- Sir Martin Sorrell’s company is predicting 35 per cent growth in like-for-like revenues and gross profit in 2021
- It is also planning a bond issue to underpin a £500m war chest for M&A
Amid a rebound in demand for advertising S4 Capital (SFOR) has upgraded its full-year earnings guidance. The digital advertising agency – which is chaired by Sir Martin Sorrell – now expects that its like-for-like revenue and gross profit will rise by 30 per cent in 2021, up from a previous forecast of 25 per cent growth.
The improved outlook follows a bumper first quarter, in which like-for-like revenues jumped by 35 per cent year on year, to £122m, and gross profits climbed by a third, to £104m. This was aided by accounts secured with confectionary giant Mondelez (US:MDLZ) and carmaker BMW (DE:BMW), which chief financial officer Peter Rademaker says started to have a “significant positive impact in March”. These clients are emblematic of the so-called “whoppers” that S4 is trying to attract, meaning that they generate over $20m (£14m) of gross revenue.
There is likely further momentum to come as the group continues its M&A spree. S4 is prepared to stretch its net debt to around two times cash profits (Ebitda) and is planning to issue long-term bonds to bolster its war chest. When combined with the cash on its balance sheet and its usual 50:50 cash and equity deal structure, the group says it will have £500m of “transaction firepower”. Broker Peel Hunt estimates that the bond issue will be between £250m and £300m.
S4 has already made several acquisitions this year, including Shanghai-based creative agency Tomorrow in January, and Toronto-based design and experience agency Jam3 in March. Alongside today’s trading update, the group announced the purchase of Brazil-based Racoon Group for an undisclosed sum. The digital search and data analytics specialist will merge with S4’s MightyHive business and expand the group’s digital media practice in Latin America. Racoon’s clients include Unilever (ULVR) and Alphabet (US:GOOGL)-owned Google.
Market conditions also appear favourable for sustained organic growth. S4 says that new business activity is “frenetic” and that the pipeline is “significantly” ahead of this time last year. As the global economy recovers and the pandemic continues to drive consumers online, spending on digital advertising is expected to grow by a fifth in 2021 and 2022.
Digital marketing expenditure is correlated to global GDP, and while Sorrell is “extremely optimistic” about this year and the next, he has cautioned that the economic rebound may slow in 2023 as governments look to address their national debt piles.
“The chickens may well come home to roost in 2023, given the debt burden that most countries will have and the tax increases that will have to be implemented,” says Sorrell. “But digital marketing expenditure remains robust, even in a recession, as our results last year demonstrate.” Indeed, S4’s like-for-like gross profits expanded by a fifth in 2020 to £295m.
The group is well placed to capitalise on the structural shift to digital advertising, and its tech sector clients should offer a defensive source of growth and the opportunity to develop more ‘whoppers’. On the back of its raised guidance and M&A ambitions, analysts have nudged up their forecasts. Jefferies has increased its EPS estimates for 2021 to 2024 by 5 per cent and now expects an adjusted EPS of 14.3p in 2021 – up from 7.8p in 2020 – rising to 19.5p in 2022. Buy at 569p.
Last IC View: Buy, 498p, 07 Jan 2021
