Research: TMT
S4 Capital had a difficult FY23, as flagged, with reduced client confidence and spend, particularly from those clients in the tech sector, and on larger transformation projects. Management is cautious in the short term, with no substantive changes likely in H124, but sees conditions likely to improve in H224 as economic pressures ease. The group’s longer-term prospects should be buoyed by its positioning across data and digital marketing and, in particular, in incorporating AI into hyper-personalisation at scale. The share price is down 77% y-o-y, -22% year-to-date, reflecting the history and short-term prospects rather than a medium-term view.
S4 Capital |
Extension of recovery horizon
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28 March 2024 |
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S4 Capital had a difficult FY23, as flagged, with reduced client confidence and spend, particularly from those clients in the tech sector, and on larger transformation projects. Management is cautious in the short term, with no substantive changes likely in H124, but sees conditions likely to improve in H224 as economic pressures ease. The group’s longer-term prospects should be buoyed by its positioning across data and digital marketing and, in particular, in incorporating AI into hyper-personalisation at scale. The share price is down 77% y-o-y, -22% year-to-date, reflecting the history and short-term prospects rather than a medium-term view.
Content practice most affected
S4’s Content is its largest practice (61% of FY23 net revenue). Content had the greatest impact from weak tech markets and low confidence from local and regional clients. Like-for-like net revenue was down 10% on FY22, with an operational EBITDA margin of 7.4% (FY22: 12.7%). Management reports a better Q124 new business performance, although recovery in tech client spend is likely to be H2 weighted. Cost reductions improve the short-term margin outlook, with further potential benefit from the AI-based offering. Within Data & Digital Media (24% group), FY23 net revenue was down 3%, with operational EBITDA margin slipping from 18.4% to 16.2%. Cost actions have also been taken here and FY24 guidance is for flat net revenue and margin. Technology Services (15% group) saw a slowdown in H223 post a strong H1, with 22% full year like-for-like net revenue growth, but margins squeezed from 39.2% to 31.7%. FY24 is expected to remain difficult.
No further material cash payments in FY24
Beyond a £10m contingent consideration payment due in Q124, there are no further material payments due, and net debt is expected to be in a range of £150–190m, from £181m at end-FY23. That latter figure represents net leverage of 1.9x, which is well inside the covenant of 4.5x, on debt dated to August 2028. The full year announcement highlighted actions to maintain rigour on costs, overseen by a newly appointed ex-management consultant chief operating officer. While the potential for cash outflow on past deals is relatively limited, the expected average share count will rise to c 675m for 2024 and to 685m in the following year.
Valuation: Reflective of past disappointment, dilution
The weak share price performance implies a mix of market scepticism on underlying performance and some concern over share dilution from the remaining contingent consideration. The internal ownership structure reduces corporate activity potential.
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Consensus estimates
Source: LSEG. *EBITDA and EPS are normalised, 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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Research: TMT
Datatec expects to report revenue of $5.44bn for FY24, up 5.8% y-o-y, and noted that the quality of earnings improved in the year. During H224, Westcon International continued to deliver a strong financial performance. Logicalis International also had a strong half, although its reported revenue growth has been suppressed by a higher proportion of net revenue-reported software sales. Logicalis Latin America had a tougher H2 due to difficult market conditions in Argentina and Brazil. We maintain our forecasts pending FY24 results, which are expected to be on or around 27 May.