Creston |
Margin benefits |
AGM statement |
Media |
6 September 2016 |
Share price performance
Business description
Next events
Analysts
Creston is a research client of Edison Investment Research Limited |
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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 |
Revenue (£m) |
PBT* |
EPS* |
DPS |
P/E |
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
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