SinnerSchrader
Written by
SinnerSchrader |
Audi win - gear change for group |
Q3 results & forecast change |
Software & comp services |
19 July 2016 |
Share price performance
Business description
Next events
Analysts
SinnerSchrader is a research client of Edison Investment Research Limited |
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SinnerSchrader (SZZ) reported 25% underlying revenue growth in Q3 and, while staffing constraints are putting renewed pressure on margins, we are confident about the medium-term outlook for the group, which was recently selected by Audi as its worldwide digital lead agency, marking a gear change in SZZ’s profile. The shares have performed well, yet the rating remains at a significant discount to agency peers – unwarranted given momentum and the outlook.
Year |
Revenue (€m) |
EBITA* |
EPS |
EPS* |
DPS |
P/E |
Yield |
08/14 |
48.6 |
4.6 |
16.5 |
27.8 |
12.0 |
18.5 |
2.3 |
08/15 |
47.7 |
4.2 |
13.4 |
25.1 |
12.0 |
20.5 |
2.3 |
08/16e |
51.0 |
5.0 |
26.4 |
29.2 |
13.0 |
17.6 |
2.5 |
08/17e |
58.7 |
5.9 |
34.1 |
34.0 |
13.7 |
15.1 |
2.7 |
Note: *EBITA and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items, share-based payments and discontinued activities.
Q3: Strong demand puts pressure on resourcing
On a like-for-like basis, Q3 revenues increased by 24.5%, keeping up Q2’s strong momentum. On a headline basis (including the impact of the now discontinued Next Audience), year to date revenue growth is 11.3%, putting the group comfortably on track to deliver its €50.5m revenue target for the year. However, a tight labour market, a prolonged pitch process for the role of Audi’s worldwide lead digital agency, which it has won, and some margin pressure on a few ‘agile’ projects has affected EBITA margins and management now expects to deliver EBITA of €4.5m (down from previous guidance of €5m).
Forecasts: Audi win is a significant milestone
We reduce our FY16 EPS forecast by 4% to reflect current margin pressure. Looking ahead to FY17, margin pressure stemming from a tight labour market is a recurrent issue for all digital agencies in Germany and we are trimming our margin forecasts slightly to reflect this (although we continue to expect year on year margin expansion). However, the Audi win is a significant milestone for the group, potentially its largest win to date. We expect this to more than offset the small downgrade to margins and increase our FY17 and FY18 EPS forecast by 4% and 10% respectively.
Valuation: Rating does not reflect momentum
SZZ’s shares, up c 62% over the last 12 months, have performed well and the ratings gap with the general ‘digital agency’ European universe has started to close. However, on a calendarised FY16e P/E of 18.5x falling to 16.7x in FY17e, it still trades at a 25% discount to the wider peer group and a 35% discount to its closest German peer, Syzygy. With the wind in its sails from the Audi deal going into FY17, as well as the potential to continue to bring EBITA margins up to historic and peer standards (see our report Coming of Age published on 12 February 2016 for background) and the rarity value of German digital agencies, a premium rather than a discount is arguably justified.
Q3 update
During Q2, management indicated that it was involved in a significant level of pitch activity and on 4 July 2016, SZZ announced that, through a multi-stage agency pitch process, it had been selected by Audi as its new worldwide lead digital agency. This is potentially the most significant win yet for SZZ and should provide a step change in revenues (and profile) for the group, which was already experiencing strong demand.
On a like-for-like basis, excluding the impact of the now discontinued Next Audience, Q3 revenues increased by 24.5%, keeping up Q2’s strong momentum. On a reported basis, Q3 revenues grew by 18.1%, taking year to date revenue growth to 11.3%. To reach management’s reiterated target of €50.5m, Q4 revenues would only need to be c 92% of the same period last year. Revenues can be lumpy quarter-on-quarter; however, given the current momentum, which excludes the potential impact of the Audi deal, this looks like a very comfortable target.
EBITA margins, while still trending in the right direction (10.4% in Q3), were not quite as strong as we expected, affected by a tight labour market compelling a greater use of freelancers; the protracted pitch process for the Audi deal; and margin pressure in three ‘agile’ projects – an approach being trialled at SZZ. Management now expects to deliver EBITA of €4.5m (down from previous guidance of €5m).
Forecast changes and outlook
We are making the following changes to estimates (summarised in Exhibit 1):
Year to August 2016: to reflect the strong run rate in revenues year to date, offset with resource pressure on margins, for the current year (to August 2016), we are increasing our revenue forecast but reducing margins. Overall, we reduce our FY16 EPS by 4%.
2017 and 2018: we expect the Audi win to have a significant impact on the group’s revenue profile and, even after factoring in some resource reallocation, we are increasing our FY17 and FY18 revenue forecasts by 9% and 12% respectively. A tight labour market is a recurrent issue for all digital agencies in Germany. However, the other pressures on margin (prolonged Audi pitch process and margin pressure in three ‘agile’ projects) should not persist into FY17. We trim our margin assumption in FY17 and FY18, but continue to expect year-on-year margin expansion. Overall, our changes convert to a 4% and 10% increase in our adjusted EPS forecasts in FY17 and FY18.
Exhibit 1: Summary forecast changes
|
2016e |
2017e |
2018e |
||
Revenues |
|||||
Old |
50,491 |
53,859 |
57,629 |
||
New |
51,000 |
58,650 |
64,515 |
||
Change |
1% |
9% |
12% |
||
Operating income - reported |
|||||
Old |
4,717 |
5,646 |
6,178 |
||
New |
4,500 |
5,865 |
6,774 |
||
Change |
-5% |
4% |
10% |
||
Operating income - adjusted |
|||||
Old |
5,217 |
5,646 |
6,178 |
||
New |
5,000 |
5,865 |
6,774 |
||
Change |
2% |
4% |
10% |
||
Diluted EPS - adjusted |
|||||
Old |
30.5 |
32.7 |
35.5 |
||
New |
29.2 |
34.0 |
38.9 |
||
Change |
-4% |
4% |
10% |
||
Source: Edison Investment Research
Valuation: Peer comparison
Exhibit 2: Listed peer comparison
Year end |
Price |
Market |
Sales current |
EBITA margin current |
Sales growth current |
Sales growth next |
EV/Sales current (x) |
EV/Sales next |
EV/EBIT current (x) |
EV/EBIT next |
P/E |
P/E |
|
Pure digital agencies |
|||||||||||||
SZZ- calendarised* |
30/08/16 |
€5.2 |
€59 |
53 |
9.7% |
4% |
13% |
1.1 |
0.9 |
9.5 |
9.1 |
16.7 |
14.5 |
Syzygy |
31/12/16 |
€11.0 |
€141 |
65 |
9.9% |
13% |
12% |
1.8 |
1.6 |
18.2 |
16.2 |
25.9 |
24.2 |
Ad Pepper Media Int. |
31/12/16 |
€2.3 |
€54 |
65 |
1.5% |
16% |
14% |
0.5 |
0.5 |
36.1 |
15.7 |
58.4 |
24.6 |
1000mercis |
31/12/16 |
€37.4 |
€117 |
61 |
15.8% |
16% |
14% |
1.7 |
1.5 |
10.9 |
10.5 |
17.5 |
15.4 |
Antevenio |
31/12/16 |
€5.0 |
€21 |
26 |
NA |
13% |
8% |
0.7 |
0.6 |
NA |
NA |
10.9 |
8.8 |
NetBooster |
31/12/16 |
€2.0 |
€33 |
40 |
12.6% |
(64%) |
7% |
1.0 |
0.9 |
7.6 |
6.8 |
11.8 |
10.5 |
dotdigital group |
30/06/16 |
€48.0 |
€141 |
28 |
21.4% |
(18%) |
23% |
4.5 |
3.6 |
20.8 |
15.6 |
26.7 |
21.8 |
Reply |
31/12/16 |
€123.9 |
€1,159 |
783 |
12.6% |
9% |
10% |
1.4 |
1.3 |
11.5 |
10.3 |
17.8 |
15.9 |
Next Fifteen Com. |
31/01/17 |
€279.5 |
€202 |
155 |
13.7% |
42% |
8% |
1.3 |
1.3 |
9.8 |
9.0 |
19.1 |
18.5 |
Adesso |
31/12/15 |
€21.5 |
€125 |
193 |
NA |
23% |
7% |
0.6 |
0.5 |
NA |
NA |
34.1 |
21.9 |
Average |
|
|
|
|
|
|
|
|
|
|
|
21.7 |
19.3 |
Publicis Groupe |
31/12/15 |
€55.1 |
€12,251 |
9,488 |
15.1% |
31% |
5% |
1.2 |
1.1 |
7.8 |
7.3 |
13.0 |
12.1 |
Havas |
31/12/15 |
€7.3 |
€3,065 |
2,155 |
13.9% |
16% |
7% |
1.4 |
1.3 |
10.4 |
9.5 |
16.5 |
14.9 |
WPP |
31/12/15 |
€1,503 |
€19,460 |
12,083 |
14.7% |
5% |
1% |
1.8 |
1.8 |
12.2 |
11.6 |
16.2 |
14.8 |
Interpublic Group |
31/12/15 |
€22.4 |
€9,118 |
7,606 |
11.5% |
1% |
4% |
1.2 |
1.2 |
10.5 |
9.6 |
19.6 |
17.0 |
Average larger agencies |
|
|
|
|
|
|
|
|
|
|
16.3 |
14.7 |
|
Source: Bloomberg, Edison Investment Research. Note: Prices as at 18 July 2016.
Exhibit 3: Financial summary
€'000s |
2014 |
2015 |
2016e |
2017e |
2018e |
||
Aug |
IFRS |
IFRS |
IFRS |
IFRS |
IFRS |
||
PROFIT & LOSS |
|||||||
Revenue |
|
|
48,601 |
47,690 |
51,000 |
58,650 |
64,515 |
Cost of Sales |
(37,168) |
(35,659) |
(37,368) |
(41,055) |
(45,161) |
||
Gross Profit |
11,433 |
12,032 |
13,632 |
17,595 |
19,355 |
||
EBITDA |
|
|
5,384 |
5,251 |
5,823 |
6,770 |
7,765 |
Continuing EBITA |
|
|
4,600 |
4,200 |
5,000 |
5,865 |
6,774 |
Intangible Amortisation |
(82) |
0 |
0 |
0 |
0 |
||
Exceptionals |
0 |
(614) |
0 |
0 |
0 |
||
Discontinued operations |
(1,536) |
(1,503) |
(500) |
0 |
0 |
||
Operating Profit |
2,982 |
2,083 |
4,500 |
5,865 |
6,774 |
||
Net Interest |
8 |
(2) |
4 |
0 |
2 |
||
Profit Before Tax (norm) |
|
|
4,608 |
4,198 |
5,004 |
5,865 |
6,776 |
Profit Before Tax (FRS 3) |
|
|
2,990 |
2,081 |
4,504 |
5,865 |
6,776 |
Tax |
(1,147) |
(563) |
(1,455) |
(1,889) |
(2,182) |
||
Profit After Tax (norm) |
3,124 |
2,847 |
3,388 |
3,976 |
4,594 |
||
Profit After Tax (FRS 3) |
1,843 |
1,518 |
3,049 |
3,976 |
4,594 |
||
Average Number of Shares Outstanding (m) |
11.1 |
11.3 |
11.6 |
11.7 |
11.8 |
||
EPS - normalised (c) |
|
|
28.0 |
25.2 |
29.3 |
34.1 |
39.0 |
EPS - normalised fully diluted (c) |
|
|
27.8 |
25.1 |
29.2 |
34.0 |
38.9 |
EPS - (IFRS) (c) |
|
|
16.5 |
13.4 |
26.4 |
34.1 |
39.0 |
Dividend per share (c) |
12.0 |
12.0 |
13.0 |
13.7 |
14.3 |
||
Gross Margin (%) |
23.5 |
25.2 |
26.7 |
30.0 |
30.0 |
||
EBITDA Margin (%) |
11.1 |
11.0 |
11.4 |
11.5 |
12.0 |
||
Operating Margin (before GW and except.) (%) |
9.5 |
8.8 |
9.8 |
10.0 |
10.5 |
||
BALANCE SHEET |
|||||||
Fixed Assets |
|
|
7,039 |
6,601 |
6,354 |
6,275 |
6,136 |
Intangible Assets |
5,136 |
4,999 |
4,481 |
4,481 |
4,481 |
||
Tangible Assets |
1,902 |
1,603 |
1,873 |
1,794 |
1,655 |
||
Investments |
0 |
0 |
0 |
0 |
0 |
||
Current Assets |
|
|
21,512 |
21,130 |
23,127 |
27,325 |
31,744 |
Stocks |
0 |
0 |
0 |
0 |
0 |
||
Debtors |
15,590 |
14,830 |
15,859 |
18,238 |
20,062 |
||
Cash |
5,833 |
5,559 |
6,526 |
8,346 |
10,941 |
||
Other |
90 |
741 |
741 |
741 |
741 |
||
Current Liabilities |
|
|
(13,777) |
(12,475) |
(12,720) |
(14,439) |
(15,794) |
Creditors |
(13,777) |
(12,475) |
(12,720) |
(14,439) |
(15,794) |
||
Short term borrowings |
0 |
0 |
0 |
0 |
0 |
||
Long Term Liabilities |
|
|
(699) |
(296) |
(296) |
(296) |
(296) |
Long term borrowings |
0 |
0 |
0 |
0 |
0 |
||
Other long term liabilities |
(699) |
(296) |
(296) |
(296) |
(296) |
||
Net Assets |
|
|
14,075 |
14,960 |
16,465 |
18,866 |
21,790 |
CASH FLOW |
|||||||
Operating Cash Flow |
|
|
2,656 |
2,244 |
4,545 |
6,119 |
7,305 |
Net Interest |
8 |
(2) |
4 |
0 |
2 |
||
Tax |
(1,147) |
(563) |
(1,455) |
(1,889) |
(2,182) |
||
Capex |
(1,504) |
(458) |
(788) |
(827) |
(852) |
||
Acquisitions/disposals |
(306) |
(300) |
0 |
0 |
0 |
||
Financing |
177 |
153 |
0 |
0 |
0 |
||
Dividends |
0 |
(1,348) |
(1,339) |
(1,583) |
(1,679) |
||
Net Cash Flow |
(117) |
(274) |
967 |
1,820 |
2,595 |
||
Opening net debt/(cash) |
|
|
(5,949) |
(5,833) |
(5,559) |
(6,526) |
(8,346) |
HP finance leases initiated |
0 |
0 |
0 |
0 |
0 |
||
Other |
0 |
0 |
(0) |
(0) |
(0) |
||
Closing net debt/(cash) |
|
|
(5,833) |
(5,559) |
(6,526) |
(8,346) |
(10,941) |
Source: Company accounts (historic), Edison Investment Research (forecasts)
|