Ilkka: Growing e-marketplace business with 6,9x P/E?

Ilkka is a growing e-marketplace and multimedia company. I’m not sure it’s perceived to be one, though.

This is quite surprising as it’s not a secret and clearly visible in the P/L statement:

Last year, Ilkka’s reported net earnings were 9,5 meur.

Of that, 8,9 meur comes from the line called “earnings from associated companies”. The associated company is 27,3 % stake in Alma Media.

Alma media is diversified e-marketplace and multimedia company.

The e-marketplace business (“Alma Markets”) is about half of Alma’s earnings and it grew 10 % last year.

The business includes most popular home, car and jobs classification websites in Finland. The jobs classifications business (Monster) also operates in Europe.

Analyst house Inderes expects that revenues and earnings continue to grow about 10 % for next couple of years (link to the many times referred report can be found at end of the blog post).

The multimedia businesses include:

1) “Alma Talent” i.e. the professional books, magazines, digital media and conference business (30 % of earnings).

Inderes expects stable revenues and earnings for next couple of years for the segment.

2) “Alma News and Life” i.e. the yellow press, dating site, tv-program site and food recipe site business (14 % of earnings).

The yellow press business includes one of the most popular websites and printed publications in Finland.

Inderes models stable earnings and revenues for the segment due to the declining yellow press print business but offset by the growing digital business (mostly yellow press I suppose).

There might be inflection point in the future when the highly scalable yellow press digital media business growth exceeds the decline in the yellow press printing business, turning the total earnings to growth mode.

With growing video productions with top Finnish journalists as anchors, I’m intuitively optimistic about the digital yellow press business and thus about the segments long term earnings growth.

3) “Alma regions” i.e. the dying regional and local news paper business (7 % of earnings). Inderes models declining revenues and earnings but the effect to the total Alma’s earnings and valuation is small due to already small size of the business.

Summary of Inderes Alma earnings model:

Assuming Ilkka’s own earnings stay at current level and 27,3 % of Inderes’ earnings forecast for the Alma stake, Ilkka’s forward P/L looks as follows:

The Inderes’ earnings forecast for Alma is probably as good as anybody but the extrapolated Ilkka estimate might be too conservative.

For Ilkka has announced about 2 meur savings in their own business. They will materialize fully from somewhere around H2/18 onwards, according to the management.

Ilkka’s own core business is regional and local news papers. As with Alma Media’s regional news paper business, it’s in terminal decline.

In 2017 Ilkka’s revenues declined 5 %. Assuming faster 7 % revenue decline, same gross margins and the 2 meur cost savings, Ilkka’s “run rate 2018E earnings power” is 1,7 meur (1,4 after tax):

Combining the Inderes’ Alma forecast and my own forecast for Ilkka’s news paper business, Ilkka’s total “forward run rate earnings power forecast” is 12,4 meur:

Ilkka’s current market cap is 85 meur, which implies 8,9x trailing PE, 7,3x forward PE and 6,9x run rate PE.

Given the historical growth and expected growth in earnings from Alma’s e-marketplace and multimedia businesses, I think the valuation is too cheap, way too cheap.

(Note that Alma’s business is scalable, high margin, asset light and cash generative).

One problem for Ilkka is the 45 meur debt it has. With the 0,6 meur trailing earnings and 1,4 meur run rate earnings from own business and 5,4 meur dividends from Alma, that’s quite a lot.

But Alma is publicly listed company and Alma’s stake is worth 169 meur vs. the 45 meur debt.

If there would be the problem with the debt with bankers, Ilkka could immediately sell some of the shares to bring the debt back to acceptable level.

More over, Ilkka is the largest owner of Alma, and Alma is paying only half of its earnings as dividends, and as Alma’s finances are strong, Ilkka could probably use its power to increase dividend payments from Alma.

Even bigger “one-off” dividend to keep the bankers happy.

With the growing earnings and dividends from Alma and profitable own business there is no immediate danger with the debt though.

Other way to look at Ilkka’s valuation is as follows:

Netting out the Alma stake @ market prices, cash and debt, the implied valuation for Ilkka’s own business is -40,5 meur.

(My understanding is that due to tax rules Ilkka doesn’t have tax liability from the valuation gain in Alma stake but that’s not 100 % sure interpretation).

If we use the same 0,5x revenue multiple for Ilkka’s own business as Inderes uses to value Alma’s news paper business, it would be worth 17,5 meur. With 0,2x revenue multiple the business would be worth 8 meur, which implies under 5x EBIT run rate multiple.

Adding the “Alma stake adjusted net financial assets” to the 8-17,5 meur valuation for the operating business, Ilkka’s fair equity value would be 130-140 meur or 57-68 % higher than the current market price:

Disclosure: Long Ilkka with 6,5 % position.

The referred Inderes analyst report can be found from here (only in Finnish but probably OK with google translate).

EDIT 18.3.2018 klo 23.11: Few bigger writin errors

EDIT 2 18.3.2018 klo 23.33 Changed term “yellow page” to “yellow press” for sake of clarity that I’m referring to “gossip news” business.