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Buy into strong momentum at Huntsworth

With its new healthcare focus, we think the media group will stay on its upward trajectory
May 24, 2018

The interwoven layers of science, demographics, politics and business makes healthcare an immensely complex industry. That is why Huntsworth’s (HNT) move into healthcare communications (away from traditional public relations) seems very sensible. Medical marketing and management is a skilled, niche business and therefore enjoys high barriers to entry and sticky customers. With 61 per cent of its revenues and 79 per cent of its operating profits now coming from its healthcare division, we think Huntsworth is capable of maintaining its recent strong share price momentum.

IC TIP: Buy at 96p
Tip style
Growth
Risk rating
Medium
Timescale
Long Term
Bull points

Acquisitions give scope for further earnings upgrades

Strong balance sheet and cash conversion

Widening margins

Sticky customers in the healthcare industry  

Bear points

Poor performance from the historic PR business

Acquisitions are reliant on the right price

Bulking up the healthcare division sent revenues up by nearly a tenth in 2017, 4 per cent of which was organic growth. That’s a stark improvement on the 1 per cent compound annual revenue growth recorded in the four preceding years. More impressive was a 20 per cent increase in like-for-like adjusted operating profits, as strong organic revenue growth was compounded with the move towards higher-margin businesses: together, the three healthcare divisions have an adjusted operating profit margin of 21.5 per cent, compared with 9 per cent at the communications business. In the past three years, margins have risen from 9.1 per cent to 13.2 per cent and, as healthcare contributes a greater proportion of the top line, those margins are set to improve further.

Although most of the swing towards the healthcare market has been organic, last July Huntsworth added a new division (Immersive) via the £25m acquisition of The Creative Engagement Group (TCEG). The new business – which contributed the majority of the £15m of revenue from the Immersive division in 2017 – consists of three agencies that provide live marketing to healthcare clients. Exhibitions, live events and virtual reality have therefore been added to the group’s offering, meaning it can cross-sell to existing clients.

Helped by a full-year contribution from TCEG, revenues in the Immersive business are expected to take a sharp step up to £31m in 2018, based on broker Numis's forecasts, while a margin improvement from 12.4 per cent to 15.2 per cent is forecast to increase the division's operating profit from £1.9m to £4.7m. Prospects for the new division prompted broker forecast upgrades at the full-year results. This contributed to upgrades to current-year forecast EPS of 42 per cent over the past 12 months. This stellar upgrade momentum, coupled with strong share price gains, has made Huntsworth a top pick of our most recent Alpha Momentum Screen. With trading strong and management planning more acquisitions, further upgrades could be in the pipeline.

A robust balance sheet supports management's acquisition plans, as long as the right deals can be found. Cash generation has been good recently, with operating cash conversion of over 100 per cent and free cash flow of £20.7m last year. Meanwhile, year-end net debt represented just 1.2 times cash profits and, assuming no more acquisitions, Numis reckons the group will be nearly debt-free by 2019.

HUNTSWORTH (HNT)   
ORD PRICE:96.4pMARKET VALUE:£318m
TOUCH:96.2-98p12-MONTH HIGH:102p49p
FORWARD DIVIDEND YIELD:2.5%FORWARD PE RATIO:14
NET ASSET VALUE:47.7p*NET DEBT:23%
Year to 31 DecTurnover (£m)Pre-tax profit (£m)Earnings per share (p)Dividend per share (p)
201516813.33.01.75
201618016.04.01.75
201719724.45.82.00
2018**21027.06.42.20
2019**22030.07.12.40
% change+5+11+11+9
Normal market size:20,000   
Beta:0.18   
*Includes intangible assets of £181m, or 55p a share 
**Broker Numis forecasts, adjusted PTP and EPS