Margin benefits

Creston 6 September 2016 Update

Creston

Margin benefits

AGM statement

Media

6 September 2016

Price

103.50p

Market cap

£61m

Net cash (£m) at 31 March 2016

1.4

Shares in issue

58.7m

Free float

95.8%

Code

CRE

Primary exchange

AIM

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

12.0

13.2

(31.3)

Rel (local)

10.2

3.1

(39)

52-week high/low

162.00p

84.00p

Business description

Creston plc, incorporating the Creston Unlimited group offer, is a marketing communications group delivering a range of digital technology-based marketing solutions to blue-chip global clients.

Next events

Half year results

Late November 2016

Analysts

Fiona Orford-Williams

+44 (0)20 3077 5739

Bridie Barrett

+44 (0)20 3077 5700

Creston is a research client of Edison Investment Research Limited

Creston’s AGM statement this morning confirms that trading is in line with expectations for the current year and our forecasts for both FY17 and FY18 are unchanged. Revenue in the first four months of FY17e was broadly flat over the previous year, but profits are more strongly ahead. This is partly currency-related, partly reflecting improvements to margins stemming from FY16’s operational initiatives showing through more strongly. The valuation remains at a marked discount to peers, despite the strong balance sheet and well-covered, premium dividend yield.

Year
end

Revenue (£m)

PBT*
(£m)

EPS*
(p)

DPS
(p)

P/E
(x)

Yield
(%)

03/15

76.9

10.0

13.1

4.2

7.9

4.1

03/16

82.6

9.9

12.0

4.4

8.6

4.3

03/17e

85.0

10.5

12.1

4.6

8.6

4.4

03/18e

87.5

11.0

12.3

4.8

8.4

4.6

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

Overhead management

The trading story is little changed from that at the prelims; revenues from good new business gains have been offset by delays and postponements on client projects. This is particularly true of the UK health-facing segment, which continues to be a turbulent market, with a concentration in Creston’s client base in the larger accounts and a fall-off in the business from the long tail of clients. Prompt moves on managing overheads and the ongoing benefits of the group’s Unlimited initiative are helping buoy margins, along with some benefit from weaker sterling compared to the prior year. An annualised £1.2m was taken out of non-client facing operating costs in FY16 (£0.7m in Comms & Insight, £0.5m in Health).

Cash characteristics remain strong

Creston’s balance sheet showed net cash of £1.4m at end March 2016. The group has naturally strong cash conversion, with little requirement for capital expenditure. For FY16, operating cash flow conversion ran at 111% of EBITDA, giving a five-year average figure of 92%. The group’s working capital position is well controlled, and our model shows an increase in net cash to £4.2m at end FY17 and £7.0m the year after. There is no debt.

Valuation: Continued discount

When compared with agency peers, Creston’s shares are trading on a discount of more than 30% on an annualised 2016 EV/EBITDA basis at 5.1x. A DCF under varying conservative assumptions on WACC and terminal growth rates also indicates a share price in a range of 114p to 130p. With a (comfortably covered) dividend, the yield is well in excess of market and sector levels. DBAY Advisors, which is represented on the board, holds 28.0% of the equity, with Artemis holding a further 15.6%.

Exhibit 1: Financial summary

£000s

2015

2016

2017e

2018e

31-March

IFRS

IFRS

IFRS

IFRS

PROFIT & LOSS

Sales

100,135

108,045

110,301

113,554

Cost of Sales

(23,257)

(25,400)

(25,300)

(26,053)

Revenue

 

 

76,878

82,645

85,000

87,500

EBITDA

 

 

11,672

11,729

12,025

12,620

Operating Profit (before amort. and except.)

 

10,181

10,087

10,725

11,231

Intangible Amortisation

0

(789)

(600)

(612)

Goodwill impairment, restructuring

0

(15,156)

0

0

Acquisition, start-up & restructuring costs less movement in fair value of deferred consideration

(384)

(1,479)

0

0

Operating Profit

9,797

(7,337)

10,125

10,619

Net Interest

(174)

(233)

(225)

(201)

Profit Before Tax (norm)

 

 

10,007

9,854

10,500

11,030

Tax

(2,165)

(2,016)

(2,363)

(2,515)

Profit After Tax (norm)

7,775

7,838

8,137

8,515

Profit After Tax (FRS 3)

7,458

(9,586)

7,537

7,903

Minority interests

(86)

(840)

(1,055)

(1,300)

Average Diluted Number of Shares Outstanding (m)

58.8

58.2

58.6

58.8

EPS - normalised fully diluted (p)

 

 

13.1

12.0

12.1

12.3

EPS - (IFRS) (p)

 

 

12.5

(17.9)

11.1

11.2

Dividend per share (p)

4.2

4.4

4.6

4.8

Gross Margin (%)

76.8

76.5

77.1

77.1

EBITDA Margin (%)

15.2

14.2

14.1

14.4

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

13.2

12.2

12.6

12.8

BALANCE SHEET

Fixed Assets

 

 

111,763

104,931

104,231

103,480

Intangible Assets

106,637

99,796

99,196

98,584

Tangible Assets

5,126

4,199

4,099

3,960

Investments

0

936

936

936

Current Assets

 

 

37,508

31,556

35,728

39,824

Stocks

1,001

735

756

778

Debtors

28,195

29,380

30,822

32,046

Cash

8,312

1,441

4,150

7,000

Other

0

0

0

0

Current Liabilities

 

 

(28,271)

(26,814)

(27,027)

(27,541)

Creditors

(28,271)

(26,814)

(27,027)

(27,541)

Short term borrowings

0

0

0

0

Long Term Liabilities

 

 

(3,727)

(3,924)

(3,924)

(3,924)

Long term borrowings

0

0

0

0

Other long term liabilities

(3,727)

(3,924)

(3,924)

(3,924)

Net Assets

 

 

117,273

105,749

109,007

111,839

CASH FLOW

Operating Cash Flow

 

 

8,647

10,636

10,150

10,600

Net Interest

(190)

(208)

(225)

(201)

Tax

(2,003)

(3,279)

(2,103)

(2,401)

Capex

(961)

(1,062)

(1,200)

(1,250)

Acquisitions/disposals

0

(10,230)

(334)

0

Financing

(1,752)

(36)

0

0

Dividends (including minority divs)

(2,491)

(2,582)

(3,498)

(3,819)

Net Cash Flow

1,250

(6,761)

2,790

2,929

Opening net debt/(cash)

 

 

(7,452)

(8,312)

(1,441)

(4,150)

HP finance leases initiated

0

0

0

0

Other

(390)

(110)

(81)

(79)

Closing net debt/(cash)

 

 

(8,312)

(1,441)

(4,150)

(7,000)

Source: Company accounts, Edison Investment Research

Edison, the investment intelligence firm, is the future of investor interaction with corporates. Our team of over 100 analysts and investment professionals work with leading companies, fund managers and investment banks worldwide to support their capital markets activity. We provide services to more than 400 retained corporate and investor clients from our offices in London, New York, Frankfurt, Sydney and Wellington. Edison is authorised and regulated by the Financial Conduct Authority. Edison Investment Research (NZ) Limited (Edison NZ) is the New Zealand subsidiary of Edison. Edison NZ is registered on the New Zealand Financial Service Providers Register (FSP number 247505) and is registered to provide wholesale and/or generic financial adviser services only. Edison Investment Research Inc (Edison US) is the US subsidiary of Edison and is regulated by the Securities and Exchange Commission. Edison Investment Research Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison and is not regulated by the Australian Securities and Investment Commission. Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com

DISCLAIMER
Copyright 2016 Edison Investment Research Limited. All rights reserved. This report has been commissioned by Creston and prepared and issued by Edison for publication globally. All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report. Opinions contained in this report represent those of the research department of Edison at the time of publication. The securities described in the Investment Research may not be eligible for sale in all jurisdictions or to certain categories of investors. This research is issued in Australia by Edison Aus and any access to it, is intended only for "wholesale clients" within the meaning of the Australian Corporations Act. The Investment Research is distributed in the United States by Edison US to major US institutional investors only. Edison US is registered as an investment adviser with the Securities and Exchange Commission. Edison US relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. As such, Edison does not offer or provide personalised advice. We publish information about companies in which we believe our readers may be interested and this information reflects our sincere opinions. The information that we provide or that is derived from our website is not intended to be, and should not be construed in any manner whatsoever as, personalised advice. Also, our website and the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. This document is provided for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.
Edison has a restrictive policy relating to personal dealing. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report. Edison or its affiliates may perform services or solicit business from any of the companies mentioned in this report. The value of securities mentioned in this report can fall as well as rise and are subject to large and sudden swings. In addition it may be difficult or not possible to buy, sell or obtain accurate information about the value of securities mentioned in this report. Past performance is not necessarily a guide to future performance. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (ie without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision. To the maximum extent permitted by law, Edison, its affiliates and contractors, and their respective directors, officers and employees will not be liable for any loss or damage arising as a result of reliance being placed on any of the information contained in this report and do not guarantee the returns on investments in the products discussed in this publication. FTSE International Limited (“FTSE”) © FTSE 2016. “FTSE®” is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under license. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent.

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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

88 Phillip St, Sydney

NSW 2000, Australia

Wellington +64 (0)48 948 555

Level 15, 171 Featherston St

Wellington 6011

New Zealand

Edison, the investment intelligence firm, is the future of investor interaction with corporates. Our team of over 100 analysts and investment professionals work with leading companies, fund managers and investment banks worldwide to support their capital markets activity. We provide services to more than 400 retained corporate and investor clients from our offices in London, New York, Frankfurt, Sydney and Wellington. Edison is authorised and regulated by the Financial Conduct Authority. Edison Investment Research (NZ) Limited (Edison NZ) is the New Zealand subsidiary of Edison. Edison NZ is registered on the New Zealand Financial Service Providers Register (FSP number 247505) and is registered to provide wholesale and/or generic financial adviser services only. Edison Investment Research Inc (Edison US) is the US subsidiary of Edison and is regulated by the Securities and Exchange Commission. Edison Investment Research Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison and is not regulated by the Australian Securities and Investment Commission. Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com

DISCLAIMER
Copyright 2016 Edison Investment Research Limited. All rights reserved. This report has been commissioned by Creston and prepared and issued by Edison for publication globally. All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report. Opinions contained in this report represent those of the research department of Edison at the time of publication. The securities described in the Investment Research may not be eligible for sale in all jurisdictions or to certain categories of investors. This research is issued in Australia by Edison Aus and any access to it, is intended only for "wholesale clients" within the meaning of the Australian Corporations Act. The Investment Research is distributed in the United States by Edison US to major US institutional investors only. Edison US is registered as an investment adviser with the Securities and Exchange Commission. Edison US relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. As such, Edison does not offer or provide personalised advice. We publish information about companies in which we believe our readers may be interested and this information reflects our sincere opinions. The information that we provide or that is derived from our website is not intended to be, and should not be construed in any manner whatsoever as, personalised advice. Also, our website and the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. This document is provided for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.
Edison has a restrictive policy relating to personal dealing. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report. Edison or its affiliates may perform services or solicit business from any of the companies mentioned in this report. The value of securities mentioned in this report can fall as well as rise and are subject to large and sudden swings. In addition it may be difficult or not possible to buy, sell or obtain accurate information about the value of securities mentioned in this report. Past performance is not necessarily a guide to future performance. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (ie without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision. To the maximum extent permitted by law, Edison, its affiliates and contractors, and their respective directors, officers and employees will not be liable for any loss or damage arising as a result of reliance being placed on any of the information contained in this report and do not guarantee the returns on investments in the products discussed in this publication. FTSE International Limited (“FTSE”) © FTSE 2016. “FTSE®” is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under license. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent.

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

88 Phillip St, Sydney

NSW 2000, Australia

Wellington +64 (0)48 948 555

Level 15, 171 Featherston St

Wellington 6011

New Zealand

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

88 Phillip St, Sydney

NSW 2000, Australia

Wellington +64 (0)48 948 555

Level 15, 171 Featherston St

Wellington 6011

New Zealand

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