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Next Fifteen flags potential margin squeeze

It is has boosted its adjusted margins through the growth of its high-margin customer delivery business.
Next Fifteen flags potential margin squeeze
  • Statutory operating profit of £14.9m, up from a small loss
  • Acquisition of shopper media group

In the last few decades marketing has shifted from charismatic artists selling emotive TV commercials to data analysts providing insights into customers’ online behaviours. Data driven marketing consultant Next Fifteen Communications (NFC) identified this trend years ago and has managed to produce robust results during a pandemic when many companies have cut traditional advertising spend. With people forced online in the past 18 months, digital first agencies are in high demand.

In the first half of the year its adjusted net revenue was up 32 per cent to £166m and adjusted profit before tax jumped 69 per cent to £35m. The associated margin improved by 4.6 percentage points to 21 per cent. Management said improved profitability was “aided by the favourable revenue mix towards more higher margin services and improved operational gearing”.

The higher-margin service in question is its customer delivery business which uses data and analytics to “create connections with customers”. This business saw its organic net revenue grow by 48.8 per cent, the fastest of any segment in the business. It also boasts an adjusted operating margin of 36.3 per cent, considerably higher than the 21.1 per cent group average.

The one aspect for investors to keep an eye on is that despite the rise in operating profit, operating cash flow fell from £31.5m to £27.3m. This was due to a £25.7m increase in the receivables which meant there was more working capital tied up in the business. Growth is great but you need to be able to turn work quickly into cash through prompt billing.

Off the back of its strong pandemic performance the company is going to accelerate investment and hire additional talent which is expected to have an impact on margins in the second half of the year. Numis is expecting full-year operating margin to drop to 19.8 per cent because of this investment. However, it has raised its 2022 EPS forecast by 2 per cent to 50.3p, giving an implied PE ratio of 22.4. Despite tricky comparators in the second half of the year, the company is expecting double-digit organic revenue growth. The addition of major clients Boots, Citibank, Diageo and Disney should help it achieve this. The group has a more developed digital offering than many of its competitors, while recent industry research suggests that upwards of 40 per cent of companies intend to increase their data-driven marketing budgets. Speculative buy.

Last IC View: Buy, 794p, 13 April 2021

NEXT FIFTEEN (NFC)   
ORD PRICE:1,127pMARKET VALUE:£ 1.05bn
TOUCH:1115-1,130p12-MONTH HIGH:1,240pLOW: 421p
DIVIDEND YIELD:0.9%PE RATIO:NA
NET ASSET VALUE:130p*NET DEBT:25%
Half-year to 31 JulTurnover (£m)Pre-tax profit (£m)Earnings per share (p)Dividend per share (p)
2020153-3.40-3.80nil
20212093.14-3.103.60
% change+36---
Ex-div:28 Oct   
Payment:26 Nov   
*Intangible assets of £184m, or 198p a share