Resilient Next 15 is cheap and cash-generative

The trading environment for marketing companies is not easy at the moment, as evidenced by S4 Capital (SFOR) earlier this month. Next 15 (NFG) is facing similar difficulties, with organic revenue shrinking by 1 per cent to £286mn in the six months to 31 July. The ‘customer engage’ division, which accounts for almost half of group revenues, had the toughest time, with sales down 6.4 per cent due to – you guessed it – client delays. Analysts at Peel Hunt have trimmed their FY2024 revenue forecasts by 3 per cent as a result.

Quite what impact sluggish sales had on profitability is not immediately obvious, given that Next 15’s statutory and underlying profits bear little resemblance to one another. However, its adjusted numbers are a good place to start. Adjusted operating profit (after lease interest) fell by 7 per cent to £57mn, while margins edged down from 22 per cent to 20 per cent. 

Macro headwinds played a part here, but management also said that “an encouraging profit performance from the majority of our brands was offset by a tough comparable in relation to the exceptional profit performance from Mach49 in the prior year”. Mach49 is a growth incubator Next15 purchased in 2020, which secured a very lucrative contract early in 2022. 

From a statutory perspective, profits actually improved in the period, largely due to acquisition-related accounting in 2022. Acquisitions are only just starting to take a toll on the balance sheet, however: while Next 15 remains very cash generative, it paid £52.6mn of acquisition-related liabilities and staff bonuses in the half, pushing down its cash reserves and pushing up its net debt (excluding lease liabilities). 

Management is clearly still feeling confident, however, announcing a buy-back programme of up to £30mn. Whether this is a sensible decision remains to be seen. 

Despite its cyclical exposure, we still like Next 15 and think – given its reliance on US tech sector clients – that it is proving fairly resilient. It is still unclear when economic conditions will improve and marketing will pick up again but, with a forward price/earnings ratio of just 6.8 compared with a five-year average of 13.6, it is going extremely cheap. Buy.

Last IC View: Buy, 810p, 25 April 2023