S4 Capital — Extension of recovery horizon

Research: TMT

S4 Capital — Extension of recovery horizon

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.

Fiona Orford-Williams

Written by

Fiona Orford-Williams

Director, TMT

TMT

S4 Capital

Extension of recovery horizon

Media

QuickView

28 March 2024

Price

41.5p

Market cap

£239m

Share price graph

Share details

Code

SFOR

Listing

LSE

Shares in issue

577.5m

Business description

S4 Capital is a tech-led, new age/new era digital advertising, marketing and technology services company. It operates in three practices: Content, Data & Digital Media and Technology Services.

Bull

Focus on shareholder value through buybacks and suggested dividend.

Potential from AI initiatives.

Addition of COO and simplified management structure.

Bear

Tech clients’ reluctance to spend.

Difficult FY23 new business record.

FY24 performance to be heavily weighted to H2.

Analyst

Fiona Orford-Williams

+44 (0)20 3077 5739

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.

Consensus estimates

Year
end

Net revenue
(£m)

Operational EBITDA* (£m)
(£m)

EPS*
(p)

DPS
(p)

EV/EBITDA
(x)

P/E
(x)

12/22

891.7

124.2

11.4

0.0

3.4

3.6

12/23

873.2

93.7

5.7

0.0

4.5

7.3

12/24e

868.3

93.5

5.5

0.3

4.5

7.5

12/25e

910.8

107.9

7.7

0.9

3.9

5.4

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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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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