Buy into S4 Capital's digital strength

The group’s ambition is well-founded. Analysts at broker Jefferies believe that global digital advertising sales stood at an enormous $329bn in 2019, up 16 per cent year on year – small wonder that the company features in this week’s Ideas Farm’s UK small-cap fund manager best ideas list. This shift to digital is likely to accelerate, as e-commerce surges during the pandemic lockdown period.  

Of course, the global marketing industry is facing near-term disruption due to the coronavirus, especially as companies ditch advertising budgets in order to shore up cash. But once the crisis passes and consumer spending picks up again, it should stand to recover. In the meantime, S4 Capital’s client base offers some shelter, with around half of its revenue derived from the technology sector. Tech has been among the least affected by the market turmoil in recent months. Customers include titans such as Alphabet (US:GOOGL) and Facebook (US:FB);  both of which noted signs of recovery in ad revenues in the first quarter despite the initial market-wide downturn in March. 

S4 Capital said in May that it has seen a limited impact from the virus so far, and sees a "fighting chance" of still achieving its three-year plan to organically double its size by the end of 2021. Indeed, like-for-like gross profit was up by almost a fifth to £61m in the first quarter of its current financial year. This follows a 44 per cent like-for-like increase in gross profit in 2019. 

It retains a healthy balance sheet, with average first-quarter net cash of around £16m, despite a cash payment for S4’s latest purchase, Circus Marketing. True to form for Sir Martin, the group has been built through a series of deals (using half cash, half shares); 10 so far and more can be expected. Management is on the lookout for smaller opportunities in high-growth areas such as data and analytics, with an eye on the German market in particular. But it has said it will not take any steps that might harm its balance sheet, given the current macroeconomic environment.