Audi win – gear change for group

SinnerSchrader 19 July 2016 Update

SinnerSchrader

Audi win - gear change for group

Q3 results & forecast change

Software & comp services

19 July 2016

Price

€5.15

Market cap

€59m

Net cash (€m) at May 16

2.6

Shares in issue

11.4m

Free float

51%

Code

SZZ

Primary exchange

FRA

Secondary exchange

NA

Share price performance

%

1m

3m

12m

Abs

3.1

19.3

58.9

Rel (local)

(1.3)

20.0

84.3

52-week high/low

€5.20

€2.76

Business description

SinnerSchrader is a leading European independent digital agency that specialises in helping companies use the internet to sell and market goods and services. The majority of sales originate in Germany, servicing accounts such as Allianz, BMW, Deutsche Bank, Telefonica and Unity Media.

Next events

FY trading update

October 2016

Analysts

Bridie Barrett

+44 (0)20 3077 5700

Dan Ridsdale

+44 (0)20 3077 5729

SinnerSchrader is a research client of Edison Investment Research Limited

SinnerSchrader (SZZ) reported 25% underlying revenue growth in Q3 and, while staffing constraints are putting renewed pressure on margins, we are confident about the medium-term outlook for the group, which was recently selected by Audi as its worldwide digital lead agency, marking a gear change in SZZ’s profile. The shares have performed well, yet the rating remains at a significant discount to agency peers – unwarranted given momentum and the outlook.

Year
end

Revenue (€m)

EBITA*
(€m)

EPS
(c)

EPS*
(c)

DPS
(c)

P/E
(x)

Yield
(%)

08/14

48.6

4.6

16.5

27.8

12.0

18.5

2.3

08/15

47.7

4.2

13.4

25.1

12.0

20.5

2.3

08/16e

51.0

5.0

26.4

29.2

13.0

17.6

2.5

08/17e

58.7

5.9

34.1

34.0

13.7

15.1

2.7

Note: *EBITA and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items, share-based payments and discontinued activities.

Q3: Strong demand puts pressure on resourcing

On a like-for-like basis, Q3 revenues increased by 24.5%, keeping up Q2’s strong momentum. On a headline basis (including the impact of the now discontinued Next Audience), year to date revenue growth is 11.3%, putting the group comfortably on track to deliver its €50.5m revenue target for the year. However, a tight labour market, a prolonged pitch process for the role of Audi’s worldwide lead digital agency, which it has won, and some margin pressure on a few ‘agile’ projects has affected EBITA margins and management now expects to deliver EBITA of €4.5m (down from previous guidance of €5m).

Forecasts: Audi win is a significant milestone

We reduce our FY16 EPS forecast by 4% to reflect current margin pressure. Looking ahead to FY17, margin pressure stemming from a tight labour market is a recurrent issue for all digital agencies in Germany and we are trimming our margin forecasts slightly to reflect this (although we continue to expect year on year margin expansion). However, the Audi win is a significant milestone for the group, potentially its largest win to date. We expect this to more than offset the small downgrade to margins and increase our FY17 and FY18 EPS forecast by 4% and 10% respectively.

Valuation: Rating does not reflect momentum

SZZ’s shares, up c 62% over the last 12 months, have performed well and the ratings gap with the general ‘digital agency’ European universe has started to close. However, on a calendarised FY16e P/E of 18.5x falling to 16.7x in FY17e, it still trades at a 25% discount to the wider peer group and a 35% discount to its closest German peer, Syzygy. With the wind in its sails from the Audi deal going into FY17, as well as the potential to continue to bring EBITA margins up to historic and peer standards (see our report Coming of Age published on 12 February 2016 for background) and the rarity value of German digital agencies, a premium rather than a discount is arguably justified.

Q3 update

During Q2, management indicated that it was involved in a significant level of pitch activity and on 4 July 2016, SZZ announced that, through a multi-stage agency pitch process, it had been selected by Audi as its new worldwide lead digital agency. This is potentially the most significant win yet for SZZ and should provide a step change in revenues (and profile) for the group, which was already experiencing strong demand.

On a like-for-like basis, excluding the impact of the now discontinued Next Audience, Q3 revenues increased by 24.5%, keeping up Q2’s strong momentum. On a reported basis, Q3 revenues grew by 18.1%, taking year to date revenue growth to 11.3%. To reach management’s reiterated target of €50.5m, Q4 revenues would only need to be c 92% of the same period last year. Revenues can be lumpy quarter-on-quarter; however, given the current momentum, which excludes the potential impact of the Audi deal, this looks like a very comfortable target.

EBITA margins, while still trending in the right direction (10.4% in Q3), were not quite as strong as we expected, affected by a tight labour market compelling a greater use of freelancers; the protracted pitch process for the Audi deal; and margin pressure in three ‘agile’ projects – an approach being trialled at SZZ. Management now expects to deliver EBITA of €4.5m (down from previous guidance of €5m).

Forecast changes and outlook

We are making the following changes to estimates (summarised in Exhibit 1):

Year to August 2016: to reflect the strong run rate in revenues year to date, offset with resource pressure on margins, for the current year (to August 2016), we are increasing our revenue forecast but reducing margins. Overall, we reduce our FY16 EPS by 4%.

2017 and 2018: we expect the Audi win to have a significant impact on the group’s revenue profile and, even after factoring in some resource reallocation, we are increasing our FY17 and FY18 revenue forecasts by 9% and 12% respectively. A tight labour market is a recurrent issue for all digital agencies in Germany. However, the other pressures on margin (prolonged Audi pitch process and margin pressure in three ‘agile’ projects) should not persist into FY17. We trim our margin assumption in FY17 and FY18, but continue to expect year-on-year margin expansion. Overall, our changes convert to a 4% and 10% increase in our adjusted EPS forecasts in FY17 and FY18.

Exhibit 1: Summary forecast changes

 

2016e

2017e

2018e

Revenues

Old

50,491

53,859

57,629

New

51,000

58,650

64,515

Change

1%

9%

12%

Operating income - reported

Old

4,717

5,646

6,178

New

4,500

5,865

6,774

Change

-5%

4%

10%

Operating income - adjusted

Old

5,217

5,646

6,178

New

5,000

5,865

6,774

Change

2%

4%

10%

Diluted EPS - adjusted

Old

30.5

32.7

35.5

New

29.2

34.0

38.9

Change

-4%

4%

10%

Source: Edison Investment Research

Valuation: Peer comparison

Exhibit 2: Listed peer comparison

Year end

Price

Market
cap (m)

Sales current

EBITA margin current

Sales growth current

Sales growth next

EV/Sales current (x)

EV/Sales next
(x)

EV/EBIT current (x)

EV/EBIT next
(x)

P/E
current (x)

P/E
next (x)

Pure digital agencies

SZZ- calendarised*

30/08/16

€5.2

€59

53

9.7%

4%

13% 

1.1

0.9

9.5 

9.1

16.7

14.5

Syzygy

31/12/16

€11.0

€141

65

9.9%

13%

12%

1.8

1.6

18.2

16.2

25.9

24.2

Ad Pepper Media Int.

31/12/16

€2.3

€54

65

1.5%

16%

14%

0.5

0.5

36.1

15.7

58.4

24.6

1000mercis

31/12/16

€37.4

€117

61

15.8%

16%

14%

1.7

1.5

10.9

10.5

17.5

15.4

Antevenio

31/12/16

€5.0

€21

26

NA

13%

8%

0.7

0.6

NA 

NA 

10.9

8.8

NetBooster

31/12/16

€2.0

€33

40

12.6%

(64%)

7%

1.0

0.9

7.6

6.8

11.8

10.5

dotdigital group

30/06/16

€48.0

€141

28

21.4%

(18%)

23%

4.5

3.6

20.8

15.6

26.7

21.8

Reply

31/12/16

€123.9

€1,159

783

12.6%

9%

10%

1.4

1.3

11.5

10.3

17.8

15.9

Next Fifteen Com.

31/01/17

€279.5

€202

155

13.7%

42%

8%

1.3

1.3

9.8

9.0

19.1

18.5

Adesso

31/12/15

€21.5

€125

193

NA

23%

7%

0.6

0.5

NA 

NA 

34.1

21.9

Average

 

 

 

 

 

 

 

 

 

 

 

21.7

19.3

Publicis Groupe

31/12/15

€55.1

€12,251

9,488

15.1%

31%

5%

1.2

1.1

7.8

7.3

13.0

12.1

Havas

31/12/15

€7.3

€3,065

2,155

13.9%

16%

7%

1.4

1.3

10.4

9.5

16.5

14.9

WPP

31/12/15

€1,503

€19,460

12,083

14.7%

5%

1%

1.8

1.8

12.2

11.6

16.2

14.8

Interpublic Group

31/12/15

€22.4

€9,118

7,606

11.5%

1%

4%

1.2

1.2

10.5

9.6

19.6

17.0

Average larger agencies 

 

 

 

 

 

 

 

 

 

 

16.3

14.7

Source: Bloomberg, Edison Investment Research. Note: Prices as at 18 July 2016.

Exhibit 3: Financial summary

€'000s

2014

2015

2016e

2017e

2018e

Aug

IFRS

IFRS

IFRS

IFRS

IFRS

PROFIT & LOSS

Revenue

 

 

48,601

47,690

51,000

58,650

64,515

Cost of Sales

(37,168)

(35,659)

(37,368)

(41,055)

(45,161)

Gross Profit

11,433

12,032

13,632

17,595

19,355

EBITDA

 

 

5,384

5,251

5,823

6,770

7,765

Continuing EBITA

 

 

4,600

4,200

5,000

5,865

6,774

Intangible Amortisation

(82)

0

0

0

0

Exceptionals

0

(614)

0

0

0

Discontinued operations

(1,536)

(1,503)

(500)

0

0

Operating Profit

2,982

2,083

4,500

5,865

6,774

Net Interest

8

(2)

4

0

2

Profit Before Tax (norm)

 

 

4,608

4,198

5,004

5,865

6,776

Profit Before Tax (FRS 3)

 

 

2,990

2,081

4,504

5,865

6,776

Tax

(1,147)

(563)

(1,455)

(1,889)

(2,182)

Profit After Tax (norm)

3,124

2,847

3,388

3,976

4,594

Profit After Tax (FRS 3)

1,843

1,518

3,049

3,976

4,594

Average Number of Shares Outstanding (m)

11.1

11.3

11.6

11.7

11.8

EPS - normalised (c)

 

 

28.0

25.2

29.3

34.1

39.0

EPS - normalised fully diluted (c)

 

 

27.8

25.1

29.2

34.0

38.9

EPS - (IFRS) (c)

 

 

16.5

13.4

26.4

34.1

39.0

Dividend per share (c)

12.0

12.0

13.0

13.7

14.3

Gross Margin (%)

23.5

25.2

26.7

30.0

30.0

EBITDA Margin (%)

11.1

11.0

11.4

11.5

12.0

Operating Margin (before GW and except.) (%)

9.5

8.8

9.8

10.0

10.5

BALANCE SHEET

Fixed Assets

 

 

7,039

6,601

6,354

6,275

6,136

Intangible Assets

5,136

4,999

4,481

4,481

4,481

Tangible Assets

1,902

1,603

1,873

1,794

1,655

Investments

0

0

0

0

0

Current Assets

 

 

21,512

21,130

23,127

27,325

31,744

Stocks

0

0

0

0

0

Debtors

15,590

14,830

15,859

18,238

20,062

Cash

5,833

5,559

6,526

8,346

10,941

Other

90

741

741

741

741

Current Liabilities

 

 

(13,777)

(12,475)

(12,720)

(14,439)

(15,794)

Creditors

(13,777)

(12,475)

(12,720)

(14,439)

(15,794)

Short term borrowings

0

0

0

0

0

Long Term Liabilities

 

 

(699)

(296)

(296)

(296)

(296)

Long term borrowings

0

0

0

0

0

Other long term liabilities

(699)

(296)

(296)

(296)

(296)

Net Assets

 

 

14,075

14,960

16,465

18,866

21,790

CASH FLOW

Operating Cash Flow

 

 

2,656

2,244

4,545

6,119

7,305

Net Interest

8

(2)

4

0

2

Tax

(1,147)

(563)

(1,455)

(1,889)

(2,182)

Capex

(1,504)

(458)

(788)

(827)

(852)

Acquisitions/disposals

(306)

(300)

0

0

0

Financing

177

153

0

0

0

Dividends

0

(1,348)

(1,339)

(1,583)

(1,679)

Net Cash Flow

(117)

(274)

967

1,820

2,595

Opening net debt/(cash)

 

 

(5,949)

(5,833)

(5,559)

(6,526)

(8,346)

HP finance leases initiated

0

0

0

0

0

Other

0

0

(0)

(0)

(0)

Closing net debt/(cash)

 

 

(5,833)

(5,559)

(6,526)

(8,346)

(10,941)

Source: Company accounts (historic), Edison Investment Research (forecasts)

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Germany

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United Kingdom

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Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

245 Park Avenue, 39th Floor

10167, New York

US

Sydney +61 (0)2 9258 1161

Level 25, Aurora Place

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NSW 2000, Australia

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New Zealand

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