 19 per cent. It now makes up 42 per cent of the group’s total revenue. The adjusted operating margin slipped slightly to 21 per cent (from 22 per cent last year) due to investment in sales and the acquisition of several businesses that are margin dilutive in the short term.

The digital commerce business is a platform subscription business and 92 per cent of its revenue is recurring. Net revenue retention rate was over 110 per cent for the year which shows they are doing well at upselling to the clients they currently have. Margins should improve as the new businesses are integrated into the product.

Product design is the highest margin portion of the business – with the adjusted Ebitda margin rising 2 percentage points to 45 per cent. It now makes up 26 per cent of total revenue. The service provides data and market forecasts to help customer predict future consumer trends. Increasingly it has been seeing growing demand for non-fashion products, especially in Consumer Insight and Beauty, where billings have grown 30 per cent. Overall reported revenue increased by 4 per cent.

The strong performance across all business sectors helped boost group free cash flow to £57.7mn, up from a negative £2.6mn last year. This included a 40 per cent increase in capital expenditure to £23.1mn – 80 per cent for which is focused on digital commerce. Despite this strong cash flow, management has decided to not declare a dividend as it  “prioritises capital for investment and acquisitions to support [its] growth strategy”.

Broker Numis has increased revenue forecasts and is now expecting 23 per cent growth next year to £429mn. However, due to investment into the digital commerce service it has maintained its forward EPS forecast at 13.9p. This gives a forward PE of 22.5.

This doesn’t look prohibitively expensive given that it is selling into a growing market. Some e-commerce businesses have struggled coming out of the pandemic because of supply chain issues and increased competition. Given that Ascential is a marketing business, more competition within the industry should increase demand for its services.  Buy.

Last IC View: Hold, 364p, 24 Feb 2020