M&C Saatchi offers speculative recovery potential

The market and its discontents can have powerful repercussions for companies trying to make an honest living in advertising as M&C Saatchi’s (SAA) full-year results illustrated all too well. The final cost of fending off separate hostile takeover bids from AdvancedADVT (AdVT) and Next Fifteen Communications (NFC) came in at an eye-watering £10.8mn, which explained the drastic fall in the company’s reported profits, alongside the pressure its technology consultancy experienced as hard-pressed tech companies reined in advertising spending to cut their costs.

However, the company’s management insisted that it will “approach 2023 with guarded optimism” and repeated its target range of headline profit for the year of £36.5mn-£38mn, with the proviso that this performance will be weighted towards the second half. Whether it can achieve that range will depend on whether its other consulting divisions can do the heavy lifting. Some of its self-improvement work seems to be starting to pay off, with operating margins in these results growing from 5 per cent in 2020 to more than 13 per cent. In addition, the actual billing performance was respectable, with growth in billings (which is not an IFRS-accepted term) of 12 per cent to £598mn, driven by what M&C Saatchi terms its Consulting, Issues and Passions segments – the fact that dating app Tinder is a client gives a flavour of its specialism.  

For a business whose major costs are people, and around £69mn of future lease liabilities, M&C can generate operational gearing on top of its fixed cost base if it can get the clients through the door. In particular, a cash conversion rate of nearly 99 per cent is a promising start that can be improved upon if business orders get a cyclical boost from a recovery in the tech sector. In the meantime, central costs will need to be cut as part of the company’s global efficiency programme – savings and margin improvement should come through in the second half of the year as Saatchi simplifies its businesses and cuts back on the number of its legal entities.

Numis analysts have the company on a forward price/earnings ratio of 10 for 2023, based on the broker’s forecasts for earnings per share of 17.8p, which assumes that cost savings will materialise in good time. The shares aren’t expensive on a price-adjusted basis and bid approaches prove that the business has some attraction. A share with speculative appeal. Buy.

Last IC view: Hold, 155p, 7 Sep 2022