Next 15 Group — Baked in AI opportunities

Research: TMT

Next 15 Group — Baked in AI opportunities

Next 15 Group’s net revenues grew 2.5% in the year to January, despite difficult markets. Adjusted operating margin rose from 20.2% to 21.0%, helped by head office cost savings. In common with much of the sector, spending by tech clients was soft, down 17% like-for-like. The group did well, though, in growing spend from non-tech clients, up 11%, making for a strong overall performance in a market beset by ongoing macro uncertainty. Next 15 has been building its AI capabilities for some time and this is now starting to show in efficiency and margin. It has the balance sheet strength to keep investing here, internally and through M&A, which should stand it in good stead as client confidence improves.

Fiona Orford-Williams

Written by

Fiona Orford-Williams

Director, TMT

TMT

Next 15 Group

Baked in AI opportunities

Media

QuickView

17 April 2024

Price

879p

Market cap

£873m

Share price graph

Share details

Code

NFG

Listing

AIM

Shares in issue

99.3m

Business description

Next 15 is a tech- and data-driven growth consultancy with operations in Europe, North America and across Asia-Pacific. It has a strong track record of creating and acquiring high-performance businesses and has long-term customer relationships with many of the world’s leading companies including Google, Amazon, Facebook, Microsoft, IBM, American Express and Procter & Gamble.

Bull

Strong and loyal client roster.

Opportunities for efficiency and growth from AI.

Robust balance sheet supports M&A, investment and buybacks.

Bear

Continuing macro uncertainty.

Lack of clarity on timing of recovery in tech spend.

Current rating may limit use of equity for M&A.

Analyst

Fiona Orford-Williams

+44 (0)20 3077 5739

Next 15 Group's net revenues grew 2.5% in the year to January, despite difficult markets. Adjusted operating margin rose from 20.2% to 21.0%, helped by head office cost savings. In common with much of the sector, spending by tech clients was soft, down 17% like-for-like. The group did well, though, in growing spend from non-tech clients, up 11%, making for a strong overall performance in a market beset by ongoing macro uncertainty. Next 15 has been building its AI capabilities for some time and this is now starting to show in efficiency and margin. It has the balance sheet strength to keep investing here, internally and through M&A, which should stand it in good stead as client confidence improves.

Holistic solutions from brand to demand

Organic growth was 0.3% in the year, which reflects both tech sector weakness and the dearth of IPOs. Management sees both these factors improving in the current year, with more IPOs post the successful debut of Reddit, although the timing on tech spend is more likely to be H2 weighted. Next 15’s decentralised operating model gives it flexibility to move resource behind market trends, such as the more holistic marketing approach some major global brands are adopting, by integrating brand spend with demand promotion, rather than seeing these as competing pots.

Healthy resource for investment

With year-end net debt of £1.4m and £150m of bank facilities in place, Next 15 has plenty of scope for further M&A. FY24 and FY25 (to date) deals have been at below seven times earnings, in the data/digital space, bringing in an additional annualised £25m of revenue. Internally, the group continues to invest in its AI capabilities, in terms of improving the efficiency and scope of its client offering, while it is now also licensing three products externally. Management views AI as being embedded across service lines, with clients expecting more in areas such as mass personalisation, rather than using it as a tool to beat down on pricing. Products such as SMG’s Plan-Apps, which facilitates retail and commerce media planning, are at the forefront here and are already delivering meaningful growth for retailers and attracting new business.

Valuation: Modest earnings multiple

The share price is up 59% from last August’s low and up 10% year to date, making it one of the better UK sector performers. In a wider context, the rating may be modest, particularly given management’s ambitions to double the size of the group over the next five years while protecting margins. The extension of the share buyback (up to £10m) to end July from end April adds further underpinning.

Consensus estimates

Year
end

Net revenue
(£m)

Adj. operating
profit*(£m)

PBT*
(p)

EPS*
(p)

P/E
(x)

Yield
(%)

01/23

563.8

114.2

112.5

80.4

10.9

1.7

01/24

577.8

121.1

117.9

81.6

10.8

1.7

01/25e

615.0

130.0

127.6

89.3

9.8

1.9

01/26e

652.4

138.3

137.9

96.9

9.1

2.1

Source: LSEG. Note: *Operating profit, PBT and EPS are normalised and fully diluted, excluding amortisation of acquired intangibles, exceptional items and share-based payments.

EDISON QUICKVIEWS ARE NORMALLY ONE-OFF PUBLICATIONS WITH NO COMMITMENT TO WRITING ANY FOLLOW UP. QUICKVIEW NOTES USE CONSENSUS EARNINGS ESTIMATES.

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General disclaimer and copyright

This report has been prepared and issued by Edison. Edison Investment Research standard fees are £60,000 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: 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 and have not sought for this information to be independently verified. Opinions contained in this report represent those of the research department of Edison at the time of publication. 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.

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No personalised advice: The information that we provide should not be construed in any manner whatsoever as, personalised advice. Also, 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 securities described in the report may not be eligible for sale in all jurisdictions or to certain categories of investors.

Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. 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, subject to Edison's policies on personal dealing and conflicts of interest.

Copyright: Copyright 2024 Edison Investment Research Limited (Edison).

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Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Crown Wealth Group Pty Ltd who holds an Australian Financial Services Licence (Number: 494274). This research is issued in Australia by Edison AU and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. Any advice given by Edison AU is general advice only and does not take into account your personal circumstances, needs or objectives. You should, before acting on this advice, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. If our advice relates to the acquisition, or possible acquisition, of a particular financial product you should read any relevant Product Disclosure Statement or like instrument.

New Zealand

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. 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 (i.e. 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.

United Kingdom

This document is prepared and provided by Edison 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.

This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document.

This Communication is being supplied to you solely for your information and may not be reproduced by, further distributed to or published in whole or in part by, any other person.

United States

Edison 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. This report is a bona fide publication of general and regular circulation offering impersonal investment-related advice, not tailored to a specific investment portfolio or the needs of current and/or prospective subscribers. As such, Edison does not offer or provide personal advice and the research provided is for informational purposes only. No mention of a particular security in this report constitutes a recommendation to buy, sell or hold that or any security, or that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person.

London │ New York │ Frankfurt

20 Red Lion Street

London, WC1R 4PS

United Kingdom

London │ New York │ Frankfurt

20 Red Lion Street

London, WC1R 4PS

United Kingdom

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