Description

Thesis Summary:

Brainjuicer Group, a highly differentiated market research business, is a long-term compounder offered at a better than fair price.  The company is run by a highly engaged and inspirational entrepreneur, John Kearon, who is on a mission to change the market research business and build a large business in the process.  While the shares have recently performed well, the probability of the business being materially larger in 3, 5 and 7 years is high.  The company has a fine balance sheet, requires little-to-no capital, produces great cash flows and is prudently managed from a capital perspective.  Attractive ongoing growth in the core business ought to result in at least a low-teens IRR, while recent new business launches, yet to prove themselves, could propel the company much beyond the base case.  

Business Summary:

Brainjuicer is a market research company.  The company is highly differentiated in that it pioneered the use of behavioral economics and System-1/System-2 thinking in market research.  The company's founder is a believer in the System-1 brain as it relates to product decision making by consumers.  The emotional brain dominates the decision making process is his view - which runs counter to most of the research business today.  After of a number of years, Kahneman's book, Thinking Fast and Slow, helped to popularize the emotional brain and provided a boost to the business.  Today, the company offers a variety of research products, including ad testing and brand tracking, developed on this differentiated view.  It operates around the globe and for the biggest brands.  It is considered to be a highly differentiate firm, having appeared at the top of GRIT report each of the last four years as the most innovative market research agency in world... and by a large margin against all the industry heavyweights (http://www.greenbookblog.org/2016/05/13/the-top-20-most-innovative-market-research-suppliers-a-grit-2016-sneak-peek/).

John Kearon:

The Chief Brainjuicer, as he is recognized, is a highly infectious evangalist for the System-1 approach to marketing and market research.  He continues to own 28% of the company and is clearly the voice and inspirational leader of the company.  John founded the business in 1999 after working advertising agency Publicis and as a brand manager for Unilver.  Today he is widely recognized (though not always agreed with) in the research business and is synonymous with advent of behavioral economics in market research.  He is focused on building Brainjuicer into a very large company and taking market share.  Here are a few videos:

https://www.youtube.com/watch?v=5y-RH7fl4Z0

https://www.youtube.com/watch?v=Zl8RH9rLkok

https://www.youtube.com/watch?v=jRFznGCG4K0

https://www.youtube.com/watch?v=nm-RhcUAvB4

https://www.youtube.com/watch?v=kL5GE5zeAvk

https://www.youtube.com/watch?v=InDJGQm6xJg

Growth Over the Years:

While the growth in the business has been impressive over the years - 1 mm to over 25 mm in 12 years, there has been a clear slowdown in the growth in recent years. This was attributable mostly to an underlying shift if the product mix over the more recent years.  The company splits its business into 2 pieces: (1) Juicy - the clearly differentiated System-1 products; and (2) Twist - more traditional products with a little company "twist".  That later category has been deemphasized over the years as the core products continued to gain acceptance.  In fact, twist revenues peaked in 2011 at over 9 mm and nearly 44% of revenue before falling to 4 mm in 2015 or 16% of revenue.  Juicy (the differentiated core and future of the business), now is 84% of revenue and has compounded at nearly 20% over the last five years.  Below is the mix through 2015:

Below is the company's new updated reporting of revenue by product. As the company transitioned away from Twist to predominantly Juicy, there were some other changes going on within Juicy. Most notably, Juice Generation, a consulting oriented business which was not scalable, did not translate into core business growth and wass senior management heavy to deliver was ultimately deemphasized. The company now really has focused on quantitative Juicy products. As you can see, this core product set has continued to grow at high teens the last few years - in GP terms. In H2 this year GP from this product set grew 26.4% and was 85% of total GP.

The business is quite a global business and the company's success in the US over the last several years is particularly noteworthy... having compounded at over 18% over the last five years. This US exposure has been a help as of late with the exchange rate changes. Below is the business performance over the last several years by geography:

Recent Performance:

H1 2016 results confirmed that the core business was quite healthy and growing. Revenue growth of 12% was accompanied by GP growth of 15%. GP growth has been growing more than revenue given product mix changes. Normalized pre-tax profit was up 22%. As mentioned, GP growth from the core product set was quite impressive at 26.4% (though some help from GBP/USD exchange). Also, the company released a trading statement late last week highlighting anticipated results above expectations, with particularly strong language around the company's core products.

Capital Allocation: 

The company rates highly on capital allocation.  The company pays a dividend and occasional large special dividends, including a 12p payment after the recent interim results.  Historically the company has also repurchased shares at attractive prices.  Just this year, the company has purchased nearly 900,000 shares at 395p.  It was aggressively trying to repurchase additional blocks, though as a smaller company with limited liquidity was only able to accomplish that which it did.  The company has also passed on aggressively priced acquisitions over the years.

New Business / New Products: 

• Remarkably, only in the last few months has Brainjuicer began to offer a product directed squarely at internet advertising.  It just launched System-1 Digital Ad-Testing.  That Brainjuicer has been able to grow as it has without a specifically tailored product is interesting.  Finally the company was able to create a well-tailored solution and finally (according to the company) there appears to be a market opportunity to sell it.   

• Earlier this year the company took the unusual step for a market research business of launching a whole new, separate business called System-1 Agency.  The new company is an advertising agency that pre-tests ad work and uses an on demand network of creative talent to deliver content to clients.  It has not had to invest in these creative people, but has begun to build a network of folks to create adverts which Brainjuicer pre-tests.  System-1 Agency then only pitches highly engaging type adverts to clients.  It launched the business in H1 2016 and lost about 300k in the period (included in all figures) and expects that to be the full-year drag on profits - suggesting first revenue and perhaps breakeven in H2.  It is very early days with this business, but it would appear to be another highly differentiated offer that could scale quite nicely in a large additional business if accepted by industry.  Success in this business might also be a boom for the core - driving further acceptance of the philosophy.  Again though, it is a business that will require some evangelizing... there appears to be a general industry belief that pre-testing inhibits creative work.  

Valuation and Return Potential:

Substantially all of earnings converts into FCF.  I expect the company to finish 2016 with 6 mm net cash.  With a 66 mm market cap and 60 mm EV, the company is trading at 18.6x net earnings ('16) and 16.9x net of cash.  For reference, just over 18x appears to be the median for a sample of market research and advertising businesses around the globe.  Brainjuicer would appear to have much better organic growth before it and a much better balance sheet.  My conservative estimates going forward suggest 9% revenue growth and 12% NPAT growth over the next 4 years.  With even a 15x multiple net of cash, Brainjuicer would seem to be in a position to deliver a low teens IRR under conservative assumptions.  This gives little credit to the two new business launches mentioned.

Risks:

• Key man risk - John Kearon is clearly a critical piece of the thesis
• Growth in the core businesses and core geographies disappoints
• Year-end budgets - there has been at least one year where year end budget spending came to a grinding hault and impacted Brainjuicer's performance
• New businesses become a distraction and do not work
• Competition - while highly differentiated, most large agencies now have units that purport to offer behavioral economics research / advice
• Industry acceptance - Brainjuicer is trying to change how an industry thinks

Catalyst

• Continued growth
• Capital returns - dividends and buybacks
• Buyout by a big firm - though I admit this is likely not a near term potential