Value play Cello

Cello's health division, which accounted for half last year's gross profit but 71 per cent of operating profit, provides highly specialised research and consultancy services to 21 of the 25 largest pharmaceutical companies worldwide. Its niche focus lets it charge a premium for its services - attested to by last year's 21.2 per cent operating margin - and demand is currently benefiting from a recovery in advertising spending among large US pharmaceutical companies. It has signed up Pfizer, Unilever and several other household names in the past year and is targeting the explosive biotech sector through acquisitions and new offices openings in Boston and San Francisco.

Management recently integrated the health division's various operations into a single brand and structure. That has raised its international profile and helped its teams win large global contracts. The business has also hired technical health experts and made select acquisitions to broaden the range of services and break into growth markets. For instance, the purchase of iS Healthcare Dynamics has opened up lucrative cross-selling and referral opportunities, while the takeover of Worldwide Promedica has provided a foothold on the west coast of the US along with a bunch of biotech clients. The strategy has led to a surge of new business, including one contract worth at least $7m (£4.6m) in gross profit this year.

Cello's signal business, meanwhile, offers social media analysis and other tech-driven marketing tools to the likes of Tesco, Oxfam and L'Oreal. It has prioritised higher-margin digital services, and to this end, acquired Line Digital last year to bolster its programming and technological expertise. This has helped it win larger, digital-focused contracts and improve revenue visibility. Moreover, its social media analysis software tool, Pulsar, grew its licensing client base from 11 to 88 in 2014 and its momentum has remained strong this year. And gross profits from its US offices and digital services soared 28 per cent and 36 per cent respectively.

Cello looks well placed to prosper further. It has invested £800,000 in new client offerings and overseas offices in the past two years, which contributed £1.5m in gross profit in 2014 and should underpin future growth. Broker N+1 Singer expects EPS to grow by 10 per cent this year and pencils in a 12 per cent dividend increase.

One concern may be that operating profit fell in Cello's signal division in 2014. But that reflected an exceptionally strong performance in 2013 due to a one-off contract, continued investment and a £0.4m operating loss from Pulsar as it began to scale up. Management has also set aside £2.9m to deal with a tax review in its signal division, but if its charity clients succeed in vetoing the new policy it could retain the funds.