Creston — Update 26 January 2016

Creston — Update 26 January 2016

Creston

Fiona Orford-Williams

Written by

Fiona Orford-Williams

Director, TMT

Creston

January headwinds

Q3 trading update

Media

27 January 2016

Price

122.50p

Market cap

£71m

Net debt (£m) at end September 2015

2.5

Shares in issue

58.0m

Free float

95.8%

Code

CRE

Primary exchange

AIM

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

(0.4)

(15.8)

(2.8)

Rel (local)

5.7

(9.0)

9.9

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

Preliminary results

June 2016

Analysts

Fiona Orford-Williams

+44 (0)20 3077 5739

Bridie Barrett

+44 (0)20 3077 5700

Creston is a research client of Edison Investment Research Limited

Continuing strong new business wins over the first nine months of Creston’s financial year have not been sufficient to offset the revenue impact of project delays and retrenchment of some client budgets in Q4. The group’s underlying positioning, with its broad spread of clients and capabilities, is sound, its cash conversion is strong and the balance sheet is only likely to show c £0.5m net debt by the March year-end. These short-term revenue setbacks will dampen the rating until more consistent delivery starts to come through.

Year end

Revenue (£m)

PBT*
(£m)

EPS*
(p)

DPS
(p)

P/E
(x)

Yield
(%)

03/14

74.9

9.6

11.8

3.9

10.4

3.2

03/15

76.9

10.0

13.1

4.2

9.4

3.4

03/16e

83.0

9.5

11.3

4.2

10.8

3.4

03/17e

85.0

10.5

12.4

4.4

9.9

3.6

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

Q3 ahead, Q4 hiatus

The trading update shows that Q3 revenue performance was ahead 2% like-for-like, with continuing good momentum on new business wins from new clients and through taking a wider share of spend of existing clients. The background has shifted in the new year. The statement describes a commercial environment of some jittery clients, unsure of how their budgets will be affected in the face of changing economic factors. Others are facing change of control or internal changes of personnel or reporting lines that are leading to a hiatus in previously scheduled projects. With just a few weeks to go until the end of Creston’s financial year, there is little scope for recovering margin through overhead management in the reporting period. We have pulled back our FY16 revenue forecast by £2.2m (in line with guidance), implying a £1.8m reduction at the pre-tax level. We have lowered our FY17 numbers by a similar percentage (EBITDA down 13% on previous forecasts for both years) until clearer evidence of recovery is apparent.

Higher weighting of new business

Strong new business wins remain a key positive in the investment story and it is particularly encouraging that those outlined in the statement are across a range of verticals and capabilities, but especially in digital strategy and CRM. The increased proportion of revenues in newly won accounts/briefs inevitably impacts on efficiency and margin, with short-term timing fluctuations making matching people to projects more challenging. As the workflow matures, that equation should ameliorate.

Valuation: Clear discount remains

Creston’s valuation now stands at 6.6x CY15 EV/EBITDA, a 20% discount to the marketing services sector; a 15% discount a year further out. We would expect this discount to start to close when there is an inflection in the newsflow and it becomes more consistently positive as the new business momentum gets translated into an improving earnings stream.

Exhibit 1: Financial summary

2014

2015

2016e

2017e

31-March

IFRS

IFRS

IFRS

IFRS

PROFIT & LOSS

Sales

101,850

100,135

105,976

108,780

Cost of Sales

(26,972)

(23,257)

(22,976)

(23,780)

Revenue

 

 

74,878

76,878

83,000

85,000

EBITDA

 

 

11,423

11,672

11,272

12,202

Operating Profit (before amort. and except.)

 

9,766

10,181

9,760

10,752

Intangible Amortisation

(60)

0

(612)

(612)

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

7,008

10,140

Net Interest

(149)

(174)

(260)

(252)

Profit Before Tax (norm)

 

 

9,617

10,007

9,500

10,500

Tax

(2,410)

(2,232)

(2,222)

(2,462)

Profit After Tax (norm)

7,648

7,792

7,278

8,038

Profit After Tax (FRS 3)

4,794

7,392

4,526

7,426

Average Number of Shares Outstanding (m)

60.0

58.7

58.3

58.3

EPS - normalised fully diluted (p)

 

 

11.8

13.1

11.3

12.4

EPS - (IFRS) (p)

 

 

7.8

12.4

6.6

11.4

Dividend per share (p)

3.9

4.2

4.2

4.4

Gross Margin (%)

73.5

76.8

78.3

78.1

EBITDA Margin (%)

15.3

15.2

13.6

14.4

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

13.0

13.2

11.8

12.6

BALANCE SHEET

Fixed Assets

 

 

110,591

111,763

115,507

114,333

Intangible Assets

104,985

106,637

110,411

109,799

Tangible Assets

5,606

5,126

5,096

4,534

Investments

0

0

0

0

Current Assets

 

 

37,305

37,508

33,404

37,613

Stocks

905

1,001

1,092

1,179

Debtors

28,948

28,195

30,745

33,217

Cash

7,452

8,312

1,568

3,216

Other

0

0

0

0

Current Liabilities

 

 

(29,666)

(28,271)

(32,088)

(30,441)

Creditors

(29,666)

(28,271)

(30,088)

(29,191)

Short term borrowings

0

0

(2,000)

(1,250)

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

112,673

117,354

CASH FLOW

Operating Cash Flow

 

 

7,517

8,647

8,500

8,900

Net Interest

(112)

(190)

(260)

(252)

Tax

(2,647)

(2,003)

(2,217)

(2,282)

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)

(2,494)

(2,534)

Net Cash Flow

(3,999)

1,250

(8,744)

2,398

Opening net debt/(cash)

 

 

(11,198)

(7,452)

(8,312)

432

HP finance leases initiated

0

0

0

0

Other

253

(390)

0

0

Closing net debt/(cash)

 

 

(7,452)

(8,312)

432

(1,966)

Source: Company accounts, Edison Investment Research

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