Debt fog clears at Creston

The advertising industry typically leads the way out of a recession, so this could be a good time to buy shares in media agencies and especially shares in Creston, given their scope for a re-rating. Creston's £35m of net debt had investors in a cold sweat after an acquisition spree that saw 10 deals sealed between 2001 and 2006, including ad agency DLKW. However, resilient trading has taken the pressure off Creston and meant that it was able to repay its £20m-worth of deferred acquisition payouts without going cap-in-hand to shareholders. Big relief. Reassuringly, Creston's interest bill is also covered more than four times by operating profits.

Creston is run by chief executive Don Elgie, a former Saatchi & Saatchi man, who knows the business and knows what works. He has focused the company on some of the most resilient areas of the ad industry - market research, direct marketing and customer relationship marketing to good effect.

The brains behind Citroen's 'You what?' puppets and Halifax's crooner, Howard Brown, Creston's plan to concentrate on winning new business while existing clients put spending on hold proved savvy. Around £7m-worth of new business flowed in during the first half, from the likes of GlaxoSmithKline on the market research side, the BBC and Facebook in communications. But as cost pressures have started to ease, many of the company's existing blue-chip clients are starting to spend again, with Creston securing additional work from BMW, Unilever and Swiss drugs giant Roche. "Clients' budgets are also showing a greater stability and visibility," says Mr Elgie.

Creston's embrace of Google, Facebook and Twitter also means it is getting slicker at marrying brands to consumers. Digital sales already add up to almost a third of group revenue and are expected to rise to roughly half of all income within a couple of years.

Creston outmanoeuvred the worst of the downturn by acting quickly, cutting around £2m from its annual cost base, albeit at the expense of a slump in reported half year profits from £4.4m to £1.6m, thanks to £0.6m of redundancy costs and a £3.8m goodwill write-off.

Still, underlying first half profits stayed flat at £6.3m despite a 6 per cent fall in revenue. More progress has been made since. A trading update in February showed sales picking up and an encouraging pitch pipeline that implies a robust final quarter of the year. The decline in like-for-like revenues in the nine months to 31 December slowed to just 4 per cent, after showing a 6 per cent fall in the first half, making Creston one of the better performing UK-quoted advertising agencies. Even so, the dull background means that profits growth in 2010-11 will be anaemic.

Yet Creston's progress is not reflected in the share price. The shares are rated at less than 6 times 2010-11's forecast earnings, which is far below the rating for Chime Communications (8.5 times). That looks out of line considering Creston's resilience, improving debt and cashflow. The dividend is likely to be restored, too, though not to a level that makes the yield look attractive.