SinnerSchrader (SZZ) expects another year of double-digit revenue growth and margin improvement in FY17, underpinned by the Audi win. This confidence is reflected in the 67% increase in the dividend to 20c. This should provide strong support to the shares which, on an FY17e P/E of 16x, trade in line with SZZ’s wider peer group, although still at a discount to closest German peer Syzygy.
Year
end |
Revenue (€m) |
EBITA*
(€m) |
EBITA**
(€m) |
EPS*
(c) |
DPS
(c) |
P/E
(x) |
Yield
(%) |
08/15 |
47.7 |
2.1 |
4.2 |
25.1 |
12.0 |
22.7 |
2.1 |
08/16 |
51.1 |
4.7 |
5.1 |
29.4 |
20.0 |
19.4 |
3.5 |
08/17e |
58.7 |
5.9 |
5.9 |
34.9 |
21.8 |
16.3 |
3.8 |
08/18e |
64.5 |
6.8 |
6.8 |
38.7 |
24.2 |
14.7 |
4.2 |
Note: *EBITA and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments. **Excludes discontinued items.
FY16 was a year of progress at SinnerSchrader, which took the decision to exit its underperforming adtech platform and focus resources on its core agency businesses. It continues to consolidate its position as one of Germany’s leading agencies, delivering c 13% underlying revenue growth in FY16, as well as announcing a landmark deal when it was selected by Audi as its worldwide digital lead agency. The protracted Audi pitch process, the impact of trialling new project management techniques (agile scrums) and the ongoing impact of a tight labour market affected efforts to improve profitability. However, despite these factors EBITA margins still increased to 10% (from 9.3%) on a continuing basis.
Another buoyant year expected in FY17
As well as the Audi contract, which could become SZZ’s largest ever contract (and has yet to materially contribute to revenues), management reports that it is seeing budget increases across the board. It has introduced guidance for FY17 of revenue growth of 10% with EBITA margins of 10.5%, implying an EBITA of €5.8-5.9m. This is consistent with our forecast for EBITA in FY17, although the revenue/margin mix is different. Audi should have a more significant impact in the coming months and consequently Q1 results should set the stage for the year. Given the strong growth backdrop and the current flux in the client base, we retain our forecasts, which reflect a more dynamic revenue development than guidance (+15%), but on a more modest margin (10%) in the light of staffing considerations.
Valuation: Dividend support, ratings expansion
SZZ shares have performed strongly over the last year and, on an FY17e P/E of 16x, now trade more in line with digital agency peers. Against a strong market backdrop and underpinned by the recent Audi win, we forecast one of the faster revenue growth profiles among its peer set for FY17 (+15%) and, given the rarity value of German digital agencies in a consolidating market (eg closest peer Syzygy, which has a similar growth and margin profile, trades on 27x FY17e P/E), a premium to the sector is arguably justified. The 67% hike in the full year dividend to 20c sets a new benchmark and, yielding 4%, should also provide a strong support.
Valuation: Peer comparison and M&A
Peer multiples: SZZ’s rating gap with the wider peer set has closed considerably over the course of the last year. The shares trade on an FY17e P/E of 16.0x and EV/EBIT of 10.5x – more consistent with the wider peer group (Exhibit 1), although still at a c 15% discount to the average. However, compared to companies with similar revenue growth rates and margins, it continues to look mispriced. For instance, according to Bloomberg estimates, Syzygy, Ad Pepper Media and 1000mercis should deliver approximately the same revenue growth rate as SinnerSchrader this year, yet their P/E ratings are considerably higher.
M&A: given the wave of consolidation in the sector, it is also worth considering the possibility of trade interest; the German market is notoriously difficult to crack for non-German companies and SZZ brings 20 years’ experience, relationships and approximately c 500 employees, of which roughly half are developers. Last year’s takeover attempt for Syzygy by WPP highlights the potential value of assets of this genre to larger corporates. Syzygy, like SZZ, is one of Germany’s largest independent digital agencies. WPP offered €9 per Syzygy share, which at the time implied an FY15 P/E of 24x and an EV/EBITA multiple of 14x. Applying a similar rating to SZZ would imply a value per share of approximately €7.5.
