In fact, having found price resistance at the 115.5p level on no fewer than three occasions since hitting a 30-month high in February this year, that glass ceiling was taken out on yesterday when the price closed at 118p. With half-year results due to be published on Tuesday 25 November, and the release likely to make for a good read, there is a realistic possibility that the June 2011 high of 123p will be surpassed in the coming weeks, which will pave the way for a free run-up to a historic price band between 130p and 135p, where I would expect to see some price resistance.
Earnings enhancing share buybacks
On inspection, one of the reasons for the recent momentum is due to an earnings-enhancing share buyback programme. At the time of the full-year results in the summer, the board announced it had set aside £2m in order to repurchase up to 1.9m shares. By my calculations, and including the share purchases made last Friday, the company has so far bought back 1.46m shares in 16 separate transactions at a cost of £1.6m. That works out at 110p per share.
It certainly makes sense to do so because at its financial year-end Creston had low-yielding net cash of £7.5m on its balance sheet, or the equivalent of 13p a share. So, based on historic EPS of 11.8p for the fiscal year to March 2014, the shares have been bought back into treasury at a bargain-basement 9.3 times historic earnings. Analyst Ian Whittaker at broker Liberum Capital estimates that if the whole £2m is spent buying back shares then this will boost EPS by over 3 per cent. Mr Whittaker also estimates that Creston will deliver current year EPS of 12.8p, which means that these share purchases are being made on a forward PE ratio of just 8.5, or a bumper 11.6 per cent earnings yield.
Moreover, with the company predicted to deliver annual free cash flow of £7.2m in the current financial year, then that cash pile is forecast to rise again to £10.1m by the March 2015 year-end. This will not only support further share buy backs and underpin the price, but will also enable the board to lift the dividend per share from 3.9p to 4.1p as Liberum predicts. The payout was raised 6 per cent last financial year. So, not only are the buy backs earnings enhancing, but there is negligible loss of finance income due to the low yields currently earned on cash. That's important because, with shares in issue reduced, Creston's net profits are spread over a fewer number of shares, which will enable the board to be more generous with the payout. It's a win-win situation for shareholders.
Strong fundamental investment case
Importantly, the fundamental case is very supportive of a further re-rating. Net new business wins accounted for £8.6m of Creston's total revenues of £75m last year and a first-quarter trading update confirmed that the 3 per cent revenue growth in the three months to the end of June 2014 was being driven by a combination of growth in international work for existing clients as well as new client wins.
Major contracts have been won with clients including Bentley, Unilever and Danone. Digital is a key driver, as highlighted by new contracts with Sony Mobile to manage its global e-mail production; and with McCain to handle the digital work across its brands. In fact, Creston generates over 50 per cent of its revenues from Digital, which is important as this segment of the market has a greater share of advertising spend. It's higher growth, too, as global internet advertising spend is forecast to grow by around 46 per cent between 2015 and 2018, according to media consultants at PwC.
Importantly, Creston has a UK bias with over two-thirds of revenue generated domestically. That's worth noting because the UK is the largest internet advertising market in Europe. By 2018, it is forecast to be worth £9.6bn in annual revenues, driven by further growth in smartphones and tablets. In fact, half of the UK population are expected to utilise tablets within the next four years.
So, not only is Creston exposed to the highest-growth market segment, but it is operating in the highest-growth economy in Europe: the UK. This is translating into higher marketing spend with the keenly followed IPA Bellwether Report recently revising its marketing budgets up for the seventh quarter in a row. Advertising spend in the UK is predicted to rise by over 6 per cent this year, with the main beneficiaries being internet and main media advertising. This clearly bodes well for companies such as Creston that are riding off this favourable back drop.
Cross-selling opportunities
When Creston releases its results in three weeks' time, expect the board to focus on the cross-selling opportunities in the business as part of its strategy to create a more integrated agency group under the branding of Creston Unlimited.
Currently, the company shares 33 clients across the business which generate around £26.7m, or a third of its total revenues. In my opinion, there is scope to increase penetration rates and make more revenue per client as Creston has more than 300 clients across 85 countries. In fact, of the top 50 clients, only 18 use services from two of Creston's divisions, and just six are serviced by all three: Health, Communications and Insight.
That seems an opportunity lost because these are strong business relationships to exploit, with the average tenure of Creston's management around 11 years. Moreover, the top 20 clients - accounting for 57 per cent of Creston's revenues - have been working with the company for 11 years, highlighting the strength of the business proposition.
The early signs are positive as this year three global FMCG clients - Tesco, Danone and Unilever - have all assigned new projects to Creston.
New and reinvigorated management structure
Importantly, Creston has a new management structure in place to drive the business. Barrie Brien, a former chief operating and finance officer of Creston, has come back to be the company's new chief executive, and Kathryn Herrick took up her position as the new finance director in July, having worked in finance positions at media groups WPP (WPP: 1,242p) and Interpublic over a 14-year period, primarily in marketing services and technology.
Compelling valuation
On a peer group basis, Creston's shares trade on an unwarranted 20 to 25 per cent-plus earnings multiple discount to Chime Communications (CHM: 276p) and Cello (CLL: 88p). The discount is even wider once you factor in Creston's cash pile: the company is rated on just five times forecast operating profit to its enterprise value, a hefty 45 per cent discount to both Cello and Chime.
Moreover, Creston's shares offer a decent dividend yield of 3.3 per cent with the payout covered three times over by earnings. They are also priced on a hefty 40 per cent discount to book value of 195p, albeit intangible assets account for 93 per cent of shareholders' funds. True, that increases investment risk as any downturn in trading could lead to an asset impairment charge and a non-cash goodwill write-off. That said, given the positive trading environment, it is far less of a risk at the moment.
In any case, I see Creston as a decent short-term trading play over the next few months to take advantage of the positive trading backdrop and valuation discrepancy with peers. So, ahead of the forthcoming results, I rate the shares a strong buy on a bid-offer spread of 116p to 118p and have a year-end target price of 135p.
Please note that I have published 38 investment columns since the start of last month, including three today, all of which are available on my IC homepage...
■ Simon Thompson's book Stock Picking for Profit can be purchased online at www.ypdbooks.com, or by telephoning YPDBooks on 01904 431 213 and is being sold through no other source. It is priced at £14.99, plus £2.75 postage and packaging. Simon has published an article outlining the content: 'Secrets to successful stockpicking'
