Creston |
January headwinds |
Q3 trading update |
Media |
27 January 2016 |
Share price performance
Business description
Next event
Analysts
Creston is a research client of Edison Investment Research Limited |
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Continuing strong new business wins over the first nine months of Creston’s financial year have not been sufficient to offset the revenue impact of project delays and retrenchment of some client budgets in Q4. The group’s underlying positioning, with its broad spread of clients and capabilities, is sound, its cash conversion is strong and the balance sheet is only likely to show c £0.5m net debt by the March year-end. These short-term revenue setbacks will dampen the rating until more consistent delivery starts to come through.
Year end |
Revenue (£m) |
PBT* |
EPS* |
DPS |
P/E |
Yield |
03/14 |
74.9 |
9.6 |
11.8 |
3.9 |
10.4 |
3.2 |
03/15 |
76.9 |
10.0 |
13.1 |
4.2 |
9.4 |
3.4 |
03/16e |
83.0 |
9.5 |
11.3 |
4.2 |
10.8 |
3.4 |
03/17e |
85.0 |
10.5 |
12.4 |
4.4 |
9.9 |
3.6 |
Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments.
Q3 ahead, Q4 hiatus
The trading update shows that Q3 revenue performance was ahead 2% like-for-like, with continuing good momentum on new business wins from new clients and through taking a wider share of spend of existing clients. The background has shifted in the new year. The statement describes a commercial environment of some jittery clients, unsure of how their budgets will be affected in the face of changing economic factors. Others are facing change of control or internal changes of personnel or reporting lines that are leading to a hiatus in previously scheduled projects. With just a few weeks to go until the end of Creston’s financial year, there is little scope for recovering margin through overhead management in the reporting period. We have pulled back our FY16 revenue forecast by £2.2m (in line with guidance), implying a £1.8m reduction at the pre-tax level. We have lowered our FY17 numbers by a similar percentage (EBITDA down 13% on previous forecasts for both years) until clearer evidence of recovery is apparent.
Higher weighting of new business
Strong new business wins remain a key positive in the investment story and it is particularly encouraging that those outlined in the statement are across a range of verticals and capabilities, but especially in digital strategy and CRM. The increased proportion of revenues in newly won accounts/briefs inevitably impacts on efficiency and margin, with short-term timing fluctuations making matching people to projects more challenging. As the workflow matures, that equation should ameliorate.
Valuation: Clear discount remains
Creston’s valuation now stands at 6.6x CY15 EV/EBITDA, a 20% discount to the marketing services sector; a 15% discount a year further out. We would expect this discount to start to close when there is an inflection in the newsflow and it becomes more consistently positive as the new business momentum gets translated into an improving earnings stream.
Exhibit 1: Financial summary
2014 |
2015 |
2016e |
2017e |
|||
31-March |
IFRS |
IFRS |
IFRS |
IFRS |
||
PROFIT & LOSS |
||||||
Sales |
101,850 |
100,135 |
105,976 |
108,780 |
||
Cost of Sales |
(26,972) |
(23,257) |
(22,976) |
(23,780) |
||
Revenue |
|
|
74,878 |
76,878 |
83,000 |
85,000 |
EBITDA |
|
|
11,423 |
11,672 |
11,272 |
12,202 |
Operating Profit (before amort. and except.) |
|
9,766 |
10,181 |
9,760 |
10,752 |
|
Intangible Amortisation |
(60) |
0 |
(612) |
(612) |
||
Goodwill impairment, restructuring |
(2,353) |
0 |
(2,140) |
0 |
||
Acquisition, start-up & restructuring costs less movement in fair value of deferred consideration |
0 |
(384) |
0 |
0 |
||
Operating Profit |
7,353 |
9,797 |
7,008 |
10,140 |
||
Net Interest |
(149) |
(174) |
(260) |
(252) |
||
Profit Before Tax (norm) |
|
|
9,617 |
10,007 |
9,500 |
10,500 |
Tax |
(2,410) |
(2,232) |
(2,222) |
(2,462) |
||
Profit After Tax (norm) |
7,648 |
7,792 |
7,278 |
8,038 |
||
Profit After Tax (FRS 3) |
4,794 |
7,392 |
4,526 |
7,426 |
||
Average Number of Shares Outstanding (m) |
60.0 |
58.7 |
58.3 |
58.3 |
||
EPS - normalised fully diluted (p) |
|
|
11.8 |
13.1 |
11.3 |
12.4 |
EPS - (IFRS) (p) |
|
|
7.8 |
12.4 |
6.6 |
11.4 |
Dividend per share (p) |
3.9 |
4.2 |
4.2 |
4.4 |
||
Gross Margin (%) |
73.5 |
76.8 |
78.3 |
78.1 |
||
EBITDA Margin (%) |
15.3 |
15.2 |
13.6 |
14.4 |
||
Operating Margin (before GW and except.) (%) |
13.0 |
13.2 |
11.8 |
12.6 |
||
BALANCE SHEET |
||||||
Fixed Assets |
|
|
110,591 |
111,763 |
115,507 |
114,333 |
Intangible Assets |
104,985 |
106,637 |
110,411 |
109,799 |
||
Tangible Assets |
5,606 |
5,126 |
5,096 |
4,534 |
||
Investments |
0 |
0 |
0 |
0 |
||
Current Assets |
|
|
37,305 |
37,508 |
33,404 |
37,613 |
Stocks |
905 |
1,001 |
1,092 |
1,179 |
||
Debtors |
28,948 |
28,195 |
30,745 |
33,217 |
||
Cash |
7,452 |
8,312 |
1,568 |
3,216 |
||
Other |
0 |
0 |
0 |
0 |
||
Current Liabilities |
|
|
(29,666) |
(28,271) |
(32,088) |
(30,441) |
Creditors |
(29,666) |
(28,271) |
(30,088) |
(29,191) |
||
Short term borrowings |
0 |
0 |
(2,000) |
(1,250) |
||
Long Term Liabilities |
|
|
(5,672) |
(3,727) |
(4,150) |
(4,150) |
Long term borrowings |
0 |
0 |
0 |
0 |
||
Other long term liabilities |
(5,672) |
(3,727) |
(4,150) |
(4,150) |
||
Net Assets |
|
|
112,558 |
117,273 |
112,673 |
117,354 |
CASH FLOW |
||||||
Operating Cash Flow |
|
|
7,517 |
8,647 |
8,500 |
8,900 |
Net Interest |
(112) |
(190) |
(260) |
(252) |
||
Tax |
(2,647) |
(2,003) |
(2,217) |
(2,282) |
||
Capex |
(1,665) |
(961) |
(950) |
(1,100) |
||
Acquisitions/disposals |
0 |
0 |
(11,323) |
(334) |
||
Financing |
(4,711) |
(1,752) |
0 |
0 |
||
Dividends |
(2,381) |
(2,491) |
(2,494) |
(2,534) |
||
Net Cash Flow |
(3,999) |
1,250 |
(8,744) |
2,398 |
||
Opening net debt/(cash) |
|
|
(11,198) |
(7,452) |
(8,312) |
432 |
HP finance leases initiated |
0 |
0 |
0 |
0 |
||
Other |
253 |
(390) |
0 |
0 |
||
Closing net debt/(cash) |
|
|
(7,452) |
(8,312) |
432 |
(1,966) |
Source: Company accounts, Edison Investment Research
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