INFORMATION SERVICES GROUP III
May 25, 2017 - 8:38pm EST by
aa123
2017 2018
Price: 3.60 EPS 0 0
Shares Out. (in M): 43 P/E 0 0
Market Cap (in $M): 155 P/FCF 0 0
Net Debt (in $M): 91 EBIT 0 0
TEV ($): 246 TEV/EBIT 0 0

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  • perpetual value trap

Description

Information Services Group has been discussed a couple of times on VIC in the past and I would suggest reading these posts as introduction to the business. In summary, ISG is a technology research and advisory firm with a particular focus on bottom-line operational improvement. I want to focus on the large acquisition the Company made in December 2016 which has added significant scale to the business. On December 2, 2016, ISG announced the acquisitions of Alsbridge for $74 million ($56 million in cash paid at closing, the issuance of 3.2 million shares and a $7 million seller’s note). This price represented a multiple of around 10.6x EBITDA pre-synergies and 5.3x EBITDA after synergies. The Company also issued 3 million shares at $4 per share to a long-time shareholder to help finance the deal. 

Both companies have competed in some areas of their businesses before and knew each other well. Both are focused on helping clients achieve operational excellence and digital transformation. Through this transaction, ISG has increased its client base by 35% (150 new clients), opening the door for cross-selling opportunities. Total number of clients for both companies combined is now around 700. 70% of the revenue mix is consulting in nature and is therefore fee-based while 30% is more recurring as either multi-year contracts or subscriptions. 75%+ of ISG clients are repeat clients from the previous year, representing a large portion of revenue and giving good visibility.

The Company has a good presentation at

http://ir.isg-one.com/Cache/1001224010.PDF?O=PDF&T=&Y=&D=&FID=1001224010&iid=4305772

When ISG announced the deal, it also included projections for the business (pro-forma of the acquisitions) with revenue between $285 and $300 million and EBITDA between $36 and $38 million for 2017. Included in these numbers are $7 million in annualized synergies (SGA, consolidation of ISG and Alsbridge hubs in India, reduction of start-up costs associated with overlapping growth initiatives) that will be realized in 2017 and 2018. The Company adjusted its guidance for 2017 downwards when it announced its Q4 results in March 2017, with revenue between $270 to $290 million and adjusted EBITDA between $33.5 and $36.5 million. The difference from the prior December guidance was due (according to management) to negative currency moves since December.  This includes some but not all the $7 million synergies and the Company has not been willing to share the breakdown of what will be realized in 2017 vs 2018. We have assumed that 5 million will be realized in 2017 and 2 million additional synergies will be realized in 2018 so all else being equal, 2018 EBITDA should be higher and we have assumed $37 million EBITDA. 

Here is the EV of the Company:

At $3.70 per share, the market cap is $160 million. There is $33.2 million of cash and $123.9 million of debt for an EV of $250 million. We expect 2018 EBITDA around $37 million and EBITDA – capex of around $34 million. The stock is therefore trading 6.75x EBITDA and 7.4x EBITDA – Capex.

Using the mid-point of the guidance for 2017 of $35 million, interest of $6.3 million, capex of $3.2 million and taxes of $10 million, we get to FCF of around $16 million representing a 10% FCF yield.

Assuming 2018 EBITDA of $37 million, an 8x multiple, and $20 million FCF generation, we see the share price at $5.25 in 12 to 18 months representing an upside of around 40%.

 

We believe the downside is limited. If EBITDA were to go down to $30 million and the stock were to trade at 7x, the stock would have a 10% downside. 

The Company will use its FCF to delever until Q1 2018 at which point it will be allowed to return cash to shareholders as its leverage goes below 3x, most likely through a buyback. 

I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise hold a material investment in the issuer's securities.

Catalyst

Buyback in Q1 2018

Sale of the Company (low likelihood)

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