Creston — Update 13 June 2016

Creston — Update 13 June 2016

Creston

Fiona Orford-Williams

Written by

Fiona Orford-Williams

Director, TMT

Creston

Steady going

Full year results

Media

13 June 2016

Price

95p

Market cap

£56m

Net cash (£m) at 31 March 2016

1.4

Shares in issue

58.7m

Free float

95.8%

Code

CRE

Primary exchange

AIM

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

(7.3)

(8.2)

(29.6)

Rel (local)

(6.9)

(9.7)

(22.2)

52-week high/low

162.00p

89.00p

Business description

Creston plc, incorporating the Creston Unlimited group offer, is a marketing communications group delivering a range of digital technology-based marketing solutions to blue-chip global clients.

Next event

AGM

August 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

Creston’s full year results exceeded the expectations that had been set in January, with constant currency like-for-like revenues and headline PBT flat on the prior year. The group is making good progress in leveraging its Unlimited group branding, with an increasing number of clients working with several group agencies. Good cash conversion has led to a higher year-end cash position – there is no debt, enabling a progressive dividend (up 5% year-on-year) on a yield well ahead of sector and market. The shares trade on an unjustifiably large discount to peers and market.

Year end

Revenue (£m)

PBT*
(£m)

EPS*
(p)

DPS
(p)

P/E
(x)

Yield
(%)

03/15

76.9

10.0

13.1

4.2

7.3

4.4

03/16

82.6

9.9

12.0

4.4

7.9

4.6

03/17e

85.0

10.5

12.1

4.6

7.9

4.8

03/18e

87.5

11.0

12.3

4.8

7.7

5.1

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

Acquisitions show strong contribution

Splendid Unlimited, the digital design and development consultancy 51% acquired in April 2015, helped boost group revenues by 8%. This countered the weakness in agencies serving the UK retail and consumer technology sectors, where market conditions were more volatile and the translation effect of euro-denominated revenues. The Health business is not yet fulfilling its potential, but costs have been taken out (as they also have in the Communications & Insight division) and our model therefore shows some recovery in operating margin in the current year and in FY18. With these results, the group has taken a non-cash exceptional write-down on goodwill of £15.2m relating 70% to Insight and 30% to Health on reappraisal of the earnings potential of two of the group’s agencies.

Good new business performance

The group is presenting its client offer in a more concise and coherent form through the Unlimited branding introduced last year, allowing it to build the amount of addressable revenue with each client. New clients are being won on a multi-agency basis, as well as cross sales of existing clients. The partnership approach for building the revenue base outside the UK is also gaining traction, with around one-third of revenues now from international business, up by 14% year-on-year. The group’s CRM offer has had a particularly successful period for new business.

Valuation: Substantial discount

When compared with agency peers, Creston’s shares are trading on a discount of over 50% on an annualised 2016 EV/EBITDA basis at 4.5x. A DCF under varying conservative assumptions on WACC and terminal growth rates also indicates a share price in a range of 120p to 130p. With a (comfortably covered) dividend, the yield is well in excess of market and sector levels. DBAY Advisors, represented on the board since February by Iain Ferguson (ex-Havas), has taken advantage of the lower price and increased its shareholding to 28.1%.

Investment summary

Company description: Agency group

Creston is a marketing communications and consultancy business. It consists of a group of specialist agencies that between them provide a full service offering. Each has its own corporate identity and approach, but all have a common branding through the use of the Unlimited suffix, introduced across the group during the last year. The agencies have a distinct data and technology backing. Creston has a strong and diverse client list, with unusually long (for the marketing service industry) tenures and has specific expertise in the health sector. The group’s growth strategy is a combination of organic progression (winning clients, adding incremental business), acquisition and start-ups to add capabilities, alongside partnership agreements with like-minded companies to fill in either complementary offerings or geographies.

Valuation: Substantial discount

Following a period of recovery earlier last year, the shares have drifted back down over the last eight months from a high of 162p, with the current share price only a little off the one-year low. This reflects market disappointment that the promise of a good record of winning new business and tighter control of overheads has yet to translate into growth in earnings per share. By delivering a set of results that have more than met market expectations, a level may have been set from which a recovery can launch, not only for the earnings but also for the share price. Applying a peer group multiple, and allowing for a 10% discount to reflect the record, results in a valuation of c 150p. Similarly the DCF, using a WACC of 10% and conservative assumptions, supports a valuation in excess of the current share price.

Financials: Strong balance sheet, cash conversion

Our revenue and profit forecasts for FY17e are unchanged on publication of the FY16 results, which were slightly ahead of our prior expectations. We have instigated FY18 forecasts, which are inevitably provisional, but which show 3% growth at the revenue level and 5% progress at pre-tax to £11.0m. Forecast growth at the earnings per share level is slightly lower due to a higher proportion of US earnings raising the expected blended tax charge. Creston has very good cash conversion characteristics and had net cash of £1.4m at end March, with no debt on the balance sheet and no further outstanding acquisition consideration liabilities.

Sensitivities: Internal and external

The broader market backdrop shows expectations for premium growth in advertising spend in both the UK and US, well ahead of growth in GDP. This is still driven by digital, and mobile in particular, but corporate confidence remains very fragile and campaigns and projects continue to be subject to delays and cancellations. Specific market segments, such as retail, are particularly nervous ahead of geo-political uncertainties, while the backdrop to the Health segment is continuing corporate realignment. The group has an impressive record of tenure at its substantial clients, but nothing is guaranteed and while the increased use of procurement officers is reducing the impact of personal relationships with CMOs, unanticipated shake-ups in the supplier base could impact client retention. The increase in overseas-derived earnings is increasing the specific currency risk, where the group’s costs are sterling-based.


Company description: Marketing communications

Creston is a marketing communications group. It operates through a number of agencies, unified under the ‘Unlimited’ suffix branding, delivering digital and technology-based marketing solutions to a broad range of global clients across many different sector verticals. Its offer includes social, multi-channel creative and digital solutions, often integrated with more ‘traditional’ approaches. The agencies making up the group fall into two broad groupings: Communications & Insight and Health (under the Health Unlimited banner). The offer as presented to clients can be categorised as covering communications and consultancy, with the individual agencies offering the required disciplines either singly, or, increasingly, in combination. Digital capability and delivery is a given in all areas of the business and is no longer separately identified. Having different branded agencies helps to manage the inevitable client conflicts. A new executive leadership team in place as of FY15 has instigated a clear and coherent five-year growth strategy, of which the second year has just been completed, although the rewards are yet to be fully reaped.

The group was founded in 2001, when Don Elgie (CEO until his retirement in 2014) backed Synergie Consulting into London Stock Exchange-listed cash shell, Creston. The group then pursued a buy-and-build strategy, building a portfolio of broadly complementary marketing services agencies, rather than focusing on a single discipline. Instead of driving profitability by stripping down overheads, the majority of managing directors of groups sold to Creston have remained in place. Over subsequent reporting periods, the emphasis became more balanced between acquisition and start-up, adding additional capabilities and skill sets to the group’s offer. With inherently strong cash generation, the group has been able to accelerate this expansionary phase with the recent acquisition of Splendid and with strategic partnerships, such as that put in place with Serviceplan Gruppe in November 2014. Further partnerships have been forged with Future Foundation (Global Consumer Trends), Propeller Communications (Digital Healthcare Communications in the US) and a ‘close working relationship’ established with Hakuhodo in Japan where another partnership covering media is in discussion. These arrangements give Creston a low-risk option to extend its geographic reach. There has been no consideration paid or equity swapped in respect of these relationships, simply agreements to look after each other’s clients in respective territories, eg with Creston responsible for the UK and US markets and Serviceplan responsible across Europe, effectively allowing both parties to offer pan-European coverage as is demanded by some international clients.

The group employs around 900 people in the UK and the US, based around hubs in London, Bristol, Richmond (Surrey) and New York. There are nine client-facing brands in Comms & Insight, all with identifiable specialisms and eight within the Health operations, all now with the Unlimited suffix.

Exhibit 1: FY16 revenue split by activity

Exhibit 2: FY16 revenue split by geography

Source: Company accounts

Source: Company accounts

Exhibit 1: FY16 revenue split by activity

Source: Company accounts

Exhibit 2: FY16 revenue split by geography

Source: Company accounts

As a group, Creston has a broad and loyal client base. The top 20 clients make up 51% (FY15: 54%) of revenue and nine of the top 20 are now served by two or more group agencies; 12 of the top 50 clients by three or more. The average fee generated by these top 20 clients is £2.2m, up over 10% on the prior year, which itself reflects the success in introducing other group agencies to existing clients and joint pitches for new business.

Exhibit 3: Top 20 clients by revenue, FY15

Position
(previous year)

Client

No. of gp
agencies

Client
since

Position
(previous year)

Client

No. of gp
agencies

Client
since

1 (1)

Danone

9 (3)

1999

11 (-)

Virgin Trains

2 (-)

2013

2 (5)

Canon

6 (5)

2001

12 (11)

Toyota

1 (1)

2009

3 (2)

Unilever

2 (2)

1990

13 (15)

Jaguar

1 (1)

2013

4 (3)

Gilead (US/UK)

4 (4)

2003

14 (13)

HSBC

1 (1)

2008

5 (6)

CDC (US)

1 (1)

1999

15 (-)

Boots (Splendid client)

2 (-)

2014

6 (-)

SSE (Splendid client)

1 (-)

2013

16 (14)

Nissan GB

1 (2)

1996

7 (4)

Diageo

1 (1)

2002

17 (16)

Novartis

5 (4)

2013

8 (8)

Infiniti

1 (1)

2007

18 (17)

Aviva

1 (1)

1996

9 (7)

Sony Mobile

1 (1)

2011

19 (-)

Sky

1 (1)

2014

10 (9)

Sainsbury’s

2 (2)

2007

20 (20)

Astellas

3 (2)

2008

Source: Company data

The group’s new business continues to perform well, and these results show that the group’s propositions were holding sway with new clients as well as those who have been with Creston a while, with brands new to the roster accounting for 63% of annualised new business wins. CRM and data strategy have been particularly strong areas, with their data element making those clients likely to be more ‘sticky’ as historical reserves of relevant information build. New CRM customers include Asda, British Airways, Vodafone, Costa Coffee and Weetabix. British Airways and Mitsubishi are among new clients placing business with more than one group agency.

Two years in to five-year plan; ticking the boxes

FY16 was the second year of the implementation of management’s five-year plan which identified five core strategies in order to drive both top line and margin growth within the company. Progress has been made on all five criteria, as outlined below:

Building an agency group brand. Having been built through a combination of acquisition, start-up and organic growth, Creston 18 months ago consisted of a large number of separately branded agencies, not immediately identifiable to potential (or existing) clients as part of a larger group with stronger resources. The appending of a suffix – Unlimited – to each agency name was a very neat solution, enabling each to retain its market presence and character, while giving them recognisable commonality. These trading names are now well recognised in their markets and the overall profile of Unlimited is building resonance and facilitating joint pitches and cross-referral of clients between agencies. Within the Health division, Health Unlimited is being particularly promoted.

Developing a full service client offer. Creston has been filling in the gaps in its overall offer and continues to add new capabilities into the portfolio. Last year, it announced a strategic 27% equity holding in an advertising agency, 18 Feet & Rising, which extended the client roster and brings a strong market reputation for creativity. During FY16 it developed and launched a digital SEO agency within Health Unlimited, Search Unlimited and in December 2015 it created a brand-partnership agency, Affinity Unlimited, which has already won business from Rolls Royce and Ocean Masters World Championship. The Communications offer now comprises:

Branding & Advertising

CRM & Loyalty

Social & Content

Technology & Innovation

Local & Experiential

PR & Comms

Media & Performance

Data & Insight

Developing a consultancy offer. The group has been building on its existing areas of expertise to develop a coherent consultancy offer which particularly addresses issues in behaviour change, business strategy and customer experience. This can be delivered either in an agency context or through the Creston Unlimited brand. Splendid Unlimited (acquired April 2015) leads the offer in digital design and development, while start-up Navigate Unlimited advises brands on the optimal technology to automate data-driven consumer marketing, an area where the pace of change can be bewildering. Navigate has successfully sold into a number of existing group clients, including Danone.

The consultancy offer currently tackles the following:

  Digital transformation

  Service design

  Product innovation

  Market optimisation

  Digital optimisation

  New market opportunities

Investing in existing companies’ offer and services. This is a perpetual process and has been particularly apparent this year in the shifting emphasis within Insight, increasingly focused on data-driven analytics and behavioural sciences. It also includes the development of the consultancy strands within the existing agencies described above.

Growing international services. There are many multi-nationals across Creston’s client roster and without international capability the group was sacrificing revenue-generating opportunities. Rather than build out an extensive and expensive network of overseas offices, the group has sought out partners to deliver services to their own clients in other territories and gain the reciprocal business from the partner agencies. In digital healthcare, Creston works closely with Propeller Communications, which now shares office space with the group in New York. Consultancy credentials in consumer trends and insight have been reinforced through the working relationship with Future Foundation. The partnership with Serviceplan in Europe has introduced a number of clients and Creston now also has a similar arrangement in South America with local partner, Ariadna.

Main board transitioned; operational board more stable

The main board changed considerably in 2014, with the appointment of former CFO Barrie Brien as CEO and the appointment of Kathryn Herrick as CFO. Since then, the line-up of non-executive directors has also been refreshed, with Chairman Richard Huntingford stepping down in March 2016, replaced on a temporary basis by senior non-exec Nigel Lingwood while a replacement is sought. Kate Burns (Bebo, AOL, Google) joined as a non-executive and chair of the remuneration committee, while Nigel Lingwood (FD of Diploma) joined in July 2015. Iain Ferguson (ex-Havas) was appointed to the board in February 2016 to represent the interests of DBAY Advisors, which holds a 28.05% equity stake.

Both Barrie and Kathryn sit on the operational board, alongside Tim Bonnet, who chairs the Communications & Insight operations and Nicky Walsby, who runs Health Unlimited. They are joined by Richard Marshall and Paul Tullo, the M and the T of TMW Unlimited. The average tenure of the executive management team is approaching 14 years.

Market conditions run fair, health shifting emphasis

Exhibit 4: UK GDP growth and ad spend 1989-2017e

Source: IMF, WARC

There is an unsurprising and clear correlation between the condition of the global economy and the amount that is spent on advertising. The additional volatility of the ad spend cycle over the last 20 years is also immediately apparent from Exhibit 4, above. There are two particular points of note about the interrelationship. First, there is no lag (or lead) between the two economic indicators. Second, projections over the three years 2016-18 show the continuing influence of the faster growth of digital and mobile ad spend. There is, though, still a tendency for clients to adopt a cautious stance and judge success on short-term horizons, rather than focusing on long-term investment and on building their brands. For two of Creston’s core markets, the UK and the US, the indications are for further outperformance of the overall economy over the next three years, with a more marked projected outperformance in the UK.

Exhibit 5: UK and US background projections

(US$bn)

2015

2018

CAGR (%)

UK adspend (ZO)

26,020

31,049

6.1

UK GDP (IMF)

1,789.046

1,907.6

2.2

US adspend (ZO)

182,615

200,603

3.2

US GDP (IMF)

16,348.875

17,567.864

2.4

Source: Ad spend figures – Zenith Optimedia, GDP figures – IMF

Within the specific healthcare and pharmaceutical markets, the period of intense corporate activity among the major companies as they sought growth and built on their strongest areas of influence has slackened off. What is clear is that drug companies need to get smarter at driving demand from both the procurement layer and stimulating the demand pull from the ultimate consumers. This applies across products to address medical needs and those designed to promote wellness, which is bringing a new swathe of potential clients into the arena. The need for professional marketing communications and services is clearly established, as is the growing willingness for pharma companies to work in partnership to outsource expertise.

In both areas of the business, the need for an understanding of the data generated has become integral and it is no longer sufficient simply to put promotional material in front of an audience. The technical demands of delivering an integrated, multi-channel campaign and measuring its impact in real time are considerable, but when agencies do it well, clients will allocate a larger proportion of their dedicated budgets and should be less likely to chop and change suppliers.

Sensitivities

Creston’s financial performance will be affected by external economic and industry factors, as well as by its own actions. These can be broadly summarised as follows:

Market: Creston’s services are broadly spread between client activities, but all ultimately depend on levels of consumer and corporate confidence. Forecasts for UK and US growth in overall ad spend, the group’s main markets, are still running well ahead of inflation, although there are short- (and possibly medium-) term economic uncertainties with respect to the EU referendum in the UK and the US Presidential election, which can affect confidence in certain sectors of the economy more than others.

Rapid transitions in technology: Creston prides itself on its culture of innovation and its ability to flex its offer as the world changes. Being able to meet these challenges can carry short-term costs as investment in both IT and in people/training takes place. Having digital solutions gives no guarantee that margins will be higher.

Client retention: the group generally has very longstanding relationships with its clients, as shown in Exhibit 3, but the loss of clients is always a possibility, particularly if there are personnel changes at the client.

Building on the Unlimited strategy: the early phases of the co-location and the rebranding were achieved without significant problems – always difficult in any ‘people’ business, but particularly so in the ‘creative’ sphere. Achieving the right balance between the unified ‘corporate’ branding and the individuality of the client facing brand/agency offer may be a challenge.

Acquisition risk: although the balance of growth has shifted from pure acquisition-led to one where this is part of the option mix for growth, successful integration can never be a given.

Currency: as the group increases the proportion of overseas business as indicated above, management of both translation and transaction risk is stepping up. Some substantial clients are based in the eurozone and while some can be encouraged to settle in sterling, other contracts are euro-denominated.

Valuation

We monitor the pricing and valuation of a range of smaller agency stocks, as well as the marketing services holding companies. Creston’s peer group is clearly the former.

Exhibit 6: Agency sector EV/EBITDA & EBITDA margin

Exhibit 7: Agency sector yield vs dividend growth

Source: Thomson Reuters, Edison Investment Research

Source: Thomson Reuters, Edison Investment Research

Exhibit 6: Agency sector EV/EBITDA & EBITDA margin

Source: Thomson Reuters, Edison Investment Research

Exhibit 7: Agency sector yield vs dividend growth

Source: Thomson Reuters, Edison Investment Research

The share price has retreated from a high of 162p at the beginning of October 2015 as progress on the trading front hesitated. A further mark down followed the cutting of forecasts in January when it became clear that the poorer trading in H216 would not be recouped in the financial year.

At current prices on a 2016 annualised EV/EBITDA basis, there is a wide divergence of valuations within the peers, with Creston, The Mission Marketing Group and SpaceandPeople all valued by the market at similar levels, at a substantial discount to the sector average. Excluding WPP from that average (on grounds of scale and complexity) brings the average in to 7.8x. Applying a 10% discount to reflect the limited liquidity and a mixed long-term historical record, the multiple equates to a share price for Creston of 150p, as shown below. This is over 50% ahead of the current level (c 95p). The dividend yield is the most generous amongst the peer group.

Exhibit 8: Valuation on an EV/EBITDA basis

Smaller agency average EV/EBITDA CY16

7.8x

Creston EBITDA annualised

£12.0m

Implied EV at market multiple of 7.8x

£93.6m

Deemed cash (straight line)

£3.5m

Derived market cap

£97.1m

Equivalent share price

166p

10% discount

150p

Source: Edison Investment Research

We have also looked at the valuation using a DCF method under varying assumptions, which return valuations considerably above the current share price, backing up the peer valuation basis. For example, as summarised in Exhibit 9, using a terminal growth rate of 2% and a 10% WACC generates a value of 125p per share.

Exhibit 9: DCF under varying assumptions

Terminal growth rate

1%

2%

3%

WACC

12%

102.2

103.9

106.0

11%

110.8

113.2

116.1

10%

121.1

124.5

128.8

9%

133.8

138.7

145.2

8%

149.8

157.2

167.6

7%

170.7

182.6

200.3

Source: Edison Investment Research

On all of these measures, the current share price of 95p is well below the less generous end of the range. As the route to acceleration in the rate of earnings growth looks smoother, there is clear potential upside to the share price.

Financials

The full year results came in a little ahead of expectations as recalibrated in January.

Exhibit 10: Minor revisions to forecasts

EPS

PBT

EBITDA

Old

New

% chg.

Old

New

% chg.

Old

New

% chg.

2016

11.3

12.0

+6

9.5

9.9

+4

11.3

11.7

+4

2017e

12.4

12.1

-2

10.5

10.5

u/c

12.2

12.0

-2

2018e

12.3

N/A

11.0

N/A

12.6

N/A

Source: Company accounts, Edison Investment Research. Note: 2015 new represents actual.

The setback earlier in the year was primarily attributable to weakness in business in the retail and consumer technology segments (see our notes of January and April), with client delays and cancellations and general volatility in spending patterns.

For the full year to March, overall revenues were ahead by 8% to £82.6m, with like-for-like, constant currency broadly flat at £76.5m (currency added 1-2%, with the benefit of the strength of the US dollar offset by the impact of the weakness of the euro). The net currency impact in the period is assessed at a cost of £0.4m at both the revenue and profit levels. The acquisition of How Splendid, now Splendid Unlimited, added £5.9m into the top line and £1.6m to the PBIT level.

Given the weakness in the two key sectors identified above, the group acted quickly to protect its margin at the operating company and at the group level. Headline PBIT of £10.1m and PBT of £9.9m were 4% ahead of our revised numbers, showing the positive impact of headcount reductions. The group had staffed up earlier in the financial year following a very successful run of new business wins, which had to be reversed in the second half as existing revenue streams came under pressure. The benefit of this overhead reduction will be reflected in the FY17e figures. The long-term record shows the steady progression in revenue, which has not as yet translated into growth in earnings per share. However, the group’s strong underlying cash conversion has enabled good growth in dividends since 2010.

Exhibit 11: Revenue record and forecasts

Exhibit 12: EPS and dividends, record and forecasts

Source: Creston, Edison Investment Research. Note: FY figures.

Source: Creston, Edison Investment Research. Note: FY figures.

Exhibit 11: Revenue record and forecasts

Source: Creston, Edison Investment Research. Note: FY figures.

Exhibit 12: EPS and dividends, record and forecasts

Source: Creston, Edison Investment Research. Note: FY figures.

Looking at the group figures masks the disparate performance of the two reporting segments, shown below. Comms & Insight recorded top line growth of 12% in the year to March 2016, whilst Health declined by 5%.

The priority across the group is to grow the operating margin from the group level of 12.2% in FY16 through growing margin at the operating level and keeping head office costs as low as is practicable. An annualised £1.2m has been taken out of non-client facing operating costs, split £0.7m to Comms & Insight and £0.5m within Health removing the regional management structure. The effect of this can be seen in Exhibit 14 below. Health margins are still ahead of those in the rest of the business, but are not at optimal levels. Health has also seen a concentration in its client base in the larger accounts and a marked tail off in the business from the long tail of clients, leading to the overall reduction in divisional revenue of 5% (8% on a like-for-like basis).

Exhibit 13: Comms & Insight long-term record & forecasts

Exhibit 14: Health long-term record & forecasts

Source: Company accounts, Edison Investment Research

Source: Company accounts, Edison Investment Research

Exhibit 13: Comms & Insight long-term record & forecasts

Source: Company accounts, Edison Investment Research

Exhibit 14: Health long-term record & forecasts

Source: Company accounts, Edison Investment Research

The headline tax charge of 20.5% reflects the decrease in the rate of UK corporation tax and we expect the rate to tick up as the proportion of earnings generated in the US increases.

Substantial exceptional charge taken

The results included a non-cash exceptional impairment charge of £15.2m taken on the book value of ICM Unlimited and DJM PAN Unlimited, allocated £10.7m to the former and £4.5m to the latter. An exceptional item of £2.0m had been identified at the half year stage as the cost of withdrawal from FieldWork UK at ICM, part of the Insight operations, following structural shifts in the market. This further write-down is on the goodwill carried on the balance sheet in regard to more conservative estimates of what the business is capable of earning in future years. A similar appraisal exercise identified a further discrepancy in the carrying value of DJM PAN Unlimited, two of the Health agencies that had been merged.

Other headline items totalling £2.2m were also indicated, the largest element (£1.3m) relating to acquisition, accounting and deal related costs, alongside restructuring and closure related costs of £0.5m and start-up related net losses of £0.4m.

Strong cash flow

Creston has naturally strong cash conversion, with little requirement for capital expenditure. For the year just reported, operating cash flow of £10.6m equated to a conversion of 111% against reported EBITDA, giving a five-year average cash conversion figure of 92%. The group’s working capital position is well controlled, with an improvement in the position over the year despite the Splendid acquisition.

Cash positive balance sheet

The group now has no outstanding deferred consideration on earlier acquisitions. There are call options over a further 24% of the equity of Splendid (51%-owned) but actioning the option is entirely at Creston’s discretion. The last payments for Cooney Walters and DJM PAN were made in FY16 (£1.4m).

As at end March, the balance sheet showed a net cash position of £1.4m and our model shows this increasing to £4.2m at end FY17 and £7.0m the year after. There is no debt. However, there are facilities in place of a revolving credit arrangement of £25.0m (including a £5.0m overdraft) and an optional accordion of £10.0m. Further share buybacks are a possibility but a decision on this will wait until the short-term market worries have subsided.

Exhibit 15: Financial summary

2014

2015

2016

2017e

2018e

31-March

IFRS

IFRS

IFRS

IFRS

IFRS

PROFIT & LOSS

Sales

101,850

100,135

108,045

110,301

113,554

Cost of Sales

(26,972)

(23,257)

(25,400)

(25,300)

(26,053)

Revenue

 

 

74,878

76,878

82,645

85,000

87,500

EBITDA

 

 

11,423

11,672

11,729

12,025

12,620

Operating Profit (before amort. and except.)

 

9,766

10,181

10,087

10,725

11,231

Intangible Amortisation

(60)

0

(789)

(600)

(612)

Goodwill impairment, restructuring

(2,353)

0

(15,156)

0

0

Acquisition, start-up & restructuring costs less movement in fair value of deferred consideration

0

(384)

(1,479)

0

0

Operating Profit

7,353

9,797

(7,337)

10,125

10,619

Net Interest

(149)

(174)

(233)

(225)

(201)

Profit Before Tax (norm)

 

 

9,617

10,007

9,854

10,500

11,030

Tax

(2,410)

(2,165)

(2,016)

(2,363)

(2,515)

Profit After Tax (norm)

7,648

7,775

7,838

8,137

8,515

Profit After Tax (FRS 3)

4,794

7,458

(9,586)

7,537

7,903

Minority interests

(107)

(86)

(840)

(1,055)

(1,300)

Average Diluted Number of Shares Outstanding (m)

60.2

58.8

58.2

58.6

58.8

EPS - normalised fully diluted (p)

 

 

11.8

13.1

12.0

12.1

12.3

EPS - (IFRS) (p)

 

 

7.8

12.5

(17.9)

11.1

11.2

Dividend per share (p)

3.9

4.2

4.4

4.6

4.8

Gross Margin (%)

73.5

76.8

76.5

77.1

77.1

EBITDA Margin (%)

15.3

15.2

14.2

14.1

14.4

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

13.0

13.2

12.2

12.6

12.8

BALANCE SHEET

Fixed Assets

 

 

110,591

111,763

104,931

104,231

103,480

Intangible Assets

104,985

106,637

99,796

99,196

98,584

Tangible Assets

5,606

5,126

4,199

4,099

3,960

Investments

0

0

936

936

936

Current Assets

 

 

37,305

37,508

31,556

35,728

39,824

Stocks

905

1,001

735

756

778

Debtors

28,948

28,195

29,380

30,822

32,046

Cash

7,452

8,312

1,441

4,150

7,000

Other

0

0

0

0

0

Current Liabilities

 

 

(29,666)

(28,271)

(26,814)

(27,027)

(27,541)

Creditors

(29,666)

(28,271)

(26,814)

(27,027)

(27,541)

Short term borrowings

0

0

0

0

0

Long Term Liabilities

 

 

(5,672)

(3,727)

(3,924)

(3,924)

(3,924)

Long term borrowings

0

0

0

0

0

Other long term liabilities

(5,672)

(3,727)

(3,924)

(3,924)

(3,924)

Net Assets

 

 

112,558

117,273

105,749

109,007

111,839

CASH FLOW

Operating Cash Flow

 

 

7,517

8,647

10,636

10,150

10,600

Net Interest

(112)

(190)

(208)

(225)

(201)

Tax

(2,647)

(2,003)

(3,279)

(2,103)

(2,401)

Capex

(1,665)

(961)

(1,062)

(1,200)

(1,250)

Acquisitions/disposals

0

0

(10,230)

(334)

0

Financing

(4,711)

(1,752)

(36)

0

0

Dividends (including minority divs)

(2,381)

(2,491)

(2,582)

(3,498)

(3,819)

Net Cash Flow

(3,999)

1,250

(6,761)

2,790

2,929

Opening net debt/(cash)

 

 

(11,198)

(7,452)

(8,312)

(1,441)

(4,150)

HP finance leases initiated

0

0

0

0

0

Other

253

(390)

(110)

(81)

(79)

Closing net debt/(cash)

 

 

(7,452)

(8,312)

(1,441)

(4,150)

(7,000)

Source: Company accounts, Edison Investment Research

Contact details

Revenue by geography

Creston House
10 Great Pulteney Street
London
W1F 9NB
+44 (0)20 7930 9757
www.creston.com

Contact details

Creston House
10 Great Pulteney Street
London
W1F 9NB
+44 (0)20 7930 9757
www.creston.com

Revenue by geography

Management team

Interim Chairman: Nigel Lingwood

CEO: Barrie Brien

Nigel has extensive executive and listed company experience and is currently group finance director of Diploma, which he joined in 2001.

Barrie was appointed CEO flowing the retirement of founder Don Elgie on 1 April 2014, having been COO and CFO since September 2004. He has over 20 years’ experience in marketing services. He was previously COO and CFO for EMEA at Lowe and DraftWorldwide. Before this Barrie was CFO for Lowe UK and held positions in Saatchi & Saatchi (Europe and North America) and other marketing groups.

CFO: Kathryn Herrick

Kathryn was appointed CFO in July 2014, joining from Equinix (a NASDAQ-listed high-growth global tech firm), where she was VP finance for EMEA. She has extensive experience in finance in marketing services at WPP and Interpublic over 14 years. She is a chartered accountant (PWC), and has client-side experience in internal audit at PepsiCo.

Management team

Interim Chairman: Nigel Lingwood

Nigel has extensive executive and listed company experience and is currently group finance director of Diploma, which he joined in 2001.

CEO: Barrie Brien

Barrie was appointed CEO flowing the retirement of founder Don Elgie on 1 April 2014, having been COO and CFO since September 2004. He has over 20 years’ experience in marketing services. He was previously COO and CFO for EMEA at Lowe and DraftWorldwide. Before this Barrie was CFO for Lowe UK and held positions in Saatchi & Saatchi (Europe and North America) and other marketing groups.

CFO: Kathryn Herrick

Kathryn was appointed CFO in July 2014, joining from Equinix (a NASDAQ-listed high-growth global tech firm), where she was VP finance for EMEA. She has extensive experience in finance in marketing services at WPP and Interpublic over 14 years. She is a chartered accountant (PWC), and has client-side experience in internal audit at PepsiCo.

Principal shareholders

(%)

DBAY Advisors

28.02

Artemis Investment Management

15.64

FIL Investment Services

5.12

Companies named in this report

Cello (CLL), Chime Communications (CHW), Next 15 Communications (NFC), Huntsworth (HNT), M&C Saatchi (SAA), Space & People (SAL), WPP (WPP), 4imprint (FOUR), The Mission Marketing Group (TMMG), Ebiquity (EBQ), Next Fifteen (NFT).

Edison, the investment intelligence firm, is the future of investor interaction with corporates. Our team of over 100 analysts and investment professionals work with leading companies, fund managers and investment banks worldwide to support their capital markets activity. We provide services to more than 400 retained corporate and investor clients from our offices in London, New York, Frankfurt, Sydney and Wellington. Edison is authorised and regulated by the Financial Conduct Authority. Edison Investment Research (NZ) Limited (Edison NZ) is the New Zealand subsidiary of Edison. Edison NZ is registered on the New Zealand Financial Service Providers Register (FSP number 247505) and is registered to provide wholesale and/or generic financial adviser services only. Edison Investment Research Inc (Edison US) is the US subsidiary of Edison and is regulated by the Securities and Exchange Commission. Edison Investment Research Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison and is not regulated by the Australian Securities and Investment Commission. Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com

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Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

245 Park Avenue, 39th Floor

10167, New York

US

Sydney +61 (0)2 9258 1161

Level 25, Aurora Place

88 Phillip St, Sydney

NSW 2000, Australia

Wellington +64 (0)48 948 555

Level 15, 171 Featherston St

Wellington 6011

New Zealand

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

245 Park Avenue, 39th Floor

10167, New York

US

Sydney +61 (0)2 9258 1161

Level 25, Aurora Place

88 Phillip St, Sydney

NSW 2000, Australia

Wellington +64 (0)48 948 555

Level 15, 171 Featherston St

Wellington 6011

New Zealand

YPB Group — Update 10 June 2016

YPB Group

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