M&C Saatchi confident in advertising bounce-back

Forecasting corporate UK's marketing spend is tricky because it is so volatile. At the beginning of the pandemic, it was one of the first expenses that businesses cut, which is why M&C Saatchi’s (SAA) revenue was down 15 per cent at the end of 2020. In the first half of 2021, Saatchi bounced back to growth and expects clients to continue to spend, especially on digital advertising. The familiar argument being that the pandemic has accelerated companies’ digital transformation and they want to sell this to their customers.

Inflation confuses this picture, though. Almost all companies are experiencing rising input costs which could undermine their earnings and tempt them to cut advertising spend to offset this. However, when inflation is rife, companies are reluctant to sacrifice market share even if working capital commitments have tightened. Advertising is a good way to achieve this, or that's the message M&C Saatchi will be taking to its clientele.

So far, 2021 has started positively. M&C Saatchi’s gross revenue was up 14.7 per cent, while like-for-like net revenue (excluding divestments and acquisitions) was up 21 per cent compared with the first half of 2020. Coupled with strict cost management, this revenue jump helped boost its operating margin by 6.4 percentage points to 10.5 per cent. This has enabled the board to settle its employees' put options in cash rather than shares, which eliminates the risk of share dilution. It's always good to keep your 'creatives' on side.

The biggest area of growth was in “passion” marketing. This part of the company includes sports and entertainment, both of which were put on hold at the beginning of last year. The resumption of Euro 2020 and the Olympics this summer helped push its net revenue up 46.3 per cent to £11.6m. Its global and social issues team is also benefiting from the global focus on ESG and was up 41.5 per cent to £14.7m

Management is expecting full-year profit before tax and EPS to be substantially ahead of consensus partly based on the fact that 72 per cent of marketing chiefs agreed that the “importance of marketing” has grown over the past year and because worldwide advertising revenue is forecast to grow 10 per cent in 2021.

Off the back of these results, house broker Numis has increased its full-year EPS forecast by 14 per cent to 5.1p. Its FY2022 forecast is also up 15 per cent to 7.3p.  

These figures are promising but advertising is closely correlated with wider economic health, which looks increasingly uncertain. It is best to wait a little longer to see how the recovery plays out. Hold.

Last IC View: Hold, 119p, 10 Feb 2021