Flagships lead the way

Centaur has undergone a significant transformation over the last few years, from a magazine and newsletter publisher for consumer and professional markets to an international B2B market intelligence and consultancy business with growing subscription revenues. Its portfolio is now focused on two verticals, marketing and brand management and the professional legal market. The group is increasingly supplying data and analysis to help its clients in their digital transformation and ecommerce implementations. It is leveraging its expertise through a content-delivery strategy that is building its subscription base. Its offering includes premium content, training and advisory consultancy, events, marketing services, marketing solutions and recruitment advertising.

With the previous MAP22 plan affected by the COVID-19 pandemic, management has now reframed its objectives around FY23. By this time, the target is for revenues to have exceeded £45m (from £32.2m in FY20e) and for the EBITDA margin to have reached 23% (over 10% in FY20e). Although our formal modelling only extends to FY22, these targets fit with the trajectory we have illustrated. To reach these levels, the group needs to move up a gear in driving new business through new clients and by driving up- and cross-selling. The balance sheet is strong, having been bolstered before the pandemic through various disposals for cash, leaving the group with a healthy net cash position. Cash conversion is strong (80%+), meaning the group is in a position to invest in the necessary resources to drive the growth.

Centaur’s stock is relatively tightly held with a high-quality institutional register. We would argue this has accentuated the pricing discrepancy between Centaur and its peers, although an element reflects the mixed history of delivery against financial expectations. With a tighter focus and clearer implementation plan, this record should improve. Our preferred metric is EV/EBITDA and we have looked at the group in the context of other B2B media groups (applying a 30% discount to the larger, more liquid shares). Averaging across FY19, FY20e and FY21e to take account of the effect of the pandemic, Centaur’s shares are trading at a discount of 21% with parity indicating an equivalent price of 40p. A DCF, with a WACC of 9% and terminal growth rate of 2% suggests a price nearer 58p. To close this discount will require management to deliver on its outlined strategy.

Experiences through FY20 have shown not all risks can be anticipated. By ensuring the utility of the content provided to users, Centaur can (and has) retained its strong client base. The business inevitably has sensitivities to issues such as credit risk (mitigated by a wide range of customers), IT and data risk. In our view, the most substantive risk is executing on delivering against the MAP23 strategy.

Over recent years, Centaur Media has undergone a substantial transformation programme, migrating from a specialist consumer and professional print business across a wide variety of sectors, to an online provider of B2B content, consultancy and training services to the marketing and legal sectors. In FY10, the group’s revenues were split 39% print advertising, 31% live events, 15% digital advertising and 14% paid-for content. By FY15, print advertising had decreased to 13% and live events were the largest element at 39%, with paid-for content increased to 28% of group.

In 2018, the group undertook a strategic review to identify those markets where prospects were strongest, resulting in the decision to concentrate on the marketing and legal sectors, where the group had scale and where rapid structural change was most likely to lead to demand for business insight and guidance. The following year (FY19), Centaur trimmed its portfolio from 28 to seven brands, raising gross disposal proceeds of £22.0m and bolstering the balance sheet. With the interim results that year, management set out its strategy for resuming growth and improving profitability, MAP22.

In August 2020, and in response to the COVID-19 pandemic, the group slimmed down further, with the closure of MarketMakers, a low-margin telemarketing operation.

Given FY20 was considerably different to expectations due to the pandemic, MAP22 has been reframed and relaunched as MAP23. We examine this in more detail below.

Reporting lines were realigned after the strategic review, with the group brands now organised in two segments, Xeim, which operates in the marketing services industry, and The Lawyer, which serves the legal profession. These are described in greater detail below. Both areas offer premium content, events, marketing solutions and advertising solutions (mostly recruitment advertising). On a group basis, our model for FY20e (based on H120 figures, but with a heavier H2 weighting to Training & Advisory) indicates 41% of revenues from continuing business from premium content, with 26% from training and advisory activities. Obviously, in FY20 live events were severely curtailed by the COVID-19 pandemic and recruitment advertising was also heavily constrained. In FY19, the underlying revenue (excluding the telemarketing operation MarketMakers) was split: 37% Premium content, 25% Training & Advisory, 12% Events, 9% Marketing Solutions, 11% Marketing Services and 5% Recruitment Advertising.

The group has a high degree of recurring and repeatable revenues, identified at 62% of FY19 revenues, up from 56% the previous year. The group’s Premium Content revenues are effectively all derived from annual subscriptions.

As the group builds its suite of digital subscription products and, in particular, grows its enterprise-level subscription book of business, the quality of earnings is increasing and the ’stickiness’ improves.

The management team is headed by Swag Mukerji CEO and Simon Longfield CFO. Swag joined the group in July 2016 as CFO and took over as CEO when Andria Vidler stepped down in September 2019. Swag is a qualified accountant with senior management experience in CEO, CFO and COO roles across a wide range of private and quoted companies and multiple sectors from healthcare to consumer products to medical technology. Simon joined the group in November 2019, having previously been CFO of BMI Research. This was a subscription business, acquired by Fitch having expanded internationally under his watch. Their tenure marks a distinct departure from the print heritage of the group. The chair is Colin Jones, previously group finance director of Euromoney.

Swag and Simon present their views on the challenges and opportunities facing the group in this video interview.

MAP22, the earlier margin acceleration plan, was put in place to drive improvement in EBITDA margin over three years to at least 20% by FY22. Obviously, this took no account of the impact of the pandemic on the business and the economy, and the initiative has now been reframed with the time horizon pushed out a year to FY23.

The key targets are now to deliver:

This requires a CAGR of 11.8% from the guidance of at least £32m revenue for FY20e and a doubling of EBITDA margin from the forecast 11.5% in FY20.

The underlying objective is unchanged: to deliver against Centaur’s financial targets through profitable, organic revenue growth. MAP22 also sought (and achieved) enhanced cost efficiencies. It included the following objectives:

The theme within MAP22 of driving revenues from Influencer Intelligence, Mini-MBA and other eLearning courses, Festival of Marketing, Econsultancy and The Lawyer has been refined. With the exception of Festival of Marketing, these other properties have been identified as the group’s Flagship 4, which will benefit from prioritisation of investment and resource.

The rest of the portfolio will continue to play an important role, particularly in facilitating the cross-and up-sell across the range of the group’s expertise.

The Xeim brands are as shown in Exhibit 3, above. Three are identified as Flagship brands: Econsultancy, Influencer Intelligence and the Mini-MBA. We estimate these business areas represented around 60% of segmental revenues in FY20 and we discuss them in greater detail below.

Econsultancy (we estimate around 19% of the group’s expected continuing FY20 revenues) has two key service offerings: insight and learning. The platform helps its users to enhance the performance of their marketing and ecommerce propositions through digital marketing transformation. This is delivered online as training, insight and essential information to stay up to date in a fast-changing landscape.

The premium content may be provided on a traditional consultancy basis, typically to major brands but increasingly on a subscription basis, incorporating business information and analytics. Most content is now behind a paywall. Although digital transformation has been in progress amongst the potential and existing client base for many years, the process is never complete and one-off projects can and do morph into long-term working relationships. While subscriptions are lower value, the value is considerably higher in margins, with content created once and used multiple times. Management believes it deals with 55 of the largest UK spenders on digital marketing.

Econsultancy also offers digital learning content, built into courses and available as one-off modules. While traditionally this was offered on a face-to-face basis, COVID-19 has encouraged the development of online options, with the future likely to be one of blended learning.

Historically, Econsultancy sold its training and consultancy services separately from its subscription offering. A revised marketing approach is putting subscriptions at the heart of a combined offering, which should help lift volumes, with cross- and up-sells to existing clients and a more coherent proposition for potential customers.

Influencer Intelligence (we estimate c 10% of FY20 revenues) has established itself as a market-leading source of trusted information and analytics for brands looking to harness the power of global influencers and talent. Revenues grew 11% in 2019, although we would anticipate it may have been a more difficult market in FY20 as the pandemic took hold and brands’ marketing strategies were reappraised. The influencer market is a relatively recent phenomenon and pricing structures are yet to formalise. However, it is gaining traction quickly and management states Mediakix has valued the market at $15bn by FY22. A small number of influencers now command very high fees and value is difficult to assess. Centaur’s database currently covers around 120k individual influencers and the intention is to scale considerably, adding another 250k.

The product is sold on subscription to brands and to agencies. The additional scale, alongside the analytics, should enable subscription pricing to build.

Mini-MBA (we estimate c 16% of FY20 revenues) was set up as an offering of Marketing Week, along with its columnist and high-profile industry figure, Mark Ritson, in 2016 and has since taken on a life of its own. It sells courses in marketing and, since 2019, brand management. While the qualification is not independently accredited, it is increasingly cited by marketing professionals in their resumes. Customers include familiar global names in the technology and FMCG sectors.

With online delivery and a move to a new operating platform, the proposition is increasingly scalable, with the opportunity to increase the number of cohorts each year. The marketing effort is now being stepped up, using the experience gleaned from ecommerce in other parts of the group. Professor Mark Ritson continues to be the ‘face’ of the Mini-MBA. He has a high profile in the industry for keynote speaking and thought leadership, having taught marketing on MBA programmes and has a financial interest in the ongoing success of the programme, although the IP rests with Centaur. There is considerable opportunity to extend the programme geographically – particularly in the US.

The remaining brands within the portfolio have been retained because they are of genuine value to the group. Oystercatchers, previously reported within Econsultancy, is a consultancy bought in 2016 that assists clients with the pitch process between client and agency. This gives the group a strong entrée into new clients, which can then be introduced to the other group services. Really was kept when MarketMakers was sold and is now run (remotely for the time being) from the main group offices. Its business model is about curating leads to drive return on marketing investment – a service inherently useful inside the group and to third parties. Festival of Marketing has had to reinvent itself to suit the altered circumstances but has good traction with sponsors and audiences. Its efforts are now focused on building greater year-round engagement with its stakeholders. Marketing Week, Fashion & Beauty Monitor, Design Week and Creative Review are all strong brands within their verticals, driven by relevant and engaging content.

We estimate The Lawyer is c 20% of continuing FY20 group revenues. The Lawyer brand is the sole remaining non-marketing-oriented business from what used to be a very broad portfolio. When other titles were sold, offers were invited but none reflected the quality and potential of the asset, which is a genuine flagship market intelligence product for the global legal sector. Around 60% of the segmental revenues are derived from premium content. In FY19, The Lawyer had more than 300 corporate clients, including 90% of the 50 largest UK firms and top US firms in London.

The strategy to develop the business is centred on driving subscription revenues and increase regular engagement by individuals within subscribing firms, so building value. Historically, The Lawyer compiled one-off reports throughout the year that help firms benchmark themselves against their peers. By increasing the relevant content delivered through regular newsletters and by running trackers in areas such as litigation, the utility to the individual user and the client is increasing. Driving regular use of The Lawyer’s resources should help with client retention, although this is not an issue as renewals are reported by management to be very strong. Embedding The Lawyer’s content into users’ work-flows also makes conversations on pricing easier to broach.

The Lawyer also runs popular events and awards ceremonies, although this has obviously not been possible in the traditional way during the pandemic.

In FY19, the group set up an employee advisory panel on diversity, inclusion, culture and engagement, reporting to the CEO and with a NED sponsor. Management conducts regular ‘town hall’ meetings with staff, including Q&A, currently carried out virtually.

The workforce is roughly evenly split male: female, with the ratio at board level of 5:3. The board consists of six non-executive directors, plus the group CEO and CFO.

With the workforce now predominantly consolidated into the WeWork office at Waterloo, London and little in the way of remaining print assets, Centaur’s direct environmental footprint is relatively limited. However, management is committed to minimising the impact under its control.

The group has undergone a considerable transformation over the last few years, with a large number of operations closed or disposed, leading to restatements of earlier accounts and making any assessment of the long-term historical performance of limited use. Our financial summary (Exhibit 8) presents the historic FY19 and FY18 numbers as published in the FY19 Report & Accounts, themselves restated for the earlier disposals. During FY20, the telemarketing operation was closed and we would therefore anticipate the FY19 figures will be restated on a continuing basis on publication of the full-year figures on 17 March. Stripping the MarketMakers, Marketing Week Live and VBR revenue (£10.4m) out of the FY19 figures gives a true revenue comparator of £38.4m.

The trading update indicates a FY20 revenue of ‘at least £32m’ and our model suggests £32.2m, in line with management guidance. This is an underlying, like-for-like decrease of 16%, which primarily reflects the impact of the COVID-19 pandemic on the conduct of the business. The largest element of the shortfall is attributable to events, both within Xeim, where the Festival of Marketing was conducted online rather than in person (although this improved the achieved gross margin) and at The Lawyer, where the normal awards ceremonies were also in abeyance. Recruitment advertising also understandably will have taken a hit in the year, with the other areas of shortfall shown in the exhibit below.

We have been relatively cautious in our assumptions and do not anticipate that in-person events will resume in FY21. Future events may evolve as a hybrid offering with a mix of physical and virtual. Our modelling is more aggressive in the build of training and advisory over the forecast period, given the group’s ambitions to scale the Mini-MBA platform and offering. We anticipate this segment will account for 43% of Xeim’s revenues by FY22, from 24% in FY19 (continuing revenues). We expect there will be a seasonal weighting to H2 each year, driven by the timing of events and with some year-end budget utilisation at client companies. Driving subscriptions within the mix will obviously help to smooth this out.

Exhibit 6 shows how the revenues are set to build across our forecast period to FY22. The new MAP23 plan extends a year further, with the stated ambition to build to revenue of £45m and an EBITDA margin of 23%. This looks achievable on the trajectory we have outlined.

A key benefit of the portfolio concentration has been the reduction of the operating cost base, with close management of costs has been a continuing theme. The removal of duplicated brand management and processing costs were estimated at taking £5m out of central costs on an annualised basis at the time of the FY19 final results. On a practical level, it facilitated the group’s operations being able to move out of expensive office space in London W1 and relocate to serviced offices in London SE1.

With the onset of the pandemic, management acted quickly on controllable costs, halting recruitment, reducing board and senior management remuneration and furloughing roughly 25% of the workforce. The decision was also taken to close MarketMakers, which had been operating from offices in Portsmouth. This will also have a beneficial impact on future group margins, as MarketMakers was a relatively labour-intensive, telemarketing operation, making it more difficult to scale.

While some of the pandemic cost cutting will have been temporary, we expect there to be a continuing improvement in EBITDA margin as the business evolves along the MAP23 path. This is predicated on an underlying principle that is much of the premium content can be created once and sold many times. Systemisation should help the business to scale efficiently. Similarly, expanding the numbers within the cohorts taking the Mini MBA courses drives the revenue while having little impact on costs.

Centaur has, in retrospect, been fortunate in the timing of its simplification and disposal programme. The rebasing of costs to better align with the revised scale and scope of the group’s activities should flow through in an improved, smoother cash flow profile.

The group’s business model has inherently attractive cash flow properties, with conversion of adjusted EBITDA to cash of 85% in FY18 and 100% in FY19.

In September 2019, Centaur laid out a revised dividend policy, targeting a 40% payout of adjusted earnings. It had planned a 5.0p special dividend to share the disposal proceeds, to be paid in May 2020, but this was deferred in light of the circumstances of the pandemic. In our model, we have assumed that the strength of the balance sheet will enable a final dividend to be paid in respect of FY20e and have pencilled this in at 0.5p. For the following year and for FY22e, we have assumed a payment of 1.0p.

The FY19 disposals of assets servicing financial services, business travel, HR and engineering raised net proceeds of £16.4m and transformed the balance sheet, which ended that year in a net cash position of £9.1m. Despite the effect of the pandemic on the operation of the business, the careful management of cash has ensured the balance sheet has stayed healthy without recourse either to shareholders or the banks.

In November 2018 the group renewed its £25m multi-currency revolving credit facility with the Royal Bank of Scotland and Lloyds, which runs to November 2021, with the option to extend for two periods of one year each. The recent end FY20 trading update indicates a year-end position of £8.3m net cash, with the RCF undrawn. This is despite having paid out £1.2m in H220 in exceptional costs mostly relating to the closure of MarketMakers. We expect the cash position to remain at around the same level in FY21e and step up over the following years, reflecting the good projected cash flow, despite continuing investment in sales and capability. At some juncture acquisitions may be back on the cards, but at this point, management’s efforts are concentrated on developing the assets within the portfolio to their optimum extent.

With the greater focus in the business model following the series of disposals, the sensitivities to the financial performance have also concentrated. The last year has clearly demonstrated that not all can be foreseen or planned for. The COVID-19 pandemic has had a profound effect on the way business is conducted, with the impact most obviously demonstrated within the events segment, where in-person events were first postponed then reconfigured to an online format, although with a high negative effect on revenues and margin. The roll-out of the vaccine programme increases the prospect that some or all planned events can be resumed, although we think this unlikely for FY21. In future years, it is possible an online element will be maintained.

The key sensitivity is in the execution risk around the implementation of MAP23. The reconfiguration of the sales function needs to deliver against the promise and on the subscription revenues that will improve the quality of underlying earnings.

The Financial Conduct Authority (FCA) requires premium listed companies to maintain a free float of at least 25%. It does not regard Centaur’s major institutional shareholders (see page 12) as contributing to that free float, which it calculates at 18.5%. The FCA has granted the company a temporary modification to its listing obligations to allow for a minimum of 17.5% of the ordinary shares in the company to be held in public hands. This modification runs until 27 May 2021.

Other sensitivities are common to most business and include:

Centaur has a high-quality share register, comprising multiple institutions as listed below, with the shares tightly held.

We have appraised the valuation of Centaur’s shares in the context of a UK-based peer group and looked at the value suggested by a DCF analysis.

We have chosen a peer set comprising other UK quoted B2B media companies, which we regard as the closest comparators. Two of them are far larger in scale (RELX and Ascential). To reflect their size and scale differential, we have discounted their ratings by 30%, while acknowledging t this is a subjective judgement.

With a relatively wide range of valuation metrics, we have compared Centaur’s rating with the median of peers. As we estimate negative EPS for FY20, we have looked at FY21e, where the P/E of 66.5x at the current price compares to 19.5x for peers, but the larger recovery is in earnings is set for FY22, where sector forecasts are not yet broadly available. The differential is clearer when looking at EV/Sales and EV/EBITDA. Centaur’s shares are priced at a notable discount, which we would ascribe partly to the group’s mixed financial performance and previous disappointments. Parity with peers on EV/Sales for FY20 would imply a share price of 47p and on EV/EBITDA averaged across FY19, FY20 and FY21 would suggest a price of 40p, 21% higher than the current level.

We have also looked at a DCF using various WACCs and terminal growth rates, as shown in the exhibit above, with an assumption of 5% forecast revenue growth beyond the explicit forecast period. For illustrative purposes, if we select a WACC of 9.0% and a terminal growth rate of 2%, the valuation derived is 58p, ahead of the level suggested by the peer comparison.