M&C Saatchi cuts costs and hopes for recovery

When interest rates were low and financing easy, tech companies spent a lot on advertising. After all, investors were obsessed with growth. Now tech companies are cutting costs and looking for profits, which is bad news for advertisers such as M&C Saatchi (SAA).

In the six months to June, M&C Saatchi's revenue fell 7 per cent year on year, while its operating profit dropped 45 per cent. This meant a contraction of the operating margin by 5.7 percentage points to 8.3 per cent.

To offset this slowdown, management has launched a “global efficiency program”. This presumably means, getting fewer people to do more work. Management expects to deliver annualised savings of £3.8mn this year and is targeting £10mn by the end of 2024. Full-year margins are guided to be in line with last year’s 13 per cent.

Advertising revenue fell 16 per cent to £50.1mn, but this was partly offset by growth in Passions (10.3 per cent) and Issues (21.5 per cent). These divisions are currently around a third and half the size of the advertising segment, respectively, but focus on events, which M&C Saatchi hopes will diversify the business and make it more resilient.

The shares are justifiably cheap but house broker Numis thinks the efficiency push will help EPS rise to 17.5p in 2024. This means M&C Saatchi is trading on just seven times its 2024 profit forecast. Advertising is notoriously cyclical, and M&C Saatchi looks to be at the bottom of the cycle. Stick to buy.

Last IC View: Buy, 176p, 18 Apr 2023