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Creston — Update 23 November 2015

Creston — Update 23 November 2015

Creston

Fiona Orford-Williams

Written by

Fiona Orford-Williams

Director, TMT

Creston

Slower H1, better momentum H2

Interim results

Media

24 November 2015

Price

139.00p

Market cap

£81m

Net debt (£m) at end September 2015

2.5

Shares in issue

58.3

Free float

95.8%

Code

CRE

Primary exchange

LSE

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

(3.5)

(5.8)

11.2

Rel (local)

(1.6)

(7.4)

15.7

52-week high/low

162.00p

114.63p

Business description

Creston is an international marketing communications group delivering services including advertising, CRM, digital and direct marketing, health communications, local marketing, market research, PR and social media marketing to a broad spectrum of blue-chip global clients.

Next event

Q3 IMS

February 2016

Analysts

Fiona Orford-Williams

+44 (0)20 3077 5739

Bridie Barrett

+44 (0)20 3077 5700

Jane Anscombe

+44 (0)20 3077 5740

Creston is a research client of Edison Investment Research Limited

Creston’s interim results outline a busy period of acquisitions, start-ups, investments and partnerships, which are showing through in a strong new business performance, with some high-profile names added to the client roster. This is tempered by the twin impacts of currency movements and the slower start to the year – previously signalled – but of a larger quantum than expected in the health sector. Underperformance of the share price has left the valuation at a discount to peers, which should correct once profits and earnings are more robustly moving in the right direction.

Year end

Revenue (£m)

PBT*
(£m)

EPS*
(p)

DPS
(p)

P/E
(x)

Yield
(%)

03/14

74.9

9.6

11.8

3.9

11.8

2.8

03/15

76.9

10.0

13.1

4.2

10.6

3.0

03/16e

85.2

11.3

13.4

4.3

10.4

3.1

03/17e

89.0

12.3

14.0

4.5

9.9

3.2

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

Improved momentum into H2

We have trimmed our forecasts (PBT down 5% for FY16) to reflect the temporary issues in healthcare, which have been addressed through merging two operations: PAN Unlimited and DJM Unlimited. Both had been working with a similar client set, but with different approaches. Combined, they should offer a multi-channel agency with both advertising and digital strengths. The impact of the Euro shift is built into in our numbers, alongside Q116 budget cuts in Communications & Insight, mostly reflecting trading conditions for specific customers in retail and consumer tech. The group has had some very good new wins, particularly in CRM, including a major contract for Vodafone in customer value marketing and British Airways, the group’s first win in the airline sector. The Unlimited project to align the group’s agencies under one banner is to be reaping returns, with clients such as Danone and Canon now working internationally with eight and five group agencies, respectively.

Modest balance sheet gearing

Following payments of £10.7m for subsidiaries (£7.8m), deferred consideration (£1.4m) and investment (£1.0m) over H115, the group finished the half year in a net debt position of £2.5m after contingent deferred consideration. The second half is seasonally stronger in terms of profit and cash generation and our model indicates the balance sheet returning to a small net cash position by the year-end.

Valuation: Substantial discount to peers

Creston’s share price has drifted back over the last couple of months and the valuation now stands at 6.8x CY15 EV/EBITDA, a 23% discount to the marketing services sector, with a similar discount a year further out. We would expect this discount to start to close when the newsflow becomes more consistently positive as the new business momentum gets translated into a more robustly improving earnings stream.

Slower H1 growth and good new business

We had made small adjustments to our numbers in October, as it became clear that there had been some trading issues with clients, principally in the consumer tech and multiple retail sectors, particularly in Q1 to end June. Prompt action had been taken to preserve operating margins, which were maintained at 10.3% year-on-year. This is more of an achievement given the need to take on additional headcount ahead of specific projects where timing on call-off by the client can slip, leading to timing issues between costs and revenues.

Exhibit 1: Revisions to numbers

EPS (p)

PBT (£m)

EBITDA (£m)

Old

New

% chg.

Old

New

% chg.

Old

New

% chg.

2016e

13.4

13.4

u/c

11.9

11.3

-5

13.6

13.0

-4

2017e

14.4

14.0

-3

12.6

12.3

-2

14.2

14.0

-1

Source: Edison Investment Research

The further revisions that we are making now relate to the Health division, where revenues were 6% lower year-on-year (but earned a maintained 16% PBIT margin). The merger of DJM and PAN mentioned above gives the group a more cohesive and comprehensive offer. The new business performance for the division has been strong, with a board spread of well-known US and European names, and we are comfortable that our new numbers are a realistic projection of the current position. The effect at the EPS level is minimised by a reduction in the number of shares due to the Treasury Stock and the EBT.

Comms & Insight revenues ahead

Top-line H1 progress in Comms & Insight at 14% over the previous year represents 4% like-for-like growth (roughly around market growth). This was supplemented by the benefits of an earlier acquisition, Splendid Unlimited, despite the fact that Q1 was affected by delays on its large digital transformation projects, where the lead party in the project – typically a systems’ integrator – is in control of timing.

There have been currency shifts between sterling and the euro, which management estimates to have taken about £0.4m off the divisional revenue and PBIT lines. The partnership relationship with Serviceplan and the working relationship with Hakuhodo in Asia are driving the proportion of international revenues, which are now responsible for 21% of the division. Emmi Caffe Latte and Mitsubishi were introduced by Serviceplan and Hakuhodo respectively in the first half.

The H1 figures include a goodwill write-off of £2m on FieldWorkUK.com Limited, which carries out face-to-face market research and whose business model has been undermined by market shifts.

New business performance benefiting from Unlimited

The ability to send in pitch teams with broader sets of competencies and more flexible approaches is clearly paying off in terms of the new business being brought in. An increasing number of the group’s largest clients work with more than one group agency, with 19 of the top 50 clients now served by at least two. In terms of pure new business, as opposed to incremental business from existing clients, Logitech and Costa were added in H1, being joined by Vodafone (Customer Value Marketing), Sony Mobile and McLaren (global lead digital strategy agency) and, just last week, the appointment of Creston Unlimited (as opposed to one of the individual Unlimited agencies) to handle British Airways’ CRM and data strategy.


Exhibit 2: Financial summary

£'000s

2014

2015

2016e

2017e

31-March

IFRS

IFRS

IFRS

IFRS

PROFIT & LOSS

Sales

101,850

100,135

108,909

113,376

Cost of Sales

(26,972)

(23,257)

(23,709)

(24,376)

Revenue

 

 

74,878

76,878

85,200

89,000

EBITDA

 

 

11,423

11,672

12,980

13,970

Operating Profit (before amort. and except.)

 

9,766

10,181

11,510

12,520

Intangible Amortisation

(60)

0

(612)

0

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

8,758

12,520

Net Interest

(149)

(174)

(260)

(220)

Profit Before Tax (norm)

 

 

9,617

10,007

11,250

12,300

Tax

(2,410)

(2,232)

(2,632)

(2,914)

Profit After Tax (norm)

7,648

7,792

8,617

9,415

Profit After Tax (FRS 3)

4,794

7,392

5,865

9,385

Average Number of Shares Outstanding (m)

60.0

58.7

58.3

58.3

EPS - normalised fully diluted (p)

 

 

11.8

13.1

13.4

14.0

EPS - (IFRS) (p)

 

 

7.8

12.4

8.7

14.0

Dividend per share (p)

3.9

4.2

4.4

4.6

Gross Margin (%)

73.5

76.8

78.2

78.5

EBITDA Margin (%)

15.3

15.2

15.2

15.7

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

13.0

13.2

13.5

14.1

BALANCE SHEET

Fixed Assets

 

 

110,591

111,763

115,507

114,987

Intangible Assets

104,985

106,637

110,411

110,411

Tangible Assets

5,606

5,126

5,096

4,576

Investments

0

0

0

0

Current Assets

 

 

37,305

37,508

34,069

37,608

Stocks

905

1,001

1,120

1,159

Debtors

28,948

28,195

30,622

31,348

Cash

7,452

8,312

2,326

5,101

Other

0

0

0

0

Current Liabilities

 

 

(29,666)

(28,271)

(31,145)

(28,072)

Creditors

(29,666)

(28,271)

(28,945)

(28,072)

Short term borrowings

0

0

(2,200)

0

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

114,281

120,373

CASH FLOW

Operating Cash Flow

 

 

7,517

8,647

9,200

12,000

Net Interest

(112)

(190)

(260)

(220)

Tax

(2,647)

(2,003)

(2,320)

(2,718)

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)

(2,534)

(2,652)

Net Cash Flow

(3,999)

1,250

(8,186)

4,975

Opening net debt/(cash)

 

 

(11,198)

(7,452)

(8,312)

(126)

HP finance leases initiated

0

0

0

0

Other

253

(390)

0

0

Closing net debt/(cash)

 

 

(7,452)

(8,312)

(126)

(5,101)

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 (www.fsa.gov.uk/register/firmBasicDetails.do?sid=181584). 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

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Germany

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United Kingdom

New York +1 646 653 7026

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US

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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

GFT Group — Update 22 November 2015

GFT Group

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