Public relations may not get investors' pulses racing, but the robust growth prospects of Next Fifteen Communications (NFC) just might. The group of 17 agencies - which counts Google, Facebook and Amazon among its clients - is growing rapidly in the US, polishing its operations elsewhere and snapping up acquisitions to bolster its profitability and broaden its services. Yet its shares trade at an unwarranted discount to peers, raising the prospect of substantial upside for new investors.
- Acquisitions have fuelled growth
- Blue-chip clients such as Google
- Shares rated below peers
- Benefiting from weaker pound
- Significant restructuring costs
- Decline in Europe and Africa
Next Fifteen's organic sales rose 8 per cent in the year to 31 January 2016 as it landed big clients such as Moneysupermarket.com and Etsy, driving adjusted operating profits up 30 per cent to £16.5m. A key reason for its agencies' success is that they specialise in digital, data-driven marketing services, such as predicting consumer behaviour, making them popular among US tech giants. Indeed, strong demand drove organic sales up 14 per cent in the US, which accounts for over 60 per cent of group turnover, while higher-value services underpinned a US operating profit margin of 21 per cent.
Sales and profits rose strongly in the UK as restructuring initiatives - such as merging three agencies under the Text 100 brand - and a trio of acquisitions widened its operating margin by 3 percentage points to 13.6 per cent. Similarly, restructuring gains widened the Asia division's operating margin by 3.5 points to 11.5 per cent. Management thinks it can widen these further this financial year.
Management's reshaping of the business remains key to boosting growth and profitability. It exited South Africa and Denmark, slashed its cost base in other markets and merged multiple agencies last financial year. In the first four months of this financial year, it acquired two UK agencies - tech-focused digital outfit Twogether and specialist content group Publitek - that it plans to roll out in the US. It also reported brisk trading in the US, better margins in the UK and Asia and more work with Google, Godiva and Facebook.
Next Fifteen has other factors in its favour. It earns the bulk of its sales and profits outside the UK, meaning it benefits from a weaker pound and should be insulated from a domestic downturn. It also has a sound balance sheet after netting £12.1m from two fundraisings last financial year. This provides ample scope for further investments and acquisitions. Given its strong positioning, analysts at stockbroker Investec expect cash profits to surge 37 per cent this financial year, then 9 per cent in 2017-18. Yet the group's shares, which come with a prospective dividend yield of 1.7 per cent, trade at just 14 times forecast earnings, an undeserved discount to shares in listed agencies.
| NEXT FIFTEEN COMMUNICATIONS (NFC) | ||||
|---|---|---|---|---|
| ORD PRICE: | 315p | MARKET VALUE: | £227m | |
| TOUCH: | 310-315p | 12M HIGH / LOW: | 318p | 179p |
| FORWARD DIVIDEND YIELD: | 1.7% | FORWARD PE RATIO: | 15 | |
| NET ASSET VALUE: | 74p† | NET DEBT: | 13% | |
| Year to 31 Jan | Turnover (£m) | Pre-tax profit (£m) | Earnings per share (p) | Dividend per share (p) |
|---|---|---|---|---|
| 2014 | 99 | 8.3 | 8.3 | 2.6 |
| 2015 | 109 | 12.5 | 13.2 | 3.5 |
| 2016 | 130 | 16.1 | 16.9 | 4.2 |
| 2017* | 155 | 22.0 | 20.2 | 4.8 |
| 2018* | 166 | 24.3 | 21.7 | 5.3 |
| % change | +7 | +10 | +7 | +10 |
Normal market size: 1,500 Market makers: 7 Beta: 0.2 †Includes intangible assets of £53.6m, or 74p a share *Investec forecasts (adjusted profit and EPS figures) | ||||
