Digital marketing agencies have been some of the big winners during the pandemic. Customers were forced to spend even more time online and companies went to the digital experts to find out how best to access them. Sir Martin Sorrell’s agency, S4 Capital (SFOR), saw its share price rise 69 per cent in the first nine months of 2021 – leaving it trading on a PE multiple more akin to a US start-up than a UK advertising agency.
However, the second half of the year was a little rockier. The market had become used to S4 posting results ahead of analyst guidance, so despite a 56 per cent like-for-like increase in revenue in the third quarter of last year due to the addition of six “whopper” clients, its value has fallen by around a third over the past four months. This could, at least in part, be due to weaker operating margins as the company chooses to focus on growth and increasing headcount.
Broker Peel Hunt argued that S4’s recent “de-rating is overdone”, though, with its shares now trading at 28 times forward earnings. Its assessment followed the news on 12 January that S4 Capital’s Media Monks arm is merging with US data consultancy business 4 Mile Analytics. The terms of the deal were not disclosed.
S4 published a trading update for the first 11 months of last year, which said like-for-like revenue growth was well ahead of its 40 per cent guidance and that cash profit (Ebitda) margins had improved significantly in the second half of the year.
Sorrell, who is executive chairman, must also see potential for a rerating, given that he purchased shares worth £53,158 on 7 January, edging up his total holding to 10.5 per cent.
His aim is to double organic revenue in the next three years. Analysts seem confident in the company’s ability to achieve this – FactSet consensus earnings per share for 2024 are 28.3p, rising from an expected 11.6p for 2021. This indicates a more affordable 2024 price/earnings (PE) ratio of around 19.
Marketing spend tends to move in line with economic growth, though, and macro forecasts are notoriously difficult – especially in this volatile environment.
