A social media group making a smart acquisition

Brave Bison (BBSN:3.05p), a London-based social and digital media group, is acquiring Social Chain, a market-leading social media and influencer marketing agency that was founded by Dragons’ Den entrepreneur Steven Bartlett. It now forms a non-core part of Germany-based parent group Social Chain AG (DEU:PU11n), which is offloading assets to de-leverage.

Founded in 2014, Social Chain has almost doubled revenue to £13.8mn in the past five years, delivering social media and advertising campaigns for global brands including Amazon, TikTok, Arla, KFC and Apple Beats. It has a similar offering to Brave Bison’s smaller social and influencer division (annual revenue of around £2mn), so significantly ramps up Brave Bison’s exposure to the social media advertising sector, the fastest growing subsection in the wider industry (annual growth rate of 15 per cent). Digital media now accounts for 65 per cent of global advertising spend, according to GlobalM.

Brave Bison’s digital focus has been driving organic growth across the group’s four pillars: search engine optimisation (SEO); social media advertising; transactional websites and platforms; and a portfolio of owned and operated social media channels. The acquisition will enable Brave Bison to cross-sell its product suite to a wider roster of blue-chip clients, and gives it a presence in the US as well as in Manchester, a key location for digital media (Social Chain has offices in Manchester, New York and London). In addition, Brave Bison’s management team should be able to reduce duplicate administration and operational costs and sub-let more of its relatively expensive London office space to make further cost savings.

Impact on forecasts

House broker Cenkos Securities believes that the enlarged group should be able to maintain a 10 per cent cash profit margin on combined revenue of £42.9mn in 2023, implying 37 per cent year-on-year growth in adjusted cash profit to £4.1mn. On this basis, expect adjusted pre-tax profit of £3.1mn and 25 per cent higher earnings per share (EPS) of 0.25p for the £39.3mn market capitalisation company.

There is scope for upside to these estimates as Brave Bison retains £4.8mn cash (0.4p a share) post acquisition and has access to £1.5mn of undrawn credit facilities, so has firepower to make further complementary bolt-on deals or invest in organic growth initiatives. The board is also delivering or exceeding guidance, hence why Cenkos pencils in 35 per cent growth in 2022 revenue to £29.2mn and 57 per cent higher pre-tax profit of £2.2mn.

It’s worth noting, too, that although there is potentially £9.5mn of contingent consideration payable over the next three years on the acquisition of Social Chain, for the maximum annual amount of £3.2mn to become payable then Social Chain would have to achieve annual cash profit of £3.2mn, £4mn and £4.8mn in years one, two and three, respectively. If it achieves that then the contingent payout will be self-funding from Social Chain’s profits. Also, Brave Bison has £50mn of historic cash losses to offset against future profits, which it can use to maintain net profit margins and a competitive advantage over rivals.

Admittedly, the progress at Brave Bison has not gone unnoticed as the share price has hit my 3p target price, up from 2.1p when I covered the interim results (‘Backing winners in the digital economy, 22 September 2022), and 71 per cent higher than when I initiated coverage at 1.75p (‘Alpha Research: A social marketing profit play for the digital age’, 10 May 2022). 

However, the shares are still only rated on a current year cash-adjusted prospective price/earnings (PE) ratio of 10.6, a modest rating for a business that is tapping into high-growth digital media markets. I also note that chairman Oliver Green and chief growth officer Theo Green invested £0.1mn in the placing to maintain their combined holding at 19.1 per cent. It’s still worth backing the brothers and I raise my target price to 3.75p. Buy.

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