ITE: Reasons to be cheerful
Posted on March 4, 2009 by Richard Beddard
Filed Under Companies |
I see rubles, up ahead
Looking at my recent posts, you’d think I’m obsessed with ITE.
It’s a very interesting stock. Top-down the case looks ropey. Financial crises are worse in emerging markets (see here, and here) so any company doing business in, say Russia, or Kazakhstan, faces an even more uncertain environment than, say, a domestic company.
Bottom-up, there’s much to like about ITE. It has cash (£30m at the end of February), not debt. It increased the dividend by 18% last year. One of its major shareholders, a very experienced director, bought 150,000 shares in December. The shares look cheap, it survived the Russian financial crisis of 1998 and it’s able to reduce its costs, and therefore maintain profit margins, if it has to.
I rang Neil Jones, ITE’s financial director, to test out the theory that despite the financial crisis, it should prevail.
On the financial crisis: He said roughly 50% of ITE’s exhibitors are local, and 50% are international companies selling to Eastern Europe and Central Asia. Business from international companies is holding up “pretty well” but local companies heavily scaled back in the first months of this year, hoarding foreign currency as the ruble devalued.
The big question is how long the loss of confidence will last. While it does, the pain will be worse in Russia, but since more business is in cash, the rebound will be sharper too.
In 1998, ITE stayed profitable through the Russian financial crisis, when the ruble devalued 90% and the country was bankrupt. The company was much smaller then, but just as focused on Russia. Today, the Russian government is more stable and committed to using its reserves to bail out the economy.
On deferred income: Deferred income is money ITE’s customers have paid for space in exhibitions it has yet to stage. Customers pay in advance and until ITE stages the exhibitions, the money is a liability the company would have to repay should it cancel.
That could be cause for concern because ITE has spent some of it. It’s using its deferred income as finance and it couldn’t pay it all back in a doomsday scenario, but that’s a possibility Mr Jones dismisses. He says he’s never cancelled an exhibition1.
On operational gearing: About 50% of ITE’s costs go on exhibition space, a further 25% is salaries, it spends 12.5% on marketing and another 12.5% on consumables like carpeting and lighting.
Although those costs look fixed, Mr Jones reckons turnover could fall 30% with only a slight impact on profit margins (the company could cut around 25% of its costs). Many Russian venues charge per square meter, so an exhibitor only pays for what it uses, and others are more happy to negotiate than Western venues and ‘spread the burden’ if demand for space falls. A third of the salary bill is in the form of bonuses and commissions and 80% of the consumables bill is discretionary.
“Exhibitions don’t lose money,” says Mr Jones, they just get smaller.
I think last year’s profits, boosted by price increases, an increase in demand, the rising euro relative to the pound, and acquisitions, will be a high watermark for some time, so it’s hardly surprising the shares have fallen in price.
If the company had been more cautious it might have paid a smaller dividend in 2008, and made fewer acquisitions2, but it’s still healthy.
It’s easy to be swayed by the top-down story. People who bought ITE shares because Russia, like India, China and Brazil is a fast developing economy were. They lost badly as the financial contagion engulfed emerging markets and the shares slumped from almost 200p two years ago to 50p today.
The best time to buy is probably when the growth story is most in doubt, and the shares are cheaper, when there is ‘blood on the streets’. That was true in 1998, and maybe it will be true in 2009.
Footnotes:
- He’s only worked at ITE since last May, but he’s ten years previous experience at exhibitions companies.
- I wish I’d thought to ask that question, actually. Would they have been more conservative in 2008 had they known what they know now?
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