Behavioural scientists
Brainjuicer Group's (LONDON:BJU) final results demonstrate that it has built a robust business with a quality client list and high levels of repeat custom, despite having an approach to market research that directly challenges typical industry norms. With strong cash generation and a cash-positive balance sheet, there is limited downside, with the potential for growth to step up as clients accept that behavioural science-based methods can best leverage their marketing budgets. The rating is above-sector on P/E but at an overly large discount (21%) on EV/EBITDA, given its superior operating margins.
Incremental growth, potential for bigger steps up
FY14 results showed constrained top-line growth, partly due to currency effects, but good progress at the operating profit level. The US business grew well, with the UK moving ahead on its quantitative business but staying flat overall. BrainJuicer has won two client mandates in the period (effectively gaining preferred supplier status). These arrangements are important for accessing budget but are not of themselves sufficient to drive higher rates of growth. The group is extending its reach in brand strategy, which helps to embed client relationships, and is building its ‘System 1 thinking’ brand-tracking business, which also helps ‘stickiness’. We have assumed modest top-line growth in our modelling for FY15 and FY16. With no need for significant structural overhead increase, this should allow margins to tick up.
Significant cash flow
With limited requirement for capital and only modest needs for personnel and offices, BrainJuicer has generated more cash than it needs internally. With a very particular ethos and culture, acquisitions have not been part of the equity story to date, but there are indications that there may now be more potential to add complementary capability to the group’s toolkit. Given the natural caution, deals are likely to be at the smaller end of the scale and would need to have a good cultural fit, as well as being sensibly priced. Failing to find and negotiate suitable candidates would likely mean further returns of cash to shareholders through share buybacks and/or special dividends, both of which have been employed historically.
Valuation: EV/EBITDA discount
Expectations of top-end revenue growth associated with an early-stage, market-disrupting company have now moderated and business is now building at a steadier pace. While trading at a premium P/E (14% ahead of peers), the EV/EBITDA stands at a discount that does not reflect the particularly strong cash flow and record for delivering a premium return to shareholders.
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