I am going through Tremor’s final results for 2020, which you can download here. I wouldn’t say that I have a particularly good process when it comes to this or that I am particularly good at it. To improve I am considering taking one of Stephen Clapham’s Behind the Balance Sheet courses.
A quick preamble there are few things that muddy the waters when trying to fully understand the accounts:
- two acquisitions
- IFRS16
- the change in the accounting of Programmatic revenue
- adjusted EBITDA.
The things (red flags?) that jumped out me were:
Debtor and creditor days
The large increase in debtor days and creditor days gives me cause for concern and I am struggling to see a reason for it. Though these are predicted (finnCap note paid service) to come down in 2021 and 2022, they are still almost double the 2019 figures. And bad debts written off have increased 44 times (page 52 of the FR) though they have halved the provision. Stephen Clapham talks about this (debtor days) as a red flag in his video at https://www.youtube.com/watch?v=Tba0mAQJKDo
Somebody on twitter pointed out that sales had been increasing rapidly into the end of the year and this might account for the debtor days but I am not convinced.
This is the one area of the accounts that still does not make sense to me.
Edit [3 April 2021] Some has subsequently pointed out (via twitter) that this seems to be an advertising thing with the likes of WPP, TTD and MGNI all have a very large debtor days number. TTD’s is 691 for example.
So for now I am going to have to take this at face value as something not to worry about, though I would like to know why.
All of my other business to business holdings have debtor days in the 20 to 65 range. I have written to Tremor IR asking for an explantation but don’t expect a reply.
EBITDA
Adjusted EBITDA (I am not a fan as Charlie Munger said replace the word EBITDA with the word bullshit) but is it valid to focus on EBITDA? My inclination is to focus on cash, which at $40m before share buybacks is still healthy but heavily down on the 2019 figure of $63m before buybacks; though in the finnCap Note op cash / EBITDA is moving towards 100%
Initially I was perplexed by the large amortisation/depreciation figure in relation to sales at about 25%, current CAPEX is 1/12th of current depreciation and has increased 9 fold in five years. However, a large portion of this relates to “business combinations” and also development costs which are written off reasonably aggressively, as they should be, over 1 to 5 years (page 24 R&A’s).
With respect to business combinations the acquisition of Unruly, for example, generated $17,878,000 of goodwill for this one transaction.
I am not a forensic accountant and I have not analysed the figures to the extent that I can be 100% certain that the various figures all “add up” but I am personally happy that the depreciation and amortisation figure is a correct figure and more importantly that it is reasonable to add back to operating profit.
While finalising this post I noticed the breakdown of the adjusted EBITDA figure on the first page of the CFO’s review.
To get to their adjusted EBITDA figure “Stock-based compensation” is added back as are “acquisition-related” costs.
Stock based compensation is a cost. I cannot remember the exact reasoning behind this but if it wasn’t a cost then why not pay for everything (wages, electricity, servers etc) with stock and the company would have no costs. So this should not be added back, nor should, in my opinion, acquisition-related costs if one thinks that Tremor is still acquisitive, which I think it is, and acquisition costs will be a regular part of accounts.
Adding back these two figures get one very close to the FCF (before share buybacks).
On the positive side cash is cash, the buy backs are obviously happening, Brooks being on the board and News Int holding 6%, the new Chairman sounds like a ‘sound’ person, which all gives comfort and I would imagine that there will a certain level of scrutiny before they can list the ADS’s on the NASDAQ. Just wish they would move the HO to London or New York!
To conclude, I still like Tremor and indeed if I could find some more cash then I would be keen to top up hear. It is currently a 5.02% position with an average purchase price of 500.35p. I would happily see this move to 7.5%
The target price set by finnCap is £10, which is possibly conservative if all the moving parts come together favourably. The Trade Desk has Price/FCF figure of 101. If we equate EBITDA with cashflow and apply a 50 multiple to that we could be looking at a share price of £22.08 based on finnCaps’s projected EBITDA of $81.7m in 2022.
I hope readers find this of interest. I always welcome criticism and pointing out of my errors and reasoning.
investing4value 