Sales stall at S4 Capital

It has been a tough few months for S4 Capital (SFOR). In July, the advertising group downgraded its forecasts after sales growth proved slower than expected. Two months down the line, and Martin Sorrell’s agency has published a second warning, causing another nasty drop in shares. 

S4 Capital now thinks that full-year like-for-like net revenue will be lower than the levels achieved in 2022. Meanwhile, operational Ebitda margins are expected to be 12-13.5 per cent - significantly narrower than 15-16 per cent originally forecast.

The agency blamed the “challenging” macroeconomic backdrop, which is making clients more cautious about spending money. The technology sector is proving particularly jumpy, as are new customers, and China’s slow recovery is making the situation even trickier.

Overall, the content division – which generates about 60 per cent of net revenue – saw like-for-like sales dip by 2.5 per cent in the period. Across the group, however, net revenue edged up by 5.1 per cent, suggesting things are expected to get materially worse in the second half of 2023. Demand over the Christmas period will be crucial.

Ultimately, however, top line growth is not S4 Capital’s only problem. The agency has been very acquisitive in recent years and the costs associated with this are now coming home to roost. The group reported a statutory operating loss of £6.4mn in the period, which was partly the result of restructuring expenses and share-based payments.

The situation is less extreme than last year, when S4 Capital banked an operating loss of £75.4mn on the back of over £100mn of adjusting items. However, in the second half of 2023 there will be a hefty cash outflow relating to acquisitions, and net debt is expected to jump to £180mn- £220mn as a result, up from £109mn at the end of June. In a high interest rate environment, this isn’t good news. 

Rapid expansion has also caused headcount to increase sharply, and S4 Capital is now cutting staff numbers to keep a lid on costs.

The group said by the end of 2023 “virtually all of the existing contingent consideration due will have been satisfied”, and it is taking “further actions” to keep costs down. High levels of debt and demand uncertainty are likely to remain troublesome, however. Hold.

Last IC View: Hold, 348p, 6 May 2022