S4 Capital struggles as revenues dip for the first time

It’s no secret that corporates pulled the reins on advertising budgets through last year. Contrary to some assumptions, these aren’t automatically pared back when the economy slows, but the increased cost of refinancing had a chilling effect on spending plans in 2023.

Revenues contracted at S4 Capital (SFOR) for the first time since it was launched by WPP (WPP) founder Sir Martin Sorrell in 2018. That equated to a 4.5 per cent fall on a like-for-like basis, with spending constraints particularly noticeable “in the technology sector and by smaller client relationships and regional and local clients”.

Management points out, with some justification, that the year contrasts with revenue progression on a cumulative basis. It could be that 2023 will eventually be viewed as something of a one-off, although the ensuing sell-off on results day suggests that the market isn’t taking a nuanced view.

It's not as though S4 didn't trim its sails as trading conditions deteriorated. Headcount has been reduced by 13 per cent since the end of 2022 and discretionary costs have been under review. Cash profits, at £93.7mn, were in line with market expectations, a fall of 36.6 per cent on a like-for-like basis. The underlying margin was kept in line with revised targets at 10.7 per cent.

Sorrell commented that S4 had seen “better relative performance and continued resilience in our top 20 and top 50 clients, with our 10 largest client relationships strong", suggesting that the negative impact of interest rates was more evident on budgets further down the food chain. Tellingly, however, the advertising group warned that client caution is “likely to persist, despite the prospect of lower interest rates”, so the 73 per cent discount to net assets should be seen in this context. Hold.

Last IC view: Hold, 70p, 18 Sep 2023