VIZ - VIZRT (Oslo Stock Exchange)

[klarmanite]

Finished a write-up on VIZ today(also posted on SumZero). I think it's an interesting little company. Take a look. Comments and questions are welcome.

 

 

INVESTMENT THESIS

 

Vizrt is a buy because it's too cheap, debt free (20% of market cap in cash), has significant economic moats and generates lots of cash which provides dividend income while one waits for a growth kicker consisting of an earnings recovery in their European business. When that happens, the stock will be repriced and reach my target price range of 27 NOK at the minimum.

 

Vizrt operates in three product lines: Broadcast Graphics (BG), Media Asset Management (MAM) and Online. It has 3 main regional markets: Europe/Middle East, Americas and Asia Pacific. Broadcaster spend is the main growth driver (which largely depends on advertising income and is highly cyclical).

 

BG: 77% of revenue

 

This is critical story telling tool for broadcasters and for branding of channels. The upgrade from standard definition to HD requires upgrading technology. Viz makes this easier. This is a market expected to grow by 200m USD over the next 2 years. Customers include CNN, Fox, Sky and BBC.

 

MAM: 18% of revenue

 

Digitalization of existing media archives is a necessity. Unbelievably, many broadcasters still have vast tape archives. To get an efficient workflow, this must be remedied. This is a market expected to grow by about 100m over the next two years.

 

Online: 5% of revenue

 

The VIZ online suite enables efficient categorization and archiving of content. This is an attractive product for print media and important in order to customize content to different media platforms.

 

VIZ is the dominant company in its niche. Despite being the premium provider of broadcast graphics solutions, they have grown much more quickly than competitors, indicating pricing power.

 

The company has low capex needs, sticky customers and a fair bit of recurring revenue (about 25% of revenue is service and maintenance income, 65% is new sales and upsales to existing customers and about 10% are sales to new customers). Although its reinvestment opportunities at high growth rates are probably limited, the company has historically generated lots of cash (cash conversion ratio > 100% every year since 2005) and diligently distributed excess cash to shareholders. In August, they distributed an extraordinary dividend to shareholders of USD 0.29. This is in addtion to the ordinary dividend of 0.12 USD per share paid in May. The dividend policy is to pay out up to 2/3rds of profits to shareholders. I expect a 5% yield going forward.

 

WHY DOES THIS OPPORTUNITY EXIST?

 

Today, VIZRT earnings suffer from weakness in European markets. Sustained wekness there has left investors fatigued. However, there is no reason to assume this is permanent, rather the opposite. European broadcasters have cut investments as advertising income has been reduced in the wake of the Euro crisis, but they must upgrade their systems to be compatible with an HD standard in order to remain competitive. So we can safely assume that European broadcast graphics income will recover, we just don't know when. Other growth drivers are increased use of live TV solutions, digitalization of media archives, more screens in TV studios and more digital platforms for distribution of media content. Later, the industry will need to make the transition to 4K/UHD from HD. The stock is also illiquid, which makes it unpopular among many institutions, but larger blocks do change hands from time to time.

 

MOATS

 

I believe VIZRT has significant moats. These consist of economies of scale (VIZRT has around 30% market share), high switching costs for customers (costly and time consuming to switch graphics platform) intangible assets (most advanced graphics platform and fully integrated product suite). Its biggest competitor is Chyron with 5-7% market share.

 

MANAGEMENT

 

Management are not as heavily invested as I would like to see, but appear shareholder friendly. Meetings with management convinced me that buybacks will be considered as an alternative means of shareholder return should the price fall much from current levels. It seems major shareholders who are also represented on the board of VIZ wanted a dividend instead of buybacks in august and got their way. I wish they would have done buybacks obviously, considering the pricing of the stock.

 

VALUATION

 

The pricing is obviously way too low in my opinion. I have done an EPV and a DCF which both confirm that at 19 NOK, zero growth is priced in. Based on current FCF, a 10% discount rate, 0% forecast FCF growth for the next 3 years and 0 - zero - % terminal growth, I get to an equity value of 19 NOK. Today, the stock trades at 20. Factoring in 3% FCF growth over the next 3 years and a terminal growth rate of 3%, the stock is worth 24 NOK, minimum. This is my low case.

 

More likely, many European broadcasters must invest fairly aggressively in the coming years to keep up with the competition, which could boost FCF at VIZ by at least 10-15% for a few years, implying about 27 NOK/share. This is my base case.

 

From a historical perspective, the company is trading at a substantial discount to average multiples. It's also significantly cheaper than peers whether you look at EV/EBIT, EV/EBITDA, P/E, EV/Sales or P/E. Currently, VIZRT is trading at P/E = 12, EV/EBIT = 5, and EV/normalized FCF = 10.

 

CATALYSTS AND RISKS

 

Based on revenue guidance given earlier this year which was reiterated after weak order intake in the first half of the year, I think it is reasonable to expect strong order intake in for the rest of 2013 (15% y-o-y is not unlikely). This could be the first thing to ignite investor interest in an overlooked stock. I don't really see the company as a take-out target, but it's certainly not unthinkable. I know I'd like to own the whole company.

 

The main risk is another macroeconomic downturn and/or prolonged economic weakness in its key European markets leading to decreased broadcaster spending.

 

[klarmanite]

I thought I'd add a little color on my growth assumptions. They may seem high to some.

 

I believe they are well within reach though, for the following reasons:

 

1. Average revenue growth since 2005 has been 22%. The company guides 12-13% annual revenue growth in the medium and long term as realistic goals. This is not a promotional management team, mind you.

 

2. My FCF assumptions here imply 7% revenue growth in 2014 and 15 and 8% in 2016. 7% revenue growth translates to about 14% EBIT growth and 12.5% growth in FCF. This is a very scalable business.

 

3. So how much would European revenues need to grow? Is it realistic that they will?

 

Historically, European revenues have averaged 52% of total revenues. Today, they constitute 43% of total revenues. If revenues from the European business just get back to 70m USD p.a (last seen in Q1 2012 on a rolling 12m basis) and the Americas and Asia-Pacific numbers stay the same as they are now, my revenue growth projections are reached.

 

So the answers to my posed questions are: not that much and yes, it is realistic, especially since pent-up demand for VIZ's products has been growing as investments have been postponed by broadcasters because of the Euro crisis.

[klarmanite]

VIZRT reported very strong numbers for Q3, (growth y-o-y i Europe iss promising) along with the divestment of their online business and the acquisition of what I believe is a strategically important company, Mosart. This wil help to protect VIZ's market leading position IMO and enhance their offering. The acquisition was priced at 7x EBIT and will raise average margins for VIZ as well as lift the company's EBIT by about 10% next year. Good deal.

 

Absolutely nobody seemed to care, there was 1 question on the earnings call and I felt like I was one of two participants.

 

The stock is now up to NOK 23 from about 20 when I first posted this. I expect the stock to go to 28-30 in relatively short order, but as noone seems to be interested on this forum either, I'll stop posting updates. Anyone interested can PM me.

[Hielko]

Always a good sign if no-one is interested imo

[siddharth18]

Always a good sign if no-one is interested imo

 

+1

 

@Klarmanite: Please don't assume no one's interested if you receive no posts here. There are many who take a look at the idea and then do their analysis but choose not to post due to one reason or another.

 

 

May I ask which broker do you use to trade in Oslo?

 

 

 

[klarmanite]

Hi - yes you may.

 

In my personal account I use a Norwegian discount broker (any of them will do: Nordnet, Netfonds etc). Pareto has a discount solution as well which looks ok. I think Interactive Brokers would give you access to Norwegian stocks as well. Might be easier for a foreign citizen.

[gary17]

I looked and liked it but wasn't sure how to buy

 

I am not that good with interactive broker... Just so much harder than rbc (my bank)....

 

 

[starmitt]

This is the first time I've seen this thread.

 

In the US it trades on the pink sheets as PZRTF. Infrequent and low volume. It last traded at $3.00 US or about 18.4 NOK. A bit of discount if you can get it.

 

Klarmanite, does the technology for upgrading to HD in Europe differ from that used in the US (other than power)? 

[constructive]

I think Interactive Brokers would give you access to Norwegian stocks as well.

 

Unfortunately no. IB has Norwegian futures and options but no stock trading.

[klarmanite]

VIZRT now reporting several new contracts. Q4 should be strong. Repricing continues.

[klarmanite]

VIZ today reported a contract worrth about 3.5 mUSD (a big deal for this company). But the most interesting part is that it is delivering an integrated solution - the customer is throwing out old his old sh*t and replacing it with VIZ. This confirms my hypothesis that the VIZ integrated solution is the preferred one by many broadcasters. The VIZ CEO says the company is now the de facto industry standard in the US.

 

Link (in Norwegian. Use google translate): http://www.hegnar.no/bors/article751629.ece

 

 

 

Disclaimer: If it is not already obvious, I am long VIZ. Do your own research, don't trust the opinions of some guy on a message board :)

[gary17]

I'd love to buy this , but can't !!  >:(

[klarmanite]

 

I have closed our position in VIZ for two reasons. 1, my target price was reached recently, and 2, the tax liability to Israel is worrisome. I think the stock could easily be worth 30 NOK or more, but the tax liability make sthe risk-reward unfavorable at this point. I am happy with a 30% + return here.